President Carter is right in saying that increased foreign trade is good for the country as a whole. But the AFL-CIO is also right in saying that some of its members are going to be hurt.
here are winners and losers in the expansion of trade-and it is necessary to acknowledge that some of the losses are permanent.
The political debate over foreign trade is about to begin again. After five years of negotiation in Geneva, a new set of worldwide trade rules was completed this month. But Congress must approve these rules before they go into effect, and within Congress there is strong opposition to any further easing of the restrictions on imports.
On the protectionist side of the argument, the AFL-CIO charges that imports have already cost too many Americans their jobs. The supporters of free trade reply that growing export industries will create at least as many jobs-and better ones. Where imports cause unemployment, the free traders argue, it will be temporary and it can be handled satisfactorily through adjustment assistance.
Unfortunately, some of the effects of trade liberalization on U.S. workers are not temporary, and the AFL-CIO position is not as week as its opponents suggest. Moving toward free trade causes permanent changes in the distribution of income. Unskilled and semiskilled workers lose, and professional or technical workers, and some owners of land and capital, win.
A sharp reduction in U.S. trade barriers would increase U.S. imports of products such as textiles, garments and shoes, all of which use large amounts of unskilled and semi-skilled labor. Domestic industries producing these products would then contract, reducing the demand in this country for such labor. Parallel trade liberalization abroad would increase U.S. exports of products such as commercial aircraft and computers, which use a great deal of professional and technical labor. Other expanding U.S. export industries, such as agriculture, use a great deal of capital and land.
When U.S. labor markets had fully adjusted to these changes, wages rates for unskilled and semi-skilled workers would have fallen relative to other incomes, and probably would have fallen in absolute terms.
These income distribution effects grow out of the basic differences among national economies, which create opportunities for international trade. Each country tends to export products that use what it has in abundance and import those products that use whatever is scarce. Compared with the rest of the world, the United States has an abundance of capital, land and technical labor, and a decided scarcity of unskilled and semi-skilled labor. That's why we export farm products, commercial aircraft and computers, and import textiles, garments and shoes.
The large efficiency gains that are inherent in free trade will cause total U.S. output and incomes to rise. But income will be redistributed away from U.S. industrial workers and toward other groups. Total employment in the economy may not change, but the mixture of jobs will shift away from less skilled workers and toward technical and professional labor.
The income distribution effects of free trade are similar to those that would result from the free international movement of labor and capital. If, for example, the United States had no restrictions on immigration, the resulting influx of large numbers of unskilled workers from developing countries would depress U.S. industrial wage rates.
It is possible to offset the income distribution effects of trade liberalization. Since total output and incomes in the United States would clearly increase, those who benefit could be required to compensate those who lose. Changes in tax laws or transfer payments could be used to provide such compensation by shifting part of the income gains from technical labor and capital to unskilled and semi-skilled workers.
Every government policy of any significance imposes losses on somebody. To argue that government cannot act to increase overall efficiency if doing so injures any group is to suggest that government do nothing. The distribution of income is always a political issue, and if society wants to restore income losses resulting from a policy shift, it has plenty of fiscal tools to do so. Tax cuts, subsidies and transfer payments are all ways of restoring lost incomes if the society feels that compensation is warranted.
Those who would lose from a more liberal U.S. trade policy, such as the AFL-CIO, obviously have little confidence that society will decide to provide compensation for their losses. So they quite reasonably oppose any movement toward free trade.
It is true that a majority of the American local force is not unskilled or semi-skilled, and does not belong to the AFL-CIO. And it is also true that most Americans would clearly gain from free trade. For the AFL-CIO, however, that is irrelevant. Many of their members would lose, and the federation's job is to represent its members. Their arguments may not be in the national interest, and may seem narrow or even selfish. But they are not ill-informed or short-sighted.