With the housing and mortgage markets in turmoil, international trade has emerged as a real bright spot for the U.S. economy. Despite the hand-wringing from critics, trade is boosting our economy and lifting the incomes and living standards of most Americans.
Booming exports are the most visible way trade has lifted the economy. Exports are growing at a double-digit pace, with exports to China growing twice as fast as exports overall.
China’s tariffs on goods of most interest to U.S. exporters have dropped from 25 percent in 1997 to 7 percent, thanks to its entry into the World Trade Organization. As a result, China has become a major market for American-made semiconductors, aircraft, chemicals, plastic materials, and other manufactured goods along with soybeans and cotton. Surging demand in China and other emerging markets is a main reason why American farmers and manufacturers are enjoying record output, sales, and profits.
Critics of trade counter that real wages for American workers have stagnated while the middle class has been squeezed by a loss of jobs to low-wage competitors such as China and Mexico. Democrats in Congress point to those anxieties to justify their opposition to any meaningful trade-expanding legislation — including pending free trade accords with South Korea and Colombia and renewal of presidential trade-promotion authority.
The critics have it all wrong: The middle class isn’t disappearing — it’s moving up. The Census reports that the share of U.S. households earning $35,000 to $75,000 a year (in ‘06 dollars) — roughly, the middle class — has indeed shrunk slightly over the last decade, from 34 percent to 33 percent. But so, too, has the share earning less than $35,000 — from 40 percent to 37 percent. It’s the share of households earning more than $75,000 that’s jumped — from 26 percent to 30 percent.
Trade has helped America transform itself into a middle-class service economy. Yes, the country’s lost a net 3.3 million manufacturing jobs in the past decade — but it’s added a net 11.6 million jobs in service and other sectors where average wages are higher than in manufacturing. Most of these new jobs are in better-paying categories, like professional and business services, finance and education and health services. Trade accounts for only about 3 percent of annual job displacement in our dynamic economy.
Critics of trade repeat as a mantra that real wages have been stagnant since the 1970s. But the data on real wages exclude benefits — which have been rising as a share of worker compensation. Those data also rely on a cost-of-living index that has systematically overstated inflation and thus understated real income gains.
The U.S. Bureau of Labor Statistics reports that the average real hourly compensation earned by Americans has actually grown by 22 percent during the past decade — even as trade and other measures of globalization have grown rapidly.
“Trade has helped America transform itself into a middle-class service economy.”
Trade has brought us lower prices on a broad range of goods — from fruits and vegetables to clothing, consumer electronics and automobiles — stretching the paychecks of U.S. workers.
Household incomes have also been rising. When they point to a small decline in median household income compared to 2000, opponents of trade are cherry-picking their numbers. That year was the frothy peak of a decade-long expansion. Use 1996 — the comparable point in the previous business cycle — as the baseline, and you see a 6 percent rise in median income.
Trade and globalization have also helped bolster the balance sheets of American households by delivering higher incomes, lower interest rates and wider investment opportunities. From 1995 to 2004, according to the Federal Reserve Board, the real median net worth of U.S. households jumped by 31 percent, boosted by rising home values and stock prices. (Even with the recent housing slump, average home values remain more than double what they were a decade ago, according to the S&P/Case-Shiller index.)
Thanks to more open capital markets, the inflow of foreign capital to the United States keeps long-term interest rates almost a full percentage point lower than they would be otherwise, saving the typical homeowner $1,500 in mortgage interest each year.
Convincing Americans that we are worse off than we were in years past has become a popular line of attack against globalization and trade expansion. But trade has played an important part in the positive story of long-term gains in hourly compensation, household income and net wealth. Turning our backs on the global economy now would put all those gains in jeopardy.
To promote further progress for U.S. workers and their families, Congress and the administration should work together to pursue policies that expand the freedom of Americans to participate in global markets.