Trade Treaties and Minimum Wages

The improbable success of Donald Trump’s candidacy is not the only surprise in this year’s presidential primaries and caucuses. Bernie Sanders continues to give Hilary Clinton strong competition for the Democratic nomination, in spite of championing policies well to the left of mainstream American thinking.

Sanders’ behaviour bears no resemblance to the incoherent buffoonery of Trump—he is passionate but controlled in his presentations. But on one topic he and Trump appear to agree.

Both are tapping into a deep dissatisfaction with the dwindling manufacturing sector, arguing that the progress in liberalization of trade between countries should be reversed.

It is true that the manufacturing portion of the middle class in developed economies has suffered reduced real incomes over the last two decades, while those at the top of the heap have become ever richer. Sanders point to Walmart heirs being worth more than $150 billion.

But that does not by itself mean that inequity has gone up globally. Hundreds of millions of Chinese, Southeast Asians, and others have been lifted out of poverty as a result of globalization.

Take the Walmart example. Who are the main beneficiaries? Well, there are three.

(1) Obviously, the family which owns it—absurdly wealthy and, no doubt, under-taxed. But probably not as under-taxed as Apple or Google. The Americans do a very poor job of taxing multinational corporations, and most other countries are not much better.

(2) Chinese and other Asian workers who make most of stuff that is sold in Walmart. They are making low wages by North American standards, but are vastly better off than they were as small-plot farmers.

(3) Rich world consumers. We are able to buy better products for less inflation-adjusted cost—for example, phones and consumer electronics from China, footwear and furniture from Vietnam, and clothing from South Asia.

Manufacturing employment in the United States has dropped by 5 million over the past two decades. The rest of the economy has added 23 million jobs over the same period. Nevertheless, Hilary Clinton and leading Trump competitor Ted Cruz have also called existing trade arrangements into question.

Canada’s manufacturing sector has also suffered over the past two decades, and now makes up just under 10% of the 18 million jobs in Canada. But overall unemployment rates—which averaged close to 10% in the nineties—have been under 8% this decade.

There is no corresponding disaffection with trade agreements in Canada, for which the domestic market is one-tenth that of the United States. To prosper, its larger companies need to have ready access to customers in other countries—especially the United States.

The Liberals, the Conservatives, and the NDP under Tom Mulcair have understood that. The Harper government’s efforts to add new arrangements did not have serious opposition in parliament.

We should be concerned about the trends in the United States. The North American Free Trade Agreement is a particular subject of attack at the moment. This is primarily because Mexico has used the opportunity to become very competitive in manufacturing, especially of automobiles.

If momentum develops to cancel the agreement, it is likely that Canada will also lose its privileged access to the American market. Prime Minister Trudeau should work on some selfies with whoever succeeds Obama (unless, of course, it’s Trump—we can only ask so much).

A second trend in the United States is more appealing. California (population 40 million) and New York (population 20 million) have each enacted a program to gradually phase in a $15 minimum wage, up from the current levels of $10 and $9 respectively. Elsewhere in the USA, minimum wage rates can be as low as $7.25.

This will probably put a dent in the profits of retailers like Walmart and Target, as well as the pockets of people who employ cleaners, security personnel, gardener,s and the like. Good. It represents a small but useful step in the reduction of income inequality.

Let’s hope that it becomes more accepted in the United States and makes its way to Canada. This is the right way to help the working poor. During the phase-in, support should be provided to low-wage manufacturing employers to update their infrastructure and equipment so that the higher wages are affordable.

This is unlike the proposals for a guaranteed annual income, which pays people more for working rather than assuring them of an income if they don’t work at all, and clawing their earnings back if they do.

A higher minimum wage pays workers more and costs taxpayers much less than guaranteed income programs. It is the right way to reduce income disparities.

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