Trade Flows During “Free Trade” Era Increased Income Inequality

Recent Studies: Trade’s Contribution to Inequality Has Increased since the 1990s and Is Likely to Increase Further

Since 1941 standard economic theory has held that trade liberalization will contribute to greater income inequality in developed countries like the United States. In the early 1990s, as U.S. income inequality soared amid the enactment of U.S. “free trade” deals, a spate of economic studies put the theory to the test, aiming to determine the relative contribution of trade flows to the rise in U.S. income inequality. The result was an academic consensus that trade flows had, in fact, contributed to rising U.S. income inequality. The only debate was the extent of the blame to be placed on trade, with most studies estimating that between 10 and 40 percent of the rise in inequality during the 1980s and early 1990s stemmed from trade flows.

More recent studies have concluded that trade’s role in exacerbating U.S. income inequality has likely grown since the 1990s, as U.S. imports from lower-wage countries, and U.S. job offshoring to those countries, have grown dramatically, impacting an increasing swath of middle-class jobs. Further, an array of studies now project future increases in the offshoring of U.S. jobs, suggesting that even under current U.S. trade policy, trade flows will soon be responsible for an even greater share of rising U.S. income inequality. Attempts to Fast Track through Congress controversial deals like the Trans-Pacific Partnership, which would expand status quo U.S. trade policy and incentivize further offshoring, would only exacerbate the historically high degree of U.S. income inequality.

Recent studies examining trade’s current and projected future contribution to U.S. income inequality:
Rising Income Inequality: Technology, or Trade and Financial Globalization?

Florence Jaumotte, Subir Lall, and Chris Papageorgiou; International Monetary Fund; September 30, 2009

The International Monetary Fund authors find that the rise in income inequality from 1981-2003 in 20 developed countries, including the United States, is primarily attributable to trade and financial globalization trends. They conclude that globalization’s contribution to inequality has outweighed the role of technological advancement: “Among developed countries…the adverse impact of globalization is somewhat larger than that of technological progress” (p. 19).

Trade and Wages, Reconsidered

Paul Krugman; The Brookings Institution; Spring 2008

In a Brookings Institution study, Nobel-winning economist Paul Krugman finds that trade flows likely now account for an even greater degree of U.S. income inequality than that found in a series of studies from the early 1990s, which had already concluded that trade liberalization had a negative, but modest, impact on income inequality in developed countries like the United States. In particular, Krugman notes that U.S. manufacturing imports from low-wage developing countries have grown dramatically in the last two decades, suggesting that the role of trade flows in spurring U.S. income inequality growth is “considerably larger” than before (p. 106). Krugman concludes, “…there has been a dramatic increase in manufactured imports from developing countries since the early 1990s. And it is probably true that this increase has been a force for greater inequality in the United States and other developed countries” (p. 134).

Globalization, American Wages, and Inequality: Past, Present, and Future

Josh Bivens; Economic Policy Institute; September 6, 2007

In this study Josh Bivens of the Economic Policy Institute updates an early-1990s model estimate of the impact of trade flows on U.S. income inequality and finds that, using the model’s own conservative assumptions, the degree of U.S. income inequality attributable to trade with lower-wage countries increased more than 40 percent from 1995 to 2006. In addition, Bivens cites an array of recent economic studies that project that the offshoring of U.S. jobs will increase under current trade policy, suggesting a substantial rise in the impact of trade flows on U.S. income inequality. For example, Princeton economist and former Council of Economic Advisors member Alan Blinder estimates that about one in every four U.S. jobs, including higher-paying service-sector jobs, could be offshored in the foreseeable future. While such studies differ in the projected extent of future U.S. job offshoreability, all imply an increase in the impact of trade flows on U.S. income inequality. Bivens finds that the range of projections for increased offshoring suggest a further 72 to 262 percent increase in U.S. income inequality attributable to trade with lower-wage countries, compared to the level seen in 2006. Bivens concludes, “The potential level of redistribution caused by offshoring is vast, and, so should be the policy response” (p. 8).