Rising Tide: Is Growth in Emerging Economies Good for
the United States?
By
Robert Z Lawrence and Lawrence Edwards
“As they say on my own Cape Cod, a rising tide lifts all the boats. And a
partnership, by definition, serves both partners, without domination or unfair advantage.”
[1963 J. F. Kennedy Address 25 June in Public Papers of Presidents of U.S. (1964)
Perceptions about the benefits of globalization have undergone radical changes.
As of 2000, it was conventional wisdom that global trade had been good for developed
countries such as the United States and some countries in Asia such as China and India
that had escaped the Asian financial crisis, but bad for developing countries especially
those in Africa and Latin America that had experienced two decades of economic
stagnation. Partly in response to this view, in 2001, a new round of multilateral trade
negotiations was launched with the principle goal of creating a trading system that would
be more beneficial to developing countries – the Doha Development Agenda. Ironically,
however, over the next seven years global growth was robust and concentrated in
emerging markets. Not only were China and India able to sustain their rapid growth but
growth in Africa, the Middle East, Latin America and the rest of Asia was strong. In
many countries, growth was driven by domestic dynamics – such as growth in the middle
class -- but the pervasiveness of the growth also pointed to the important role of global
factors such as buoyant commodity markets, strong export growth and large capital
flows.
By contrast, after 2000, US economic performance was modest. The longest
postwar expansion lasted from 1993 to 2000 but it was rudely ended when the bursting of
the speculative “dot.com” bubble in the stock market led to falling investment in capital
goods and a recession in which the US manufacturing sector lost almost 3 million jobs.
While the economy recovered after 2003, manufacturing employment remained stagnant
and GDP growth averaged just 2.3 percent between 2000 and 2007. Moreover, the gains
from even this tepid growth were not widely shared. Although the top one percent of US
income-earners did well and corporate profits reached the highest share of national
income in 80 years, wage growth for both skilled and unskilled Americans was slow and
real median household income actually fell. But their slow income growth did not prevent
American consumers from responding to low interest rates and strong housing and equity
prices by going on a spending spree. The US current account reached record levels as
American imports from developing countries, especially China, increased rapidly.1
The difference between US and foreign economic performance was striking. The
US share in the world economy had declined between 1950 and 1980 as Western Europe
and Japan converged toward American income levels. But between 1980 and 2000, the
United States had actually grown about as rapidly as the rest of the world -- a remarkable
achievement for the world’s richest economy. Between 2000 and 2007, though, the
combination of weak American growth and rapid growth in emerging economies reduced
the US share in global GDP by about ten percent.2
There were also notable differences in economic performances in the developed
and emerging markets in response to the 2008 global financial crisis. While no country
was spared its effects, economies like China and India were able to maintain positive
growth and recover quickly. With their financial sectors relatively unaffected, inflation
rates relatively low and large holdings of foreign exchange reserves, many developing
countries were able to offset the loss in exports with stimulatory domestic policies. These
actions in turn bolstered primary commodity markets helping other troubled developing
country producers. In the developed countries however, falling demand devastated the
manufacturing sector -- in the US, between 2007 and 2009 an additional two million jobs
were lost in manufacturing – while troubles in the financial system shackled the recovery.
Long term forecasts by the International Monetary Fund suggested that the US share in
global output was likely to decline further.
It was not surprising, therefore, that even prior to the global financial crisis,
Americans had become increasingly disillusioned with international trade The
coincidence of trade deficits and increased imports from developing countries with
several years of sluggish real wage growth, growing income inequality, and declining
manufacturing employment all contributed to these perceptions. In addition the rapid
growth in the off-shoring of business services sparked considerable concern. In 2004 it
was hard to open a newspaper without reading stories about the off-shoring of jobs going
to India”. Strikingly, however, the stories disappeared from the headlines as it emerged
that the scale on which this had happened was actually quite modest. Nonetheless, it was
clear that the concerns had strike a cord with the public and helped contribute to concerns
about trade.
