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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. They essentially mean that the United States consumes more than it produces. The United States must finance this additional consumption by selling off domestic assets, such as treasury bonds, but also banks, buildings, and other real assets. Running up ever more debt to pay for additional consumption, though, can only work so long. Eventually, a country has to start worrying about repaying its debt.
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 invest- ments in other parts of our economy. Defaulting on this debt, through higher inflation, which reduces the value of assets in the United States, or a rapidly falling currency, which debases the currency value of U.S. assets held by foreign investors, are equally unpalatable because both will have serious adverse consequences for future economic growth and for living standards. Because of these threats to future living standards, economists have long considered the large and growing U.S. trade deficits unsustainable.
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 (see box on page 10 for a discussion of this so called “virtuous circle” strategy of global economic development). An integral part of this virtuous circle strategy is the promo- tion of enforceable labor rights, including by negotiating them as part of trade agreements.
Better labor standards in trading-partner countries, especially in less industrialized econo- mies, 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 this paper we consider 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. Specifically, we analyze if the United States has smaller trade deficits or even trade surpluses with less industrialized countries that have some or even strong labor rights compared to countries that have limited or no labor protections. Our analysis shows that better labor rights can be a productive part of a trade agenda that aims to correct massive U.S. imbalances. In particular:
- The U.S. trade deficit grows much more slowly with countries that have stronger labor standards. Between 2000 and 2007, the gap between U.S. exports and U.S. imports widened faster for countries with limited or no labor rights than for countries with some or strong labor rights.
- The United States has also smaller trade deficits with countries that have better labor rights. Specifically, on average U.S. exports amounted to 74.5 percent of U.S. imports in countries with strong or some labor rights in 2000 (indicating a trade deficit) compared to an average ratio of 36.0 percent (and thus a larger trade deficit) for countries with limited or no labor protections.
- Trade with less industrialized countries with weak or no worker protections has substantially contributed to the increase in the U.S. trade deficit from 2000 to 2007.4 If the United States had only traded with less industrialized economies that had some or strong worker rights during those years, its trade deficit in 2007 would have been $123 billion smaller than it actually was.
- U.S. exports tend to be larger when worker rights are stronger. In 2000, U.S. exports to countries with strong or some worker rights were 182.3 percent greater than U.S. exports to countries with limited or no worker rights. If we exclude China from the analysis, the difference was 253.5 percent. In 2007, the difference was still 93.5 percent for all less industrialized economies, and for the analysis without China we find a differ- ence of 327.2 percent in U.S. exports.
- Stronger labor rights are associated with smaller U.S. imports. U.S. imports grew faster from 2000 to 2007 for countries with limited or no labor rights than for countries with some or even strong labor rights.
Labor rights clearly have a positive effect on U.S. trade deficits, and thus help to put U.S. economic growth on a more durable path. Consequently, the promotion of labor standards, alongside environmental protections, should be an integral part of the future U.S. trade agenda. In the pages that follow, we present the detailed analysis to support these conclusions and examine how the inclusion of labor rights in trade agreements with newly industrializing economies would result in higher U.S. exports and a growing global middle class.
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