Bloomberg News

Obama’s Goals Clash as Allies Say Trade Push Widens Income Gap

January 30, 2014

President Barack Obama

U.S. President Barack Obama delivers the State of the Union address to a joint session of Congress at the Capitol in Washington, D.C. on Jan. 28, 2014. Photographer: Andrew Harrer/Bloomberg

Even as he calls income inequality the “defining challenge of our time,” President Barack Obama is pursuing new trade agreements that some of his political allies say will only make the problem worse.

Obama says expanded trade will generate high-paying jobs for an economy that’s still more than 1 million paychecks short of its pre-recession peak. His critics in the labor movement and some economists say previous deals, such as the North American Free Trade Agreement, destroyed millions of factory jobs.

“It has absolutely been a contributor to the rise in inequality,” said economist Josh Bivens of the Economic Policy Institute, a Washington research group partially funded by labor groups. “We would have a different country, with less inequality, had we not seen the developments in the global economy that we’ve had over the last 15 to 20 years.”

The concern that Obama is fanning over the income gap could boomerang on his plans. Five fellow Democrats on the Senate Finance Committee this month said they won’t vote for giving the president “fast track” authority to speed trade deals through Congress, citing in part the risk to jobs.

Senate Majority Leader Harry Reid yesterday said he also opposes the legislation. “Everyone would be well-advised just to not push this right now,” he told reporters in Washington.

The discontent in Obama’s party could be bad news for companies such as Procter & Gamble Co. (PG:US) and Citigroup Inc. (C:US), which are seeking better protection for intellectual property in the Pacific trade deal.

Complicating Talks

“It’s going to complicate the task” of getting both the trans-Pacific agreement and fast-track authority, said William Reinsch, president of the National Foreign Trade Council, which represents multinational corporations.

In his State of the Union address to Congress this week, Obama called for expanding trade.

“When 98 percent of our exporters are small businesses, new trade partnerships with Europe and the Asia-Pacific will help them create even more jobs,” he said. “We need to work together on tools like bipartisan trade-promotion authority to protect our workers, protect our environment, and open new markets to new goods stamped ‘Made in the USA’.”

Jason Furman, chairman of the president’s Council of Economic Advisers, says trade deals aren’t the major reason for the growing income gap, which Obama has vowed to try to close through such measures as raising the minimum wage. The spread of advanced technology, which often eliminates factory jobs, has played a far greater role, Furman said.

Globalization’s Effect

“The phenomenon of globalization from 1980 to the present would have created challenges for inequality whether or not we entered into any agreement,” Furman said.

The agreements the U.S. is negotiating with the European Union and Pacific Rim nations amount to “the most ambitious trade agenda in the history of the United States,” according to Michael Froman, the U.S. trade representative.

Yet Furman says any new accords, including the Trans-Pacific Partnership, which would link the U.S. with nations such as Japan, Australia and Vietnam, won’t repeat past mistakes.

“We’re negotiating new types of trade agreements,” Furman said. Measures to protect labor and the environment “are not side letters that aren’t enforceable. They’re in the core of the agreement; they are enforceable.”

During the past three decades, as China and India embraced the market economy and the political division of Europe healed, global trade and investment helped drive income inequality in most nations to new highs.

Growing Gap

The richest 10 percent of Americans now claim more than half of national income each year, up from about one-third in the late-1970s, according to Emmanuel Saez, a professor at the University of California at Berkeley. That’s the highest percentage since 1917.

In the U.S., trade’s share of the economy has roughly doubled to 28 percent since the January 1994 start of Nafta, according to data compiled by Bloomberg.

Surging Chinese imports between 1990 and 2007 helped increase U.S. unemployment, reduce labor force participation, lower wages and increase disability claims, according to a 2011 study by economists Gordon Hanson of the University of California at San Diego, David Autor of the Massachusetts Institute of Technology and David Dorn of the Institute for the Study of Labor in Madrid.

About 20 percent to 25 percent of manufacturing job losses can be attributed to import competition from China, according to Hanson.

“The workers who’ve been hurt are primarily lower-wage workers, and they’re workers who often have a weaker attachment to the labor force,” Hanson said in a phone interview.

Bigger Culprit

Hanson said trade doesn’t explain the most important income shift, the rise of the super-rich. The top 1 percent -- families with income of more than $394,000 in 2012 -- claimed more than two-thirds of U.S. income growth between 1993 and 2012, according to Saez.

Economists generally agree that the globalization of trade and investment has contributed to the widening income gap, though it isn’t the most important reason.

Greater trade with developing nations lowered annual wages among workers without a college degree by 5.5 percent or about $1,800 in 2011, according to Bivens.

A 2013 study by three economists at the International Monetary Fund concluded that the impact of globalization is “still smaller than that of technological progress.”

China’s rise, and the growth of U.S. imports from low-wage countries, means trade is probably having a greater impact on inequality than in the 1990s, according to a 2008 paper by economist Paul Krugman.

‘A Mistake’

For Obama, trade has been a delicate issue since his 2008 campaign. In January 2008, he called Nafta “a mistake” and decried the lack of labor and environmental standards that would assure “workers in the U.S. were getting a square deal.”

As president, he has emphasized the benefits of trade, securing congressional approval of agreements with South Korea, Panama and Colombia, negotiated during the Bush administration.

In his January 2010 State of the Union speech, Obama also called for doubling U.S. exports in five years. Jobs producing goods for export pay 13 percent to 18 percent above the national average, according to the administration.

Last month, while warning of the twin dangers of rising inequality and less mobility, the president endorsed trade “that grows exports and works for the middle class.”

Union officials and Democratic economists say the employment gains won’t offset the almost 6 million factory jobs lost because of earlier trade treaties. And imports as well as exports tend to grow after trade deals.

Korea Example

South Korea offers a case in point: Through the first three quarters of 2013, the U.S. was on course to run up a $13 billion deficit in its goods and services trade with the Asian country, up from about $4 billion two years earlier before the deal went into effect, according to the Bureau of Economic Analysis.

“How can you say you want to address economic fairness and on the other hand say you want trade-promotion authority so you can pass these Nafta-style trade deals?” Representative Keith Ellison, a Minnesota Democrat and co-chairman of the House Progressive Caucus, told reporters on Jan. 27. “It doesn’t make any sense.”

To contact the reporter on this story: David J. Lynch in Washington at dlynch27@bloomberg.net

To contact the editors responsible for this story: Steven Komarow at skomarow1@bloomberg.net; Mark McQuillan at mmcquillan@bloomberg.net


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