Testimony by Robert E. Scott, EPI economist
House Committee on International Relations, Subcommittee on International Economic Policy and Trade
April 29, 1998

Madam Chair and members of the committee, thank you for the opportunity to share my views on the process leading toward a Free Trade in the Americas Agreement (FTAA). This afternoon I will discuss the results of our research on the effects of changing trade flows, and the NAFTA agreement in particular, on American workers. I will then consider policies that can improve the benefits of trade for all workers.

Trade has had a depressing effect on employment and wages in the U.S. for almost two decades. NAFTA has contributed to these problems, and the Asian financial crisis threatens to greatly deepen them, as shown in recent EPI research.

Between 1979 and 1994, trade was responsible for the elimination of 2.4 million jobs in the U.S.1 Growing trade deficits were responsible for most of these job losses, which were concentrated in manufacturing, because most trade involves the sale of goods. NAFTA added to the flow of jobs out of the U.S. by encouraging firms to move production to Mexico (and Canada). Our trade deficit with both countries increased from $16 billion in 1993 to $48 billion in 1996 (in constant 1987 dollars). The U.S. lost 395,000 jobs as a result of these growing trade deficits.2

By 1999, the U.S. trade deficit is expected to increase by $100 billion or more as a result of the Asia financial crises. Deficits are already growing with Korea and with Japan. The Japanese economy is contracting sharply as a result of crisis, and U.S. exports to both countries have fallen sharply. The expected increase in the U.S. trade deficit could eliminate an additional 1 million jobs in the U.S., if the Fed Reserve board does not act quickly to lower interest rates and keep unemployment here from rising.3

Trade deficits and associated job losses are important for two reasons. First, the administration has used the promise of jobs to sell trade agreements to the American people. That promise has not been fulfilled. Second, trade-related job losses are symptomatic of the much larger problem of falling real wages and rising income inequality, which have become endemic problems in the U.S. economy. For every worker who loses his or her job in a trade-related plant closing, there are many more who are threatened with job loss. Globalization has weakened the bargaining power of workers, and it has therefore depressed wages in both rich and poor countries.4

Real wages in the U.S. have been falling since 1979. In addition, income inequality in the U.S. has also been rising in this period. Many factors have contributed to our wage problems, including low productivity growth, falling rates of unionization, erosion of the minimum wage, technological changes, and immigration. Many economists who are proponents of free trade have now concluded that trade is responsible for 20 to 25 percent of the increase in income inequality over the past two decades.5 Our own research suggests that trade is responsible for 30% to 100% of the increase in income inequality that occurred between 1979 and 1989.6

Falling real wages and rising income inequality affect a large proportion of American workers and voters, and help explain why a large share of the public believes that NAFTA has failed to deliver its promised benefits. For example, in a recent article my colleague Ruy Teixeira noted that, by a 57% to 36% margin, the public believes that the U.S. government should not “approve more trade agreements with Latin American countries.”7

Policy alternatives
The negative effects of trade, including job displacement and falling wages, have been growing rapidly in the 1990s as new trade agreements (NAFTA, WTO) and the tremendous growth in international capital flows have stimulated rapid increases in trade volumes. U.S. trade deficits are once again reaching record levels, and the growth of foreign investment (actual and potential) has severely depressed wages. Despite these problems, the U.S. is doing very little to help workers and communities that have been hurt by globalization.

Our research indicates that the U.S. has lost about 200,000 jobs per year because of trade since 1979. These losses are likely to accelerate in the next two years because of the Asian financial crisis. A reasonable program of retraining and adjustment assistance would require at least $10,000 per worker for at least two years per worker, which suggests that we need at least $4 billion per year for retraining alone.8 However, we currently spend less than $1 billion per year on all adjustment programs (including TAA and NAFTA-TAA), and a significant share of this aid goes to communities rather than individual workers. Clearly, there is much more that we can and should do to assist displaced workers to give them the skills needed for high-wage jobs in the future. Trade adjustment assistance programs are up for renewal by the Congress later this year, and I urge you to support a substantial expansion of funding for these programs.

