Does trade policy cause income inequality?

An important new report concludes that trade is not a principal driver of inequality and that lowering trade barriers could benefit lower-income Americans.

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International trade is one area in which President Obama and the new Republican-controlled Congress might find common ground in 2015. The Administration has been busily negotiating new trade deals—including agreements with the Asia-Pacific and Europe—that could become an important part of President Obama’s legacy. Republicans are also generally supportive of trade and likely want to demonstrate that they have the ability to get important things done for the country.

But despite potential openings, trade will always be a difficult political and policy issue. Debates on trade inevitably morph into discussions of issues that are far broader than new trade agreements, including the role of globalization, infrastructure and technological change and the need for improving worker skills. It’s certainly important to raise these and other issues in debating new trade deals. But it’s equally important to keep the role of trade policy in its proper context—and to have a realistic sense of how trade policy affects and can help the American economy.

A new report by Ed Gresser of Progressive Economy makes a vital contribution to the trade policy debate by exploring the relationship between trade policy and U.S. income inequality—an issue that is increasingly being raised by trade critics in the context of trade policy. Gresser’s thoughtful, in-depth study supports three key conclusions:

  1. Growing trade is not a major cause of income inequality;
  2. Trade policy—while potentially helpful—won’t provide the primary solutions for addressing inequality in income; and
  3. Lowering U.S. trade barriers is likely to raise living standards for lower-income Americans.

Gresser notes that most studies on the issue have concluded that trade growth plays a relatively limited role in income inequality. He highlights, for example, that Thomas Picketty’s landmark study on economic inequality, Capital in the 21st Century, concludes that trade protectionism would do nothing to counter what Picketty sees as the main driver of inequality—that returns for investors tend to exceed economic growth rates.

Gresser agrees with Federal Reserve Chair Janet Yellin that the primary solutions to income inequality are domestic ones, including policies that improve primary education, increase access to higher education, and promote the formation of small business. He notes that trade policy can play an important supportive role by, for example, driving stronger economic growth and encouraging small business exports.

Gresser has written extensively and eloquently on how America’s high tariffs on cheap shoes, clothing, and home goods place a particular burden on lower-income Americans. He notes that, by eliminating or reducing these regressive import taxes, new trade agreements would directly help raise living standards for poorer Americans, helping to reduce inequality.

Based on these overall conclusions, Gresser highlights a number of ways in which smart trade policies can play a role in raising living standards. He notes, for example, that new trade deals like the Trans Pacific Partnership can support stronger growth rates that can at least slow increases in inequality, and highlights the role that these agreements can play in reducing foreign barriers for America’s dynamic small business exporters.

At the same time, Gresser emphasizes the need to maintain trade and other programs that help Americans adjust to a changing global economy, including a robust Trade Adjustment Assistance program, a strong safety net, lifelong learning opportunities, and competitiveness policies.

Gresser rightly notes that countries will continue to build new container ships, increase global Internet connections, and generally work to increase global trade—whether or not the United States enters into new trade agreements. But if these trade deals are done right, they can help support broader domestic efforts to address income inequality.

As policymakers craft and consider new trade deals, Progressive Economy’s study will provide a critical roadmap for assuring that trade can provide the greatest benefit to Americans of all incomes.

Edward Gerwin, Jr. is Senior Contributing Editor for Republic 3.0 and President of Trade Guru LLC. Follow: @EdGerwin