Trade Treaties and Minimum Wages

Posted April 8, 2016

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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  • “Free markets lead to thinking, that eternal enemy of politicians.”
    – P.J O’Rourke, On the Wealth of Nations

    Gordon a.... | April 11, 2016

  • I do not believe that it was the responsibility of a ‘global’ economy, and one sided trade deals, many sponsored by Harper, to bring China out of their working conditions of a decade or two ago. And this, at the expense of Canadian jobs and the integrity of Canadian manufacturing.

    I would comment on quality and I have two prime examples, a toaster and a coffee machine, six months and three months old, respectively. Both have failed and I now await replacements.

    I have had a fridge which was made in Ontario and finally retired after fifty-five years of service. It still ran well but the door gasket was shot.

    I have had toasters which lasted fifteen years and often were replaced only because I wanted something fancier.

    I have a US made Corning Electric coffee pot which is fifty years old and still works perfectly.

    I have a coffee maker which is made in Germany and is an antique with no features, but it still works.

    These days are past, so we have huge container ships devoted to bringing Chinese garbage to San Diego on a weekly basis, and returning with empty containers. It makes one wonder where the ‘trade’ has gone in free trade.

    What is sauce for the Chinese workforce is not sauce for the Canadian consumer.

    Another risky facet of trade with the Orient is food stuffs. I hold these products in fear and with contempt, as I have no idea of the conditions under which they were processed.

    Your mention of Wally World leads me to the hardware department and the shoddy tools for sale. Some of the finest names in tools are now mis-manufactured in the Orient. Stanley, DeWalt, etc.

    Retailers are so uncertain of the quality of the merchandise they handle that they will only replace within fourteen days. It is in the loading door and out the front door and, if it fails while on warranty, it becomes your problem to deal with some adjustment agency.

    I hope that Clinton or Trump manages to reverse the trend and re-open all the idle plants and get people back to work. That will surely spread to Canada.

    Bob Tuttle | April 11, 2016

  • The opposition of Trump and Sanders to trade liberalization/globalization effectively is a demand to override consumers’ choices in order to gain votes of those who would benefit from such restrictions.In an open market, anyone is free to make “buying local” a major factor for their purchases. It seems clear that, for many goods (computers and cars to name two),most consumers rank quality and price ahead of location of production. Trump and Sanders cannot accept this and demand the power to require consumers to purchase “made in the USA”. They should read Adam Smith and Ludwig von Mises to better understand that expanding the division of labour internationally (i.e. allowing people to do what they do best and trade freely) will increase living standards for us all.
    I question whether enacting minimum wage laws is a good thing. If wage rates in an open market tend to reflect the marginal productivity of the employees,then any employee producing at less than the minimum wage will tend to be priced out of a job.The least productive (entry level) jobs will either be lost or not created as employers will have an incentive to invest in automation vs labour. The result may well be that some workers will benefit from higher wages but only at the expense of others not able to find work.

    Steve Chipman | April 9, 2016

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