In January 2008, for example, the negative views about trade were reflected in
responses to a poll by Fortune magazine in which 63 percent of the US respondents
indicated that “trade had made matters worse for the United States as a whole.” 78
percent felt it “made things worse for US workers” and 55 percent felt it “made things
1
US imports from China grew from $100 billion in 2000 to $323 billion in 2007!
2
According to the IMF, the US averaged 3.3 percent GDP growth in both the 80s and the 90s. The rest of
the world grew at annual rates of 3.1 and 2.8 percent in the 80s and 90s respectively
worse for US business.” 3
And 68 percent said that “the benefits of trade to other
countries were greater than those for the United States.”4
But was not just the populace at large that voiced negative views about trade.
Some very distinguished economists also raised doubts. Emblematic was an op-ed
published in the Financial Times in April 2008 by former US Treasury Secretary
Lawrence Summers who would become the director of the National Economic Council in
the Obama Administration. Summers’ piece entitled “America needs to make a new case
for trade” raised several concerns. 5
First, he invoked the authority of Nobel Laureate
Paul Samuelson who had pointed out that growth in developing countries could reduce
America’s gains from trade.6
Moreover, Summers was not alone in agreeing with
Samuelson. In her 2008 campaign for the American Presidency, for example, Hilary
Clinton referred to Samuelson’s argument as providing support for her position that the
US call a “time-out” on negotiating any new trade agreements to reconsider whether
these were in America’s interest. 7
Second, Summers observed that while global growth might benefit Americans
who were already highly paid for their intellectual creations -- such as those making
movies -- it could put downward pressure on US wages in industries such as computers
that the US produces on a significant scale. Again Summers was not alone. In making
this claim, he was joining another Nobel Laureate, Paul Krugman who had raised similar
alarms a year earlier writing that “growing U.S. trade with third world countries reduces
the real wages of many and perhaps most workers in this country.” 8
Third, Summers observed that growth in countries like China had increased the
price of oil for the US and he also pointed out that such growth also increased
competition for “environmental resources”..9
3
In September 2009, in response to a Rasmussen Poll, Only 14 percent of Americans said what is good for
the World economy is always good for the night States. Seventy-five percent disagreed with the statement.
http://www.rasmussenreports.com/public_content/politics/general_politics/september_2009/60_favor_less_
international_economic_oversight_not_more
4
http://money.cnn.com/magazines/fortune/electionpoll/2008/pollresults.html
5
Lawrence Summers, “America needs to make a new case for trade”, Financial Times April 27 2008.
6
“As Paul Samuelson pointed out several years ago, the valid proposition that trade barriers hurt an
economy does not imply the corollary that it necessarily benefits from the economic success of its trading
partners. ….When other countries develop, American producers benefit from having larger markets to sell
into but are challenged by more formidable competition. Which effect predominates cannot be judged a
priori. But there are reasons to think that economic success abroad will be more problematic for American
workers in the future.”
7
“Clinton doubts benefits of Doha revival” Financial Times, December 2 2007. Senator Clinton was
quoted as saying “I agree with Paul Samuelson, the very famous economist, who has recently spoken and
written about how comparative advantage, as it is classically understood, may not be descriptive of the 21st
century economy in which we find ourselves.” http://www.ft.com/cms/s/0/bacd5572-a103-11dc-9f34-
0000779fd2ac.html.
8
Paul Krugman, “The Trouble with Trade; Keep Our Markets Open but Protect those who get Hurt”
Pittsburgh Post-Gazette (Pennsylvania), December 29, 2007.
9
Summers also expressed concern that “growth in growth in the global economy encourages the
development of stateless elites whose allegiance is to global economic success and their own prosperity
rather than the interests of the nation where they are headquartered”….. “Even as globalisation increases
inequality and insecurity, it is constantly and often legitimately invoked as an argument against the viability
The concerns raised by Summers and others are especially troubling because they
relate to the long run impact of trade. They would not be mitigated by the passage of
time. Traditional objections to trade often focus on “jobs”. Some believe that the growth
in imports from developing countries prevents the US economy from reaching full
employment. But this has not been the US experience. Since the acceleration in imports
from developing countries the US economy has twice been able to reach close to
historically low unemployment rates – 4.0 percent in 2000 and 4.5 percent in 2007.