There is much more that can and should be done to improve the benefits of trade for workers and communities. For the past several decades, trade agreements have emphasized investor rights and the protection of intellectual property rights and other concerns of the business sector. Little or no attention has been paid to labor or the environment in trade negotiations, and their interests have suffered as result, as trade and investment grew in the deregulated, and often unregulated, international environment. Governments, workers, and communities have become entangled in a global race to the bottom that has lowered wages, increased income inequality, and eroded environmental quality. Yet these are not the only possible outcomes from globalization. Foreign trade and investment can and should be beneficial to the economy, but new rules are needed to ensure that the benefits of globalization are widely distributed and fairly shared.

As a first step, labor rights and environmental standards should be included in the core of any new trade agreements that involve the United States. These codes should be enforceable through trade sanctions, just as investor and intellectual property rights are enforceable under the NAFTA and WTO agreements. Labor and the environment are critical, scarce resources, and key inputs to the production process. They should be afforded the same level of attention and respect as investors in all future trade agreements.

The inclusion of enforceable labor rights in the FTAA, in particular, will ensure that hemispheric integration generates widely shared benefits to workers, both in the U.S. and in the less-developed countries in the region. Without rules to protect worker rights, including the right to organize and bargain collectively, labor forces in the hemisphere will be pulled into a race to the bottom in wages and working conditions. We have experienced these consequences in Mexico and the U.S. after NAFTA, and should learn from our mistakes.9

Two weeks ago in Santiago, an alternative “Summit of the Peoples of the Americas” was held for those shut out of the official FTAA and summit negotiations. More than 1,000 people participated in 11 forums over four days, and there was wide agreement that labor and environmental issues must be addressed in the integration process. I attended and participated in many of those forums. The forum for labor unions produced a remarkably strong declaration that included demands for:

• The creation of a working group on labor topics within the negotiation process for the FTAA;
• Recognition of fundamental labor rights and creation of a mechanism for their effective implementation, including fighting child labor and compulsory (prison) labor;
• Introduction of a social clause referring to worker rights and the environment; a NAFTA-style side agreement is not acceptable.

These conclusions demonstrate that there is strong support throughout the labor movements in the hemisphere for the inclusion of labor rights and environmental standards in the FTAA.
In conclusion, it is clear that the forces behind globalization are quite powerful. However, there are many different ways in which integration can proceed in the hemisphere. Until progress is achieved on labor and environmental issues, workers and citizens groups will continue to oppose integration. The failure of fast track last fall and the growth of public concern about the effects of trade suggest that these groups will work together to slow the process of globalization until their concerns are adequately addressed.

Expanded programs of adjustment assistance and the inclusion of labor rights and environmental standards in the FTAA can raise the benefits of trade for all workers, while lowering the costs of globalization. Economic integration should result in a high and rising standard of living for workers in all participating countries, and an improvement in the quality of life and the sustainability of our natural environment. We can achieve these goals if we place a high priority on labor and the environment in the FTAA negotiations.

Thank you for your time and attention.

Notes
1. Scott, Robert E.,Thea Lee and John Schmitt. 1997. “Trading Away Good Jobs: An Examination of Employment and Wages in the U.S., 1979-94,” Briefing paper. Washington, D.C.: Economic Policy Institute. October.
2. Scott, Robert E. and Jesse Rothstein. “NAFTA and the States: Job Destruction is Widespread,” Issue Brief. Washington, D.C.: Economic Policy Institute. September.
3. Scott, Robert E. and Jesse Rothstein. 1998. American Jobs and the Asian Crisis. Washington, D.C. Economic Policy Institute. Issues Brief. January.
See, for example, United Nations Conference on Trade and Development, Trade and Development R 1997: Globalization, Distribution and Growth. (UNCTAD/TDR/17). New York: United Nations.
4. See, for example, Tyson, Laura. 1997. “Inequality Amid Prosperity,” The Washington Post. July 9.
5. Mishel, Lawrence, Jared Bernstein and John Schmitt. 1997. The State of Working America