Q: But don’t the countries we trade with have unfair advantages? Do any of them have to comply with occupational health and safety laws, environmental regulations, or unions that work for higher pay and benefits?
A: Let’s remember that our main trading partners are other developed countries. For example, Canada, Japan, Germany, and the United Kingdom are among the top six exporters to, and importers from, the United States. Not only do they have their own substantial regulations, but these countries have a higher share of unionized workers than the United States.
Nonetheless, it is true that our less developed trade partners, such as China and Mexico, pay lower wages (regardless of whether their workers are free to organize) and impose fewer regulatory restrictions. This gives firms in those countries a cost advantage in the global marketplace. But it also means that we pay lower prices for these goods, which is to our advantage.
Q: It may be an advantage to buyers, but won’t it make U.S. workers and companies in that industry lose their competitive edge? Isn’t free trade supposed to make everyone better off?
A: Not exactly. Economists recognize that not all individuals benefit directly—that free trade creates both winners and losers. In particular, those employed in import-competing industries will find that trade reduces their wages or costs them their jobs.
The critical point, from the standpoint of economic theorists, is that the winners gain more from trade than the losers lose. In other words, the winners could more than compensate the losers for all their trade-related losses and still have gains left over.
Q: Will this lead to a “race to the bottom,” as more advanced countries reduce wages and eliminate social regulations to keep up with world markets?
A: The problem isn’t trade, but rather what we do (or don’t do) with the gains from that trade. We have already put in place a number of programs, such as Trade Adjustment Assistance and job retraining . Unfortunately, these only target those who have lost their jobs, not those still working for a lower wage. The latter are much harder to identify.
To some extent, the winners are also hard to identify. We don’t exactly know who buys the cheaper foreign imports (and in what quantities), nor what portion of the higher wages of some is the result of trade-induced demand for their products.
This puts economists and well-intentioned policymakers in the uncomfortable position of being confident that the net gains from free trade outweigh the costs, yet lacking any clear means of transferring a portion of those gains to those who have borne the costs.
Ultimately, this sort of trade accounting may be unnecessary. We can instead choose to make the social safety net better or worse, regardless of our trade policy.
With the 2008 presidential election moving into high gear, it is quite likely we’ll see attention focused on at least one aspect of that safety net: our health care system.
Beyond that, appropriate macroeconomic policies can keep us near full employment—perhaps the most important thing for the apartment industry. Stay tuned.
Mark Obrinsky is NMHC’s vice president of research and chief economist.