Others, more legitimately focus on the adjustment costs that trade imposes. Indeed,
increased trade does cause short term pain in the form of job-loss and dislocation.
Nonetheless the justification for open trade is that these adjustment costs will be more
than offset by eventual gains from improved resource allocation once most of those who
lose their jobs are reemployed.10
Support for free trade is very widespread among economists. Accustomed to
being berated for their stupidity, free trade skeptics relish the sight of apparent cracks in
the foundation on which that support rests. When those in the highest ranks of the
economics profession raise questions about trade’s benefits, they attract lots of attention.
11
But the high-priests of the economics profession making these arguments are not
apostates who advocate protectionism. They are also not challenging conventional trade
theory and agreeing with those who claim that the theory requires making outdated
assumptions that are “inappropriate for the 21st
Century.” Instead, they are actually
invoking standard trade theory to make empirical claims familiar to anyone who has
taken an undergraduate course in international economics. The textbooks for these
courses do of course demonstrate how trade could be more beneficial than selfsufficiency,
but they also explain that these benefits could shrink or grow and that trade
can create winners and losers within nations.
While they may not represent an intellectual challenge, therefore, if these
concerns are valid, the implications for US policies could be profound. The downward
pressures on US living standards from developing country growth would be occurring at
a particularly inopportune time since Americans were already being forced to tighten
their belts because of the global financial crisis. The US has been on a spending binge
that has proven to be unsustainable. Since the late 1990s, US households have become
increasingly indebted as their homes and stocks have appreciated while credit has been
available at low real interest rates. Because home and equity prices declined precipitously
when the financial crisis erupted in 2007-2008, it seems reasonable to foresee a period in
which American households increase their savings and rebuild their wealth. More US
growth will therefore have to come from exports and less from domestic consumption.
of progressive taxation, support for labour unions, strong regulation and substantial production of public
goods that mitigate its adverse impacts.” These concerns are more fully discussed by Theodore H. Moran,
“American Multinationals and American Economic Interests: New Dimensions to an Old Debate”
Washington DC: Peterson Institute for International Economics Working Paper 09-3.
10
Cite benefit adjustment cost ratios.
11
This is documented by Jagdish Bhagwati, “Don’t Cry for Free Trade” in Jagdish Bhagwati and Alan
Blinder, Offshoring of American Jobs? What Response from U.S. Economic Policy? Cambridge MA: MIT
Press 2009 pp 8. They include Aaron Bernstein, “Shaking UP Trade Theory” Businessweek, Dec 6 (2004).
Thus it is likely that whatever the trend effects of growth in emerging economies, a
weaker dollar and lower US terms of trade will be part of the adjustment process.12
The US economy responded to the recession caused by the global financial crisis
with expansionary monetary and fiscal policies. But over time will become increasingly
dependent on foreign growth to maintain the recovery. If the critics are correct, the US is
caught between a rock and a hard place. On the one hand, it needs foreign growth to
maintain demand; on the other hand, the costs of this dependence could rise if such
growth reduces America’s terms of trade.
US foreign policy might also be affected. As exemplified by the Marshall Plan
after the Second World War, American global economic leadership has been predicated
on the view that a “rising tide lifts all boats.” The American case for a liberal economic
order is that it is “win-win.” Open markets are conducive to growth in foreign economies
and that growth is in America’s economic interest. But the claim that the US is hurt by
developing country growth could provide an economic rationale for policies that would
seek to preserve US incomes by keeping the rest of the world poor. Given the emergence
of countries such as China and India as major global players, an American repositioning
on this issue and the policies that might follow could seriously threaten the current global
order which is increasingly centered on the G20 group that gives more decision-making
power to developing countries. 13
It could, to be sure, still be in America’s interest to
foster foreign economic growth, either because of altruism or non-economic benefits such
as greater stability and peace but the case for doing so would be much weaker than if
foreign growth also provides material advantages for Americans.
