Foreign Policy In Focus Special Report: U.S. Leadership in the Global Economy - Winners and Losers under the Current Policy

Three leading think tanks, Brookings Institution, Progressive Policy Institute, and Twentieth Century Fund, began a 1998 book entitled Globaphobia as follows: "It is one of the paradoxes of the modern age. America has been leading the world to encourage more integration of national economies. Yet just as we appear to be succeeding, increasing numbers of Americans appear to be expressing growing doubts or worries about this process of ‘globalization’."⁶ The goal of that book, as well as many other pro-free trade works in recent years, was "to demonstrate that the fear of globalization--or ‘globaphobia’--rests on very weak foundations."⁷

Figure 2

U.S. Share of the
World's* Billionaires

*Europe is the EU15, plus Switzerland.
*Russia and South Africa have just one billionaire each, but fall outside the categories represented in this chart, and so are not represented in this chart.

Source: "Forbes' Annual Survey of the World's Richest People," Forbes, 1998.

Accordingly, the central question that should guide U.S. policy toward the global economy is: do the majority of people in the United States and abroad benefit or lose from the deregulated market approach to globalization?

The position of most globalization supporters is that consumers everywhere gain from the liberalization of trade and investment, and that most workers gain as well. Yet in the battles over NAFTA and the WTO, growing numbers of groups have challenged these assertions from two quite diverse quarters. The nationalist right--led by Pat Buchanan in the United States and his counterparts elsewhere and supported by small business--argues that most small entrepreneurs and workers are hurt by globalization, and that sovereignty and culture are undermined. These forces have kindled populist passions with the argument that protectionism leads to prosperity. By the late 1990s, roughly 60-70 Republican members of Congress belonged to this camp.

A second group--comprising unions, environmentalists, small farmers, and citizen leaders such as Jesse Jackson and Ralph Nader--argues that free trade undermines workers, the environment, farmers, and sovereignty and thus deepens inequality. In the United States, this view is shared by most Democratic members of Congress, led by David Bonior and Richard Gephardt, with their call for "fair trade." Portions of this left coalition did, at times, intersperse their internationalist posture with more nationalist arguments about the safety of imported foods and the dangers of Mexican truck drivers on U.S. roads.

Both sets of critics have amassed strong evidence that the policies of the elite consensus have benefited a small number of highly mobile corporations and hurt most workers, consumers, the environment, and equality:

Inequality

United Nations studies show that, with a handful of exceptions, growing inequality has accompanied trade and investment liberalization over the past 15 years in most countries. Likewise, researchers at the Institute for Policy Studies have noted a growing divide between the wealth of the world’s billionaires and the world’s poorest since the early 1990s. In the most recent year for which data are available, the combined wealth of the world’s 447 billionaires is greater than the income of the poorest half of the world’s people.⁸ (See Figure 2.) Growing inequality, globalization opponents argue, is a direct outgrowth of the rising disparity in power between corporations and workers. The growing imbalance is a result of the ability of globalized corporations to threaten and shift operations to a location with lower wages or standards (see Figure 3). This mobility allows corporate managers to bargain down wages and working conditions, thus exacerbating income inequality.

Environment

Many developing countries, from Chile and Brazil to the Philippines and Indonesia, have been endowed with abundant natural resources. In these and many other countries, the elite consensus emphasis on leading "development" with exports has translated into some combination of tearing down forests, overfishing, rapid depletion of minerals, and poisoning land with agrochemicals. The long-term costs of this brand of growth are not factored into the various measures of success, yet the next generations in these countries will spend much of their energy coping with erosion, depleted fishing banks, and increasingly unproductive soil. This is not to suggest that these countries were pursuing environmentally sustainable policies before the pressure for increased trade and investment liberalization. But liberalization has accelerated the plunder of resources in many countries.

In the United States, mobile corporations can increasingly use the threat of moving production elsewhere to water down U.S. environmental regulations. For example, an official of Boise Cascade, a timber giant that had already moved some of its mills from the United States to Mexico, boldly stated in the congressional debate over logging rights that: "The number of timber sales granted by the government will determine our decision to move south."⁹ This kind of intimidation helped the logging industry pressure Congress into passing a law in 1995 to allow increased logging and to suspend environmental protections in national forests.

Northern environmentalists also express concern about the rising power of the World Trade Organization (WTO), which gives nations the power to challenge perceived barriers to trade and investment, including health, safety, and environmental laws. Since the United States and other Northern nations have relatively strong environmental regulations, the WTO represents a largely negative forum where other nations challenge those laws as unfair trade practices. Among the more controversial of the 125-plus WTO rulings thus far are the following:

The first WTO ruling involved a challenge by the Venezuelan and Brazilian governments on behalf of their oil industries against the United States. They charged that an Environmental Protection Agency (EPA) regulation governing the cleanliness of gasoline discriminated against oil imports into the United States. The WTO ruled against the United States and, in 1996, the Clinton administration agreed to abide by the ruling rather than face trade sanctions.

