A New Deal for Globalization

Kenneth F. Scheve and Matthew J. Slaughter

From Foreign Affairs, July/August 2007

Summary:  Globalization has brought huge overall benefits, but earnings for most U.S. workers -- even those with college degrees -- have been falling recently; inequality is greater now than at any other time in the last 70 years. Whatever the cause, the result has been a surge in protectionism. To save globalization, policymakers must spread its gains more widely. The best way to do that is by redistributing income.

Kenneth F. Scheve is Professor of Political Science at Yale University. Matthew J. Slaughter is Professor of Economics at the Tuck School of Business at Dartmouth and Adjunct Senior Fellow for Business and Globalization at the Council on Foreign Relations. He served on the White House Council of Economic Advisers from 2005 to 2007.

WAGES FALLING, PROTECTIONISM RISING

Over the last several years, a striking new feature of the U.S. economy has emerged: real income growth has been extremely skewed, with relatively few high earners doing well while incomes for most workers have stagnated or, in many cases, fallen. Just what mix of forces is behind this trend is not yet clear, but regardless, the numbers are stark. Less than four percent of workers were in educational groups that enjoyed increases in mean real money earnings from 2000 to 2005; mean real money earnings rose for workers with doctorates and professional graduate degrees and fell for all others. In contrast to in earlier decades, today it is not just those at the bottom of the skill ladder who are hurting. Even college graduates and workers with nonprofessional master's degrees saw their mean real money earnings decline. By some measures, inequality in the United States is greater today than at any time since the 1920s.

Advocates of engagement with the world economy are now warning of a protectionist drift in public policy. This drift is commonly blamed on narrow industry concerns or a failure to explain globalization's benefits or the war on terrorism. These explanations miss a more basic point: U.S. policy is becoming more protectionist because the American public is becoming more protectionist, and this shift in attitudes is a result of stagnant or falling incomes. Public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor.

Given that globalization delivers tremendous benefits to the U.S. economy as a whole, the rise in protectionism brings many economic dangers. To avert them, U.S. policymakers must recognize and then address the fundamental cause of opposition to freer trade and investment. They must also recognize that the two most commonly proposed responses -- more investment in education and more trade adjustment assistance for dislocated workers -- are nowhere near adequate. Significant payoffs from educational investment will take decades to be realized, and trade adjustment assistance is too small and too narrowly targeted on specific industries to have much effect.

The best way to avert the rise in protectionism is by instituting a New Deal for globalization -- one that links engagement with the world economy to a substantial redistribution of income. In the United States, that would mean adopting a fundamentally more progressive federal tax system. The notion of more aggressively redistributing income may sound radical, but ensuring that most American workers are benefiting is the best way of saving globalization from a protectionist backlash.

RISING PROTECTIONISM

U.S. economic policy is becoming more protectionist. First, consider trade. The prospects for congressional renewal of President George W. Bush's trade promotion authority, which is set to expire this summer, are grim. The 109th Congress introduced 27 pieces of anti-China trade legislation; the 110th introduced over a dozen in just its first three months. In late March, the Bush administration levied new tariffs on Chinese exports of high-gloss paper -- reversing a 20-year precedent of not accusing nonmarket economies of illegal export subsidies.

Barriers to inward foreign direct investment (FDI) are also rising. In 2005, the Chinese energy company CNOOC tried to purchase U.S.-headquartered Unocal. The subsequent political storm was so intense that CNOOC withdrew its bid. A similar controversy erupted in 2006 over the purchase of operations at six U.S. ports by Dubai-based Dubai Ports World, eventually causing the company to sell the assets. The Committee on Foreign Investments in the United States, which is legally required to review and approve certain foreign acquisitions of U.S. businesses, has raised the duration and complexity of many reviews. Both chambers of the 109th Congress passed bills to tighten CFIUS scrutiny even further; similar legislation has already passed in the current House.

This protectionist drift extends to much of the world. The Doha Development Round of trade negotiations, the centerpiece of global trade liberalization, is years behind schedule and now on the brink of collapse. Key U.S. trading partners are becoming increasingly averse to foreign investment, as expressed both in their rhetoric (recent public pronouncements by the governments of France and Germany) and in their actions (new restrictions in China on foreign retailers).

At first glance, this rise in protectionism may seem puzzling. The economic gains from globalization are immense. In the United States, according to estimates from the Peter G. Peterson Institute for International Economics and others, trade and investment liberalization over the past decades has added between $500 billion and $1 trillion in annual income -- between $1,650 and $3,300 a year for every American. A Doha agreement on global free trade in goods and services would generate, according to similar studies, $500 billion a year in additional income in the United States.