No End of Free Trade

CFR's Slaughter and Yale University's Kenneth F. Scheve wrote in a 2007 Foreign Affairs article that earnings for most U.S. workers have been falling in recent years, with inequality greater than at any time in the past seventy years. Economists are divided over how much this inequality is due to globalization, but Slaughter and Scheve add: "Public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor."

Democratic presidential contenders, many with free-trade records or support from trade advocates, campaigned on the dangers of free-trade deals and lack of "trickle down" wealth from these deals to the middle and working classes. Obama economic adviser Austan Goolsbee told CFR.org in a September 2008 interview that Obama supports free trade. However, he said that flawed agreements filled with loopholes and clauses for special interests have impeded broader benefits. "If you look at these free trade agreements, they're a thousand pages long and 980 pages of that are giveaways to individual companies and monopolies and very little of it looks like the economist's case for free trade," he said. The Democratic party platform approved last summer in Denver says it supports the Doha round of trade talks and that a successful agreement "would increase U.S. exports, support good jobs in America, protect worker rights and the environment, benefit our businesses and farms," among other things.

At the same time, Democrats also come under criticism for protecting special interests. The five-year, nearly $290 billion Farm Bill that passed over President Bush's objections earlier in 2008 retained a number of subsidies seen as distorting trade, and gave scant attention to calls by trading partners for reform. The Doha round, for instance, remains stalled over agriculture questions, including the support levels given by United States and European Union to their farmers.

Many economists believe a central plank in advancing trade policy is improving the way Washington deals with those buffeted by trade, something both Obama and McCain agreed on during the campaign. This will involve strengthening social safety nets such as access to health care and pensions, and improving education opportunities. Most important will be providing compensation for those sectors that are clearly losers in the short term due to trade liberalization. One approach, advanced in a 2007 Council Special Report by University of Chicago professor Robert J. LaLonde, calls for revamping current trade assistance programs by shifting resources to a displacement insurance plan, which would provide an earnings supplement for workers facing a long-term drop in wages. CFR's Slaughter and Yale's Scheve propose boosting the pay of lower-income wage earners through efforts like eliminating the payroll tax for those earning below the national median income.

As part of his plan for addressing the country's economic crisis, Obama proposes revamping the country's Trade Adjustment Assistance system by "extending it to service industries, creating flexible education accounts to help workers retrain, and providing retraining assistance for workers in sectors of the economy vulnerable to dislocation before they lose their jobs." Obama also calls for ending tax breaks for companies that move operations overseas, and providing tax credits to companies that bolster their U.S. operations and maintain "good jobs with good benefits."

© 2008