TPA and the Democratic Disunity – Obama’s Trade Bill, Jobs and Income Inequality in America

Well, they say the TPP deal is now ‘practically wrapped up’. The House and Senate Leadership have now tabled the bipartisan Trade Promotion Authority (TPA) bill that must now slouch through the Congress. It will be the first real trade debate in thirteen years, and the world have changed – but the politics on the Hill have not. Actually, few congressional debates are predictable as the one on international trade.

The bill is set for a smooth sailing through the House, while the real fracas is in the Senate and the split within President Obama’s own party. Sen. Wyden reportedly came under immense pressure from the unions and environmentalists to walk out of the deal. As the old saying goes about the one-eyed who is king, the outgoing Minority Leader Harry Reid will “not even consider the bill“ until there are guarantees it will benefit the middle class. The TPA bill comes equipped with a 60-day public review period of the trade agreements; it also includes trade adjustment assistance (TAA) – a rarely used benefit package for workers displaced by global trade invented in the Clinton era.

The split in the Democrat leadership may seem a little exorbitant, almost a little rude, that the TPP – sometimes berated as an instrument for US control of the Asia-Pacific – must be sold to its main beneficiary – the United States.

As so often when electorates deal with major trade agreements, the debate is seldom about the agreement itself but an abstraction of something larger and existential. When the Congress is voting on the TPA bill, it is not taking a stance on whether the executive office should be given a stab at opening up the Asian and Japanese markets, or whether to surround China without using aircraft carriers. Instead, it is a proxy vote on globalization and the increasing income gaps at home – Some will be livid over how America ‘lost out’ to China, stealing American jobs, or that trade only makes the rich richer.

If the truth is to be told, trade has always been a minor factor to the US economy. The US may be the world’s second largest exporter, but the contribution from trade is relatively small compared to its rich domestic market: thanks to globalization, US exports of goods and services (as share of GDP) increased from ten to fourteen percent, which is still very low compared to economies like China (26%), Germany (46%) or Singapore (191%).

Yet US exports are considerable in absolute terms: In 1996, by the second Clinton administration and establishment of the WTO, the US exported $4,745 per capita (compared to China’s mere $170). Eighteen years later, the US exports have increased by $1,426, outperforming China’s by almost two to one. It makes you wonder how much winning margins some people need, and why America persists in making itself out to be a loser when it is a winner. Sure, China had a huge increase in percentage terms. But you get that if divide any number by near-zero.

However, these increases in GDP are just that – increases in domestic product of a country – which does not automatically translate to higher wages and welfare for its middle class. Indeed, growing income inequality has become a permanent feature of most industrialized countries – but more trade and wider income gaps are not necessarily unrelated. Some European socialists (like the Swedes) may even tell you that free trade is a prerequisite for creating a wealth to redistribute in the first place.

One of the untold mysteries-cum-tragedies of the US economy is the drop in wages: Real wages started to freefall in the beginning of the 1970s. As the inflation ate away the pay raises, the workers climbed backwards into a socio-economic time warp: the average weekly wages dropped 22% from 1972 until mid 90s when they hit the rock bottom at $550. Although we never fully recovered, these wages did not rise again until the Clinton years, when they rose rapidly to stabilize around $600-610 during the terms of G.W. Bush.

The Clinton-Bush era (if there was ever such a term) saw a period where not only the wages increased, but the income differences started to slow down for the first time in recent times despite record trade deficit of 720 billion annually, contradicting the notion that trade and imports spurs income inequality. When the Gini-index (the ratio between the high and low income groups) is plotted against manufacturing imports, the line starts to move in circles – a sure sign there is little connection between inequality and imports.

Trade economists will tell you that the real trade gain for the middle class is on the import side: The more foreign stuff you let into your economy, the more you gain. Trade negotiations are simply about acting coy – imported cars, flat screens, iPods, fleece sweaters and tacky Christmas ornaments helped significantly to curb US consumer prices since the millennium. Without imports, the inflation would even surpass the Chinese economic bubble, and once again eroded worker salaries.

While inexpensive imports helps to keep the domestic prices down, the US export prices increased 15% during the same period. In short, the American households got a far better mileage on their dollar and could afford more, while America focused on making more valuable and future-proof items. This trend is still ongoing – the US export prices are continuously rising, whereas China see their prices falling rather than rising despite their drastic efforts to move up on the ladder.

The final question is about job losses. The economy shed about one-tenth of its manufacturing jobs between 1996-2008, or about 1.5 million job losses, a considerable number by any account. But during the same period, exports created 2.7 million new jobs according to the Department of Commerce. Now, trade agencies love to beat their own drum, and it is probably wise to take such numbers with a pinch of salt. But even in the unlikely case where all manufacturing jobs were lost due to imports – and not a single job was lost to domestic competitors, robots or incompetent CEOs (i.e. pretty unlikely) – job creation from trade exceeds destruction with a hefty margin.

Moreover, in that period 20 million new jobs were created elsewhere – for every manufacturing job lost, 13 new jobs were created in the services sector. Increasing number of retailers, engineering and technology companies – like Target, GE, IBM or Apple that were exclusively in assembling items – have branched out to services. Over the course of twenty years, assemblers changed their job descriptions to customer advisers or consultants. Some manufacturing jobs disappeared because they were upgraded – and not necessarily lost. To the extent there were layoffs, many workers were swallowed up by the new jobs in the services sector. This is why the Trade Adjustment Assistance funds for those displaced by trade were rarely used – trade displaced relatively few, and those who were found better opportunities thanks to trade.

All in all, America seems to have come out on top in the trade game. The country is producing $1,426 more per person thanks to it, and fared way better than China. But how the income boost from trade is divided between the have and the have-nots is not a question that the TPA bill could settle in 2015 – that question is better saved for a year later: the 2016 Presidential elections.