Trade with Developing Countries: Effects on U.S. Workers

Growth in U.S. trade with developing countries is one of the more troubling "globalization" issues and has been part of the debate over passage of fast-track authority, extension of the North American Free Trade Agreement (NAFTA), and the Africa trade bill. A central concern for many is whether this trade relationship leads to lost jobs or reduced wages for the U.S. labor force, particularly unskilled workers. Over the past three decades, U.S. trade with developing countries has expanded markedly. From 1987 to 1997, developing-country trade rose 195% (compared to 104% for trade with developed countries), increasing its share from 36% to 45% of total U.S. trade. U.S. exports to developing countries grew by 243% compared to 135% for developed countries, and imports expanded respectively by 167% and 84%. Imports from developing countries represent only 5% of U.S. gross domestic product (GDP). The economic implications of these trends are disturbing precisely because trade theory may be seen to support the prospect that trade with developing countries can hurt unskilled U.S. workers. Developing countries have a comparative advantage in the production of goods using unskilled labor. Accordingly, increased U.S. imports from low-wage countries may lead to a decline in demand for unskilled U.S. workers, reducing their wages and contributing to a widening of the differential between skilled and unskilled manufacturing wages. However, because many assumptions of trade theory are violated in the real world and other factors affect real wages, the effects of trade need to be examined carefully. Economists disagree on the strength of the trade-wage inequality relationship, with estimates ranging from those that consider trade the primary problem of unskilled workers to those that see trade as virtually blameless, or overwhelmed by other factors, chiefly technological change. Most studies suggest that extreme estimates may be overstating their respective cases and that trade is only one of many factors affecting inequality. A "consensus" of estimates would put developing-country trade responsible for between 10% and 20% of the growth in wage inequality since the 1970s. Economists generally portray this as only a "modest" effect, suggesting that most of the inequality problem cannot be explained by trade. Although economists disagree on the effects of trade, they tend to agree on trade policy, arguing that protectionist policies do little to help unskilled workers and come at a very high price to the rest of the economy. Alternatives involve helping unskilled workers adjust to trade by upgrading their skill levels, helping them transition to higher quality jobs, or perhaps providing some type of transitional income assistance or insurance. In short, whether one is inclined to accept the worst case scenario on the effects of developing-country trade on the United States, or dismiss it entirely in favor of technological change as the greatest threat to the American Dream, the consensus solution among economists lies with making the work force as competitive as possible in the global economy.