Even if trade with developing countries does benefit the US as a whole, if it also
harms large numbers of US workers, there could be reasons for concern. In addition
political opposition to open trade could be strong. If American workers were generally
doing well, some pressures on US wages because of trade might be acceptable, but in a
context of stagnant compensation, rising income inequality and high unemployment, they
could engender more powerful protectionist responses. The conventional nostrum,
adjustment assistance for workers displaced by trade, is of no help to workers that remain
employed but experience real wage reductions. A response that could help would be more
progressive tax and transfer policies to redistribute gains from winners to losers. In
practice, however, it is politically difficult to raise taxes on the rich, and workers have
justifiable reasons for skepticism that they will be fully compensated. As Paul Samuelson
observed in his article, “Marie Antoinette said, “Let them eat cake” But history records
no transfer of sugar and flour to her peasant subjects”.14
12
See for example, Bergsten C Fred and Williamson, John (eds) 2004 Dollar Adjustment, How Far?
Against What? Washington DC Peterson Institute for International Economics and Bergsten C. Fred (ed)
2009 The Long Term International Position of the United States, Special Report no 20.( Washington DC:
Peterson Institute for International Economics).
13
At the Pittsburgh Summit in September 2009 it was decided to designate the G-20 to be the premier
forum international economic cooperation.
14
Samuelson (2004) page 144.
The implications of higher oil prices are also significant. The middle class in India
and China is growing rapidly. This will result in rapid increases in automobile purchases
and use and put upward pressure on oil prices. America’s urban geography and
transportation system are premised on abundant and inexpensive gasoline. Oil is also the
most important reason for the strategic significance of the Middle East because the
United States imports about fifty-eight percent of its needs. The oil price influences
politics in US allies and adversaries. By its impact on oil prices, therefore, developing
country growth could fundamentally change both America’s domestic lifestyle and its
foreign policies.
Finally, developing country growth will have a major effect on Green –House Gas
(GHG) emissions. With the US committed to taking action on global climate change,
frictions over costs and obligations are bound to grow. Without meaningful action by
developing countries, costly conservation efforts by developed countries might do little to
prevent global warming. Indeed, in the Byrd-Hagel resolution passed by the US Senate in
1997 by a 95-0 vote, developing country participation was endorsed as a critical
precondition for US participation in commitments under the Kyoto protocols. But
developing countries have not accepted binding obligations to reduce their emissions
because of their concerns such policies would limit their growth. The great challenge in
this area, therefore, is how to reconcile developing country growth with effective action
on climate change.
Study Outline and Findings. Does growth in developing countries reduce US
welfare? Does it significantly increase wage inequality? Does it raise the cost of oil
imports? Will it doom efforts to prevent climate change? In this study, we evaluate the
concerns voiced by the economists we have quoted and draw policy implications.15
Not
surprisingly, given their eminence, the economists’ concerns about US welfare; wage
inequality and oil prices all rest on firm theoretical grounds. Our consideration of each
topic, therefore, begins with a discussion of the theories on which these concerns are
based; this is followed by an examination of the evidence. A final chapter concludes and
draws policy implications
We will cast doubt on several of the critics’ claims. We do not find that trade with
developing countries has reduced American living standards. On the contrary, we find
that such trade has improved America’s terms of trade and increased its product choices.
We also do not find that recently trade with developing countries has exerted major
pressures for increased US wage inequality. The core explanation for both these
outcomes is the same: the US and the developing countries have specialized in very
different products and processes and this makes their growth complementary rather than
competitive. Developing country growth provides US exporters with larger markets and
15
For discussions of the issue see William C Cline, The Economics of Global Warming, 1992, David G.
