Are Free Trade Agreements Really Good For Consumers ?

One of the major arguments in favor of Free Trade Agreements is that it allows American consumers to buy cheaper goods made in other countries -- and that this allows them to enjoy a better standard of living. But that is not necessarily true.

We know that these agreements are good for giant corporations and bad for American workers, but it may also be a bad deal for Americans in general (including consumers).

Here is how Josh Bivens at the Economic Policy Institute explains it:

Often, proponents of expanding trade argue that its benefits are progressive because it lowers the prices of goods that are disproportionately consumed by low- and moderate-income households. This, however, looks at only one narrow facet of trade’s impact: lower prices for consumers stemming from cheap imports. But these lower prices for consumers are the gross benefits of expanded trade, so of course focusing solely on them would show trade helps everybody. One also has to examine the other effects of trade—those that impose gross costs as well.

For example, while expanded trade lowers prices for imports, it also raises domestic prices for exported items. At the national level, because imports are more likely than exports to be consumption goods, this does mean that trade’s net effect is to lower prices faced by consumers. But it is possible that exported items are also disproportionately consumed by low- and moderate-income households. Take an obvious example: the U.S. exports a lot of food products (grain, beef, etc.). If it did not export a lot of these food products, their prices would be cheaper in the United States. Given that lower-income households likely spend a higher share of their income on food than higher-income households, expanded trade of food exports could well have regressive effects.

Further (and much more importantly), looking only at prices misses the effect that growing trade has on wages. The same fall in import prices that benefits consumers also leads to lower wages for most workers. Essentially, as growing imports lower prices of import-competing goods produced in the United States, domestic production of these import-competing goods becomes less profitable, and so this production shrinks. As this domestic production shrinks, resources displaced from this sector have to try to find employment in more capital-intensive sectors. This leads to a reduction in demand for labor (as well as bidding up the price of capital), and this in turn triggers adverse wage effects. The more imports drive down domestic prices for domestic goods, the worse the wage effect is. This wage effect, again, harms most workers, not just those located in particularly trade-exposed regions.

It is clear that the decline in wages stemming from this process will be larger than the decline in prices. This means that falling import prices are not a net benefit from trade for the majority of American workers on the wrong end of globalization’s distributional conflict.

Finally, the estimates of wage declines caused by growing trade in this paper are real, inflation-adjusted wage changes—that is, they fully price in the effect of price declines driven by trade (or by anything else). So it is absolutely clear that these workers are losing, regardless of price declines.