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The United States of Inequality -- Part 7

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Trade Didn't Create Inequality, and Then It Did -- I typed this article on a laptop that was made in China. Just about everything I own was made in China. Just about everything you own was made in China, too.

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Kit B. (277)
Saturday September 18, 2010, 8:27 pm
Trade Didn't Create Inequality, and Then It Did

I typed this article on a laptop that was made in China. Just about everything I own was made in China. Just about everything you own was made in China, too. In 1979, when the Great Divergence began, you and I didn't own anything made in China. With Mao only three years in the grave, China still had a sluggish centrally planned economy. In that year, Mao's successor, Deng Xiaoping, decided enough was enough and inaugurated various market reforms. "Black cat, white cat," the Communist leader famously said. "What does it matter what color the cat is as long as it catches mice?"

Since 1979, China has caught a stunning quantity of mice, raising the annual value of its exports one-hundredfold. In 2007, China displaced the United States as the world's second-biggest exporter, and in 2009 it displaced Germany as the world's biggest exporter. That year, China's per capita gross national income was $6,710—compared to $47,240 in the United States—and the U.S. trade deficit with China stood at $227 billion. Given China's aggressively mercantilist trade policy and its preposterously huge pool of cheap labor, it's logical to wonder whether the common timeline of China's manufacturing boom and the United States' inequality boom is more than mere coincidence. Did China—and growing trade competition from other low-wage nations—cause the Great Divergence?

Two decades ago, Adrian Wood, a British economist, started arguing that trade with low-wage countries lowered wages for unskilled workers in developed countries. "There is a clear inverse association," Wood wrote in a 1995 paper. "Countries with larger increases in import penetration experienced larger falls in manufacturing employment." But in the United States, Wood had to concede, imports of manufactured goods from low-wage countries still totaled less than 3 percent of gross domestic product. By itself, that wasn't enough to displace many workers. Wood answered by arguing the effects were subtle and indirect. For example, he wrote that imports from low-wage countries required more labor than other goods, and therefore displaced more U.S. workers than imports from high-wage countries.

Most leading economists in the United States didn't buy it. Paul Krugman (then at MIT, now at Princeton) and Robert Z. Lawrence (then at the Brookings Institution, now at Harvard), argued that international trade had played a much smaller role in U.S. manufacturing's decline than had domestic considerations. Among these, ironically, was the U.S. manufacturing sector's own efficiency, which had lowered prices on consumer products and therefore on the proportion of U.S. spending on goods (TVs, refrigerators, groceries) as opposed to services (CT scans, legal advice, college tuition). From 1970 to 1990, the prices of U.S. goods relative to services had fallen by nearly one-quarter. "Although the effect of foreign competition is measurable," Krugman and Lawrence concluded, "it can by no means account for the stagnation of U.S. earnings."

A decade later, Krugman decided his earlier analysis no longer held up. "My argument was always yes, in principle" imports from low-wage countries could affect income inequality, Krugman told me. But in the 1990s there simply weren't enough of them. That changed in the aughts. In a December 2007 New York Times column and a 2008 paper for the Brookings Institution, Krugman observed that the United States had in 2006 crossed "an important watershed: we now import more manufactured goods from the third world than from other advanced economies." (See Figure One.) Imports of manufactured goods that came from less-developed nations had more than doubled as a percentage of gross domestic product, from 2.5 percent in 1990 to 6 percent in 2006. Moreover, the wage levels in the countries ramping up U.S. trade the fastest—Mexico and China—were considerably lower than the wage levels in the countries whose increased U.S. trade had created worry in the 1990s—South Korea, Taiwan, Hong Kong, Singapore. The Southeast Asian nations had, in 1990, paid workers about 25 percent of what U.S. workers received. By 1995 they paid 39 percent—demonstrating, reassuringly, that low-wage developing countries that undergo rapid economic growth don't stay low-wage for long. But as of 2005, Mexico and China paid 11 percent and 3 percent, respectively. "It's likely," Krugman concluded, "that the rapid growth of trade since the early 1990s has had significant distributional effects."

Lawrence, looking at the same new data, continued to believe that trade did not affect U.S. income inequality to any great extent. Lawrence focused on the fact that China was increasingly exporting computers and other sophisticated electronics. To depress the wages of lower-skilled workers in the United States, Lawrence reasoned, China would have to compete with American firms that employed lower-skilled workers. But the U.S. tech sector doesn't, for the most part, employ lower-skilled workers. It employs higher-skilled workers. If trade with China were throwing anybody out of work, Lawrence concluded, "it is likely to be … workers with relatively high wages." And in fact, Lawrence wrote, during the first decade of the 21st century there was very little measured increase in income inequality "by skill, education, unionization or occupation." Income inequality did increase through the aughts, but that was because incomes soared at the tippy top of the income-distribution scale. It didn't increase because less-skilled workers got squeezed—or rather, it didn't increase because less-skilled workers got squeezed any more than they did during the previous two decades. At the very bottom, incomes actually edged up slightly.