In 1998, the WTO ordered the United States to lift a ban on shrimp imports from nations that do not adequately protect sea turtles. In the United States, the shrimp industry is required to use devices on its nets to prevent drownings of endangered sea turtles. Thailand, Malaysia, India, and Pakistan had complained that the U.S. ban unfairly discriminated against their shrimp industry.

Workers

Factories have sprung up in southern China, Indonesia, Brazil, Malaysia, and dozens of other countries. Indeed, an average of more than one factory each day has been opening along Mexico’s 2,000-mile border with the United States since the advent of NAFTA in 1994. Yet, workers in most of the third world’s new global factories are denied basic rights to organize and strike. And in the United States, companies use the threat of moving production to China or Mexico to bargain down wages and benefits.

What about the quantity of jobs? Globally, there is a severe crisis of unemployment and underemployment; in its World Employment Report 1998-99, the International Labor Organization estimated that 25-30% of the world’s workers were underemployed and about 140 million workers were fully unemployed. In the United States, despite low overall unemployment, liberalized trade also claims victims. Free trade advocates often boast about jobs created by U.S. exports while ignoring the jobs lost to increased imports. But if consumers switch from a U.S.-made product to one made elsewhere, this does result in lost U.S. jobs and, often, to poorer quality jobs in the United States. This trend has become a major concern as the U.S. trade deficit has grown for six consecutive years. Moreover, though U.S. jobs in export industries tend to pay better than the average U.S. job, so do industries that face intense import competition, where jobs are currently being lost. This is because both import and export jobs are concentrated in manufacturing, while more U.S. jobs overall are in the lower-paying service sector. When the Washington-based Economic Policy Institute compared U.S. industries where exports and imports were growing most rapidly, they found that wages were higher in the import-competing industries than in the export sectors.¹⁰

This debate over winners and losers is one of the most important empirical policy issues of our time.... Clearly, the argument here is that the number of losers is substantial and that the gap between the winners and losers is growing.

Free trade backers often shrug off complaints of lost U.S. jobs, citing the overall low U.S. unemployment rate. Yet, the U.S. Labor Department reports that only about 35 percent of dislocated workers find new jobs that pay as well or better than their old ones. Many of the fastest growing job categories are the less desirable ones; indeed Labor Department projections indicate that the fastest growing U.S. job category is cashiers, who made $6.58/hour on average in 1996. Institute for Policy Studies’ monitoring of U.S. workers who lost jobs due to NAFTA-related trade and investment dislocations also indicates that a disproportionate number of U.S. workers hurt by trade and investment are people of color, women, or located in rural areas.¹¹

Consumers
Although globalization boosters will often admit that free trade and investment can have a negative impact on inequality, the environment, and workers, they invariably argue that these impacts are greatly offset by the overwhelmingly positive impact of global markets on consumers. The Globaphobia authors put it this way: "Consumers benefit from trade not only because imported goods can be (and often are) cheaper than their domestically produced counterparts, but also because the competition provided by imports, or the mere threat of imports, keeps domestic producers from charging excessive prices."¹²

Yet, how many consumers are really benefiting? There is no question that globalization has expanded the variety of goods available in the marketplace. It is also true that roughly a third of U.S. imports come from poorer countries, where workers earn a fraction of U.S. wages. Hence, these goods often enter the United States at prices far below the price of U.S.-made goods.

Yet, a key question is how frequently these firms sell cheaper goods to consumers at lower prices instead of selling them at normal or even higher prices to keep the benefits of trade for themselves. Evidence suggests that in sectors of the economy where small producers predominate, such as clothing, consumers often find that increased trade lowers prices. Many firms in certain other sectors, such as steel and computers, have also kept prices low. However, in sectors where a handful of large global firms dominate--such as autos, grains, pharmaceuticals, and chemicals--increased trade often does not lower prices.

In the United States, for example, General Motors decided to expand production of its "Suburban" sports utility vehicle in 1994. Instead of investing in its Suburban plant in Janesville, Wisconsin, or adding capacity at another U.S. plant, the company built a new facility in Silao, Mexico, to produce for the U.S. market. By 1996, GM was producing almost as many Suburbans in Mexico as in Wisconsin. In the process, General Motors’ wage bill plummeted, since its Mexican workers made $1.54/hour versus the $18.96/hour paid to GM’s U.S. workers (in 1996). Yet, the price of Suburbans bought in the United States jumped from an average of $22,750 in 1994 to $27,250 in 1996.¹³

This debate over winners and losers is one of the most important empirical policy issues of our time. In addition to the factors of equality, workers, the environment, and consumers, there are likewise debates over the impact of globalization policies on food security and safety, culture, and the viability of communities. Clearly, the argument here is that the number of losers is substantial and that the gap between the winners and losers is growing. And that is certainly the perception of the majority of Americans.