Victor, Climate Change: Debating America’s Options, Council on Foreign Relations, Washington DC:
Brookings Institution Press, 2004 Gary Clyde Hufbauer , Steve Charnovitz and Jisun Kim , Global
Warming and the World Trading SystemWashington DC: The Peterson Institute for International
Economics, March 2009 and Trevor Houser , Rob Bradley , Britt Childs , Jacob Werksman and Robert
Heilmayr Levelling the Carbon Playing Field: International Competition and US Climate Policy Design,
May 2008
with the possible exception of some computer and electronics products, as yet developing
countries are not major competitors for US exporters. In addition, close substitutes for
many of the finished and intermediate products the US imports are no longer produced at
home. American producers are not adversely affected by these imports, but US buyers
enjoy lower prices and more choice.
Oil however is an exception. The purchases of oil-importing countries do
compete with each other and large differences in world oil prices can be occasioned by
relatively small changes in the world oil supply-demand balance. In this regard demand
generated by developing country growth has played a role in boosting oil prices. But the
primary responsibility for the shortfall between demand and supply that caused oil prices
to soar between 2003 and 2008 actually rests with the developed countries whose oil
production failed to keep up with their demand and as a result accounted for eighty
percent of the rise. The contribution of the US to these higher prices was actually as
important as China. US policy should focus on reducing dependence on foreign oil, rather
than reducing foreign economic growth.
In sum, the maxim that a rising tide raises all boats remains an appropriate guide
for US international economic policy. Americans benefit from growth in developing
countries and the effects on wage inequality in the US are modest.
Aggregate welfare. In Chapter 1, we consider the theory behind the concern that
America’s gains from trade are shrinking. Samuelson’s basic point is that foreign growth
could reduce US welfare by having an adverse impact on its terms of trade – the ratio of
export to import prices – because these are the link between trade performance and
welfare. In principle the impact of foreign growth on the terms of trade is ambiguous: As
Samuelson showed using a conventional Ricardian model, the US gains if foreign
productivity growth occurs equally in all foreign industries. It also gains with foreign
productivity growth in export industries. But if foreign productivity growth occurs only
in industries that compete with imports from the US -- import biased growth -- the US
could lose because foreigners emerge as competitors for US exports. Since any of these
outcomes is possible, empirical investigation is required to resolve the issue. But we can
make presumptions on a priori grounds. John Hicks conjectured, for example, that in
their early stages of development, countries are most likely to experience rapid
productivity growth in the industries in which they have a comparative advantage. Such
export-biased growth will improve the terms of trade of their developed country trading
partners. He suggested that the negative case for the rich countries, in which developing
country growth is biased towards their imports, is likely to occur only when they come
close to developed country income levels.
As in most classical trade models Samuelson assumes that trade is balanced.
However, to test the validity of his concern, we need to take account of the fact that the
US has been running large trade deficits. This is necessary because the trade balance is
likely to have an independent and systematic influence on the terms of trade. In the
second section of chapter one therefore, we explicate the theory of how international
transfers (net foreign borrowing or lending) might affect the terms of trade. We argue
that the relationship between the terms of trade and the trade balance can be captured as a
“transfer” schedule. This schedule will have a negative slope is expenditure patterns are
home biased. This allows us to distinguish between movements along the transfer
schedule which are caused by spending changes (associated with net foreign borrowing
and lending) and upward and downward movements of the transfer schedule which are
associated with the forces explored by Samuelson that we can identify as shifts in
competitiveness. This framework provides the basis for the empirical tests in the
following two chapters.
In Chapter 2, we explore the behavior of the terms of trade over the postwar
period and plot the relationship between the terms of trade and the trade balance. We find
support for John Hick’s conjectures. From 1950 until the late 1960s, when today’s
developed countries were relatively far behind the US, the US terms of trade had a strong
upward trend. In the 1970s, as he predicted, when Japan and Europe converged more
closely to US productivity levels, however, the improvement was more than reversed.
More recently, countries such as China and Mexico with a sixth and fifth of US
productivity levels respectively have become important US trading partners. Again, as
Hicks would have anticipated, a trend of improving terms of trade has again become
apparent. Between 1993 and 2008, we find that the US manufacturing (and non-oil goods
and services) terms of trade steadily improved because the relative prices of US
manufactured imports from developing countries declined. Between 1995 and 2006,
Germany and Japan also experienced rising trends in their manufacturing terms of trade.
