The United States for decades now has racked up large and growing trade deficits with the rest of the world. These deficits—at or above 5 percent of gross domestic product since the middle of 2004—could contribute to much lower U.S. living standards in the future. Repaying this accumulated debt—at the end of 2007, the United States owed $2.4 trillion more to foreigners than it held in foreign assets abroad—will become increasingly costly to our nation’s standard of living because it will come at the expense of making needed investments in other parts of our economy.
But what should policymakers do about it? One important approach is to increase the competitiveness of U.S. producers by investing in innovation here at home. Another is to promote the creation of a global middle class that can buy more high-end U.S. goods and services. An integral part of this virtuous circle strategy is the promotion of enforceable labor rights, including by negotiating them as part of trade agreements.
Better labor standards in trading-partner countries, especially in less industrialized economies, can positively affect U.S. exports and U.S. imports. Better labor rights could increase demand for U.S. exports by boosting the incomes of workers overseas. And better labor standards abroad reduce the cost advantage that some countries may enjoy by paying their workers poorly. This effect should contribute to fewer U.S. imports from low-wage countries, assuming nothing else changes.
But is that assumption correct? In a recent paper CAP considered data on U.S. trade with a range of countries to see if there is a link between labor rights of other countries and the U.S. trade balance. The analysis shows that better labor rights can be a productive part of a trade agenda that aims to correct massive U.S. imbalances.
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