Krugman wasn't convinced by his former collaborator's argument. "There is good reason to believe that the apparent sophistication of developing country exports is, in reality, largely a statistical illusion," he answered in his Brookings paper. Unskilled laborers paid a pittance in China weren't really doing high-tech work, Krugman wrote. They were grabbing sophisticated components manufactured in more advanced and higher-paid economies like Japan, Ireland, and—yes—the United States, and they were slapping them together on an assembly line. That couldn't be good news for less-skilled workers in the United States, though Krugman said he couldn't quantify the effect without "a much better understanding of the increasingly fine-grained nature of international specialization and trade."

Where does that leave us? Trade does not appear to have contributed much to the Great Divergence through the mid-1990s. Since then, it may have contributed to it more significantly, though we don't yet have the data to quantify it. With trade more than with most topics, the economics profession is struggling to interpret a reality that may not fit the familiar models.

Trade Didn't Create Inequality, and Then It Did
By Timothy Noah for
The United States of Inequality Part 7

Graphs and charts on article page.

Rebecca T. (1)
Sunday September 19, 2010, 1:37 pm
I check everything I buy (and aside from groceries, that really isn't much at all) and refuse to buy products made in China. My motive: I do not want to support a country that so shamelessly engages in the black market for animals on the near brink of extinction.

Kit B. (277)
Sunday September 19, 2010, 2:04 pm
I would disagree that socialism is the answer; there are no quick, easy one word, one concept answers. Co-ops are a part of the answer, revamping the operating systems and structures will help, but to rely on just one concept to solve so many years of neglect and ignorance of deep rooted problems will dig us in deeper.

Jo Balltes (44)
Sunday September 19, 2010, 2:38 pm
Thank you very much for sharing x

Ricardo C. (66)
Sunday September 19, 2010, 3:32 pm
In China they use "forced" labor. Yes, "forced" labor because they pay very low wages and they can compete with anyone in the world because of this. For countries that pay high wages it will be more difficult to compete in the worldwide market. But that's not the only thing that may favor China, wait till they start making superior products! When this happens, China will be world power No. 1...! In order for the U.S. to continue as a super power, it will have to start from square one! That's about moving back 30 years in wages and product costs. If we don't do it, things will get worse and worse. BUT, only time will tell...


Marlyn Vega (1)
Sunday September 19, 2010, 4:14 pm
thanks for sharing

Allan Yorkowitz (461)
Sunday September 19, 2010, 5:10 pm
Yes, the US does employ highly skilled workers at a tremendous salary, health benefits, stock options, 401k plans. How are we ever going to compete with China?

Trish K. (93)
Sunday September 19, 2010, 5:21 pm
Yes , What Global Trade contributed was a Loss of JOBS for Americans.
And I didn't even have to "struggle to interpret" that .

Kit B. (277)
Sunday September 19, 2010, 5:34 pm
How do we compete with China? We don't. China is still very much a totalitarian government, we are bordering on that by still thinking in terms that belong to yesterday.

We have the need, the resources, the labor to rebuild this country, from the infrastructure to totally ending our dependence on fossil fuels, cleaning up our water ways, the way we currently abuse our farming lands and our landfills for trash. The technology is here, the jobs are needed, we are country are so deeply "married" to only one way of thinking that we react we "knee jerk" response to new and need ideas. Any thing aimed at protecting the citizens from massive corporate abuse, and total disregard for our air, water and land, are quickly labeled "socialism" or "fascism." Far too many find these labels though without reality or context, to become the standard bearer to prevent any efforts that moves out of this quagmire and moving forward.

Matloob ul Hasan (81)
Sunday September 19, 2010, 7:24 pm
Noted, thanks.

Lis T. (0)
Sunday September 19, 2010, 7:42 pm
Interesting article.....kind of scary though..thanks for sharing...

alex croes (29)
Sunday September 19, 2010, 8:01 pm
this guy is good,socialism is the answer to finish poverty

Elvira S. (82)
Sunday September 19, 2010, 8:23 pm
I try very hard to buy goods made here in Canada, specifically in my home province of British Columbia. it is becoming quite a challenge though, the products are either difficult to find or are out of our price range.With our insatiable consumerism and thirst for cheap goods from conglomerates like Walmart, we have screwed ourselves economically.

moggy w. (119)
Sunday September 19, 2010, 10:12 pm
very scary article. I don't know an answer. We would like to have trade income like China, but do we want to become like China? Will the nation that treats it's workers worst be rewarded for it? How can that not send that message to our government, who have the power to improve our lives, or not?
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