Although this price evidence is instructive, it is not completely dispositive of
Samuelson’s concerns because these terms of trade improvements were associated with
larger current account deficits. The relevant question is if the US was to go back to the
trade balance it had prior to acceleration of growth with developing countries, what
would the terms of trade be?
To answer this question we chart the relationship between the trade balance and
the terms of trade. Using data from 1980 through 2008, we find a negative association
that confirms our theoretical expectations. Each 1 percent improvement in the terms of
trade of goods and services is associated with a 4 percent decline in the ratio of exports to
imports. After 2003, the transfer schedule shifts downwards and lower terms of trade are
consistent with any given trade balance. However, this decline in competitiveness is
entirely due to oil. Once oil is excluded, after 2004, the schedule relating the (non-oil)
terms of trade for any given (non-oil) trade balance in goods and services, actually shifts
upwards. This is contrary to what we would expect if Samuelson's concerns about import
biased growth in developing countries were increasingly relevant. Instead, the data point
to strong export biased growth in foreign countries. In fact, the terms of trade
improvement was sufficient to offset a decline in non-oil competitiveness that had
occurred in the 1980s.
While the terms of trade are the relevant variable for appraising welfare, the real
exchange rate is of independent interest as an indictor of required adjustment. In Chapter
3 we therefore explore the relationship between the trade balance and the real exchange
rate through plots and regression analysis. Both our plots and our regressions suggest that
between 1980 and 2000 the relationship between the trade balance in goods and services
and the real exchange rate was remarkably stable. Changes in the world economy
associated with the rise of developing countries during this period did not have a material
impact on the structural determinants of US trade flows.
After 2000, however, there are both unfavorable and favorable developments that
change the relationships between the variables. On the one hand the plots indicate
adverse shifts in the trade balance schedules relative to the exchange rate, even after we
exclude oil. On this account a weaker exchange rate was required to achieve any given
(non-oil) trade balance. Part of the reason is that merchandise export volumes declined
relative to predictions after 2000. Our analysis indicates that this is not due to increased
international competition from developing countries. Rather, we conjecture that the deep
drop in domestic capital goods spending in the recession adversely impacted the
industrial base that also produces for exports. We do, however, find that US comparative
advantage in computers and electronics declined.
On the other hand, there were a number of favorable developments that more than
offset the effect on US welfare associated with the relatively poor export performance.
The pass through of real exchange rate changes into import prices has declined
considerably. The implication is that after 2004, the US non-oil terms of trade were
stronger than expected, given the depreciation of the dollar. The discipline played by
China in generally restraining import prices played an important role in this outcome.
Our estimates of the US import relationship also point to an additional source of
gain: the benefits from increased varieties of imports. Output growth in both
industrialized and non-industrialized countries raises US import demand through
production of new varieties.
In sum, our estimates suggest that even taking the impact of larger (non-oil) trade
deficits on the terms of trade into account and the decline in export volumes relative to
predictions, growth in developing countries has been good for the United States. Our
estimates, for example, indicate that in addition to the increase in varieties, a restoration
of the US trade balance from 2007 to 1990 levels would still leave the US with a 5 log
point improvement in the non-oil terms of trade. Contrary to the concerns raised by
Samuelson, that growth has improved the non-oil terms of trade and increased the variety
of products available to Americans. Had developing countries grown even faster, the
variety of imports available to Americans would have been even greater and the terms of
trade associated with any given trade balance even higher.
Oil Prices. Despite the improvement in the manufacturing terms of trade, the
aggregate US terms of trade in 2008 were lower than in the mid 90s. As we discuss in
Chapter 4, higher oil-import prices account for the difference. We analyze the
contributions of supply and demand in both developed and developing countries in
driving oil prices higher between 2000 and 2008 when they averaged $95 a barrel. While
attention has been focused on the contribution of demand growth in China and other
emerging markets, the role of slow production growth in developed countries was far
more important. Ex ante demand by OECD countries increased by 6.7 percent between
2000 and 2008, but their oil production declined by nine percent. This shortfall explains
81 percent of the price rise over the same period. The increase in net Chinese demand can
explain 34 percent of the price rise, but increased supplies in other developing countries
offset 15 percentage points, so that overall developing countries accounted for just 19
percent of the rise. The net-supply shortfalls created by the US alone, where production
fell by 6 percent over the period, were actually quite similar to those created by China.
Strong emerging economy growth in the future will not necessarily lead to higher
oil prices. Future outcomes are extremely sensitive to both supply growth and
conservation trends. Scenarios modeled by the US Energy Information Agency suggest
that increased supply (or reduced) demand of just one percent per year could reduce oil
prices in 2030 by seventy-five percent compared with what they would otherwise be.
Developing country growth is a major problem for climate change. The businessas-
usual emissions of growth in emerging economies especially China will dominate
global aggregates GHG emissions and cannot be offset even with radical conservation by
industrialized countries. Measures that reduce the carbon intensity of electricity
generation in these countries are required.
Wage Inequality. Do the improvements in the US terms of trade and declines in
the relative import prices from developing countries imply that trade with developing
countries has increased US wage inequality? Section two of the study suggests the
answer is no.
Chapter 5 explicates the theory. Orthodox trade theory highlights a key role for
changes in the relative prices of skilled- and unskilled-labor intensive traded goods in
relative wage determination within industries. Cheaper exports produced by developing
countries could, according to this theory, cause inequality to rise in the US. This theory
has also served as the basis of many studies of the effects of trade and relative wages.
However, to link changes in relative traded goods prices directly with changes in relative
wages requires the assumption that close substitutes for imports are produced
domestically. If imported and domestic products are imperfect substitutes, or countries
fully specialized, the transmission process could be attenuated. In fact, if they do not
compete directly in making products similar to imports, lower priced imports from
developing countries could actually raise the real wages of less skilled US workers by
increasing their purchasing power.
In chapter 6 we survey several studies of the impact of trade on US relative wages
since the mid 1990s. These have not found substantial effects. US industries with high
shares of imports from developing countries actually do not employ relatively high shares
of unskilled workers. As a result, estimates of the net factor content of trade that use US
input coefficients do not imply that trade caused large relative wage changes. Approaches
that estimate mandated wage effects or use general equilibrium simulation models also
suggest that over the past decade, the impact of trade on US wage inequality has not been
large.
In chapter seven we confirm this conclusion. Although the US industries with
high shares of developing imports have experienced declining relative prices, this has not
translated into declining relative prices in unskilled-labor-intensive US industries. This is
because, even highly disaggregated employment data indicate that manufactured imports
from developing countries are not especially concentrated in unskilled-labor-intensive US
manufacturing industries. Particularly once productivity growth is taken into account, US
domestic price changes have not mandated increased wage inequality. The relative wage
changes mandated specifically due to imports from developing countries have been
negligible. Not only that there have not been major changes in US wage inequality since
the late 1990s, but even without developing country trade, the outcomes would have been
similar.
The assumptions for applying the conventional trade theory linking traded goods
prices to relative wage changes are not met. Judged by US input coefficients US
manufactured imports from developing countries are as skilled-labor-intensive as US
manufactured imports from developed countries. They are actually more skilled-labor
intensive than US manufacturing production in general. This means that declines in the
relative prices of developing country imports do not necessarily result in more wage
inequality.
