Misconceptions on the Campaign Trail: Benefits of Trade Agreements

April 12, 2016 9:45 AM

In the run-up to the 2016 US presidential election, candidates on both the right and the left have been taking strong anti-trade and foreign investment positions. One assertion is that trade agreements like the Trans-Pacific Partnership (TPP) benefit only the rich and not low- and middle-income households.

Most of the talk about trade agreements focuses on how they affect job opportunities for low-income workers. In this blog post, we highlight another channel that is often neglected: the lower prices and increased consumption possibilities that result from increased trade, which raise the real incomes of these same workers, allowing them to consume more while spending less. In fact, because they spend a greater share of their earnings on consumption goods, low-income households gain much more from the consumption benefits of trade than do higher-income households.

The lower prices, better products, and greater choices that result from globalization affect all consumers in the United States, not just those at the upper echelon. Bradford, Grieco, and Hufbauer (2005) estimate that gains to American households from the expansion of trade and investment since the end of the Second World War equal about $10,000 per household. Digging deeper into the data shows that these gains have a larger effect on the living standards of poor and lower-middle-class households than on the well-off.

To offer concrete evidence of this $10,000 expansion of purchasing power through 2013, we draw on analysis presented in the online course “Globalization’s Winners and Losers: Challenges for Developed and Developing Countries,” which examines US household expenditures on four of the items most exposed to trade competition—clothes, shoes, food, and other home goods—over the past two generations.1 Table 1 shows that the share of family spending on these four basic items has steadily declined. In current dollars, the shift from 32.4 percent of annual spending in 1973 to 20.2 percent in 2013 means an extra $8,156 for families to save or spend on other things.

Table 1 Share of American family expenditures on clothes, shoes, food, and other home goods
Year Percent of US household spending
2013 20.2
2005 21.9
2000 23.9
1991 26.0
1973 32.4
Source: Edward Gresser, “American families have cut their bills for food & home goods by 40 percent since the 1970s,” Progressive Economy, Trade Fact of the Week, February 4, 2015.

These figures do not mean that American families have cut back on the purchases of household items, however. Quite the contrary, at least for garments and shoes (see table 2).

Table 2 Average US household purchases of garments and shoes
Year Garments Pairs of shoes
2013 62 7.5
2005 69 7.8
2000 66 6.6
1991 40 5.4
1973 28 4.8
Source: American Apparel & Footwear Association.

Edward Gresser, who compiled these comparisons, worries that this expanded purchasing power might be limited to higher-income families. So he undertakes a separate calculation for single-parent households. This subgroup earned an average of $35,000 per year in 2013. The share of total income of this subgroup devoted to purchases of garments and shoes is naturally higher than the share of total income of wealthier families, but it has fallen faster over time— from 11.6 percent of annual spending in 1973, to 8.1 percent in 1991, 6.8 percent in 2000, and 4.4 percent in 2013. So this exercise shows that poorer and middle-class individuals win from globalization as consumers.

Similarly, Lawrence and Moran (2016) find that once differences in spending shares are taken into account, the percentage gains to poor and middle-class households from the TPP will be larger than the gains to households at the top of the income distribution.

This does not negate the fact that many low-income workers are losing their jobs, some of them as a result of globalization. In an economy as dynamic and competitive as the United States, the churn in labor markets is quite large, with some 16 million to 18 million layoffs, re-hires, and new jobs generated annually depending upon where the economy is in the business cycle. But only a very small proportion of this shuffling in the labor market is due to import competition or export expansion, about 2 to 3 percent of the total (Lawrence 2013, 47). Meanwhile, a comparison of the gains from globalization with the losses shows that the outcome is not even close, approximately 20-to-1 gains versus losses in the case of the United States over the period 1947–2003 (Bradford, Grieco, and Hufbauer 2005). Estimates show a projected 18-to-1 gains versus losses for the United States from implementation of the TPP (Lawrence and Moran 2016).

So while the presidential candidates are tapping into legitimate concerns about job loss on the part of low-income US workers, it is important to keep in mind that restricting trade will have large negative effects as well. And these effects will hurt exactly the low-income households that the candidates claim to be concerned about.

Note

1. The raw data have been compiled by Edward Gresser, then of Progressive Economy, see  “American families have cut their bills for food & home goods by 40 percent since the 1970s,” Progressive Economy, Trade Fact of the Week, February 4, 2015.

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