One three digit US industry (NAICS 334) -- Computers and Electronics –
highlights the problems with assuming that declining import prices from developing
countries automatically translate into wage inequality along skill lines. Viewed through
the prism of conventional trade theory in which specialization is assumed to be
incomplete, the computer and electronics sector (NAICS 334) is an anomaly. Developing
countries account for three quarters of US imports in the sector. Yet the US industry
employs very high shares of skilled workers and the pace of its productivity growth and
price declines reflect rapid technological change. But it is problematic to assume that the
skill-intensity of the computer and electronics sector in the US is an accurate measure of
the skill-intensity of US imports from developing countries. Both horizontal- and
vertical-specialization are important. Many of the electronics products made (and
finished) in the US are different from those that are imported and tasks that add value to
products within the US differ from those that are required to produce the components that
are imported. The behavior of the computer industry is an extreme version of a more
pervasive pattern of product and intra-industry specialization. These findings suggest
either that the Hecksher-Ohlin theory fails to explain trade patterns, or that developed and
developing countries use different production methods and/or produce different goods.
In Chapter 8 we distinguish among these explanations. We find that the evidence
strongly suggests that developed and developing countries produce different products.
Our analysis using value and unit value data at the six and ten digit Harmonized System
level reveals that for the most part, developed and developing country exports do not
overlap. And even when they share similar highly disaggregated product categories, there
is a high degree of within-product specialization by developed and developing countries.
Export unit values of low and middle income countries are a fraction (typically between a
third and a half) of the equivalent U.S. export products and high income OECD exports
to the US. This suggests that they are not close substitutes.
While developing countries have experienced growth in exports classified as
technology intensive or advanced-technology products, it has mainly been low priced
varieties that differ substantially from those exported by high income OECD countries
and the US. We also find no evidence of within-product quality upgrading by developing
countries in these technology intensive products. The within-product relative price
differentials in these high-tech sectors have remained remarkably stable over the entire
time period we analyze. Growth in exports from developing countries to the US appears,
therefore, to have been through increases in the supply of existing or very similar
varieties, rather than through within-product upgrading of quality.
These findings suggest that great caution is required in using of measures of
“advanced -technology” trade that are routinely produced by the US Department of
Commerce in its monthly trade release to track performance. When imports from
developing countries are important, the trade balances in particular high-tech products are
likely to involve comparing apples and oranges. This is especially the case for
information technology products.
All told this evidence confirms the impression that the key differences between
developed and developing country exports do not only reflect differences in the industries
from which they originate, but also the degree of sophistication of the products produced
by those industries. The fact we find these differences at such disaggregated levels
suggests that the most important explanation for the finding that imports from developing
countries are not concentrated in unskilled-labor intensive US industries is due to that
fact that they are different products rather than that they reflect aggregation bias or are
the same products but produced using different technologies. The high degree of
international specialization helps accounts for the weak link between import prices and
industry relative wage behavior we and others have found. It also helps confirm our
rejection of Samuelson’s fear that developing country growth could be biased towards
producing US exports.
Chapter 9 concludes and draws four major policy implications. First, the US
continues to benefit from developing country growth and if the Hicks conjecture is
accurate, developing countries will pursue export-led growth for some time to come. US
tariffs are generally lower than those in other countries. This suggests that the best policy
for offsetting any adverse terms of trade movements in the future would be to persuade
other countries to match US levels – as occurs in Free Trade Agreements. Rather than
occasioning a time-out, therefore, the Samuelson concern is actually a reason for more
vigor in negotiating new trade agreements.
Second, income inequality has increased in the US, but trade with developing
country is a modest contributor. Here in any case the appropriate policy response is not
trade protection but income redistribution to deal with inequality and adjustment
assistance to deal with dislocation.
Policies need to use different instruments to deal with oil and climate change.
Even if effective policies are introduced to set a price on carbon emissions they will do
little to alter US oil consumption patterns. Conversely, while they may help, even very
high world oil prices would not generate sufficient reductions in GHG emissions to
adequately mitigate threats of climate change. This leads to recommendations for two
sets of policies. One should be prescheduled increases in measures in oil import tariffs or
taxes that are designed to reduce US oil consumption and encourage the production of oil
and oil-substitutes. The second set should be policies that gradually raise the price of
GHG emissions at home. In addition, rather than policies to retard developing-country
growth, policies should also assist these countries in the costs of conserving energy and
achieving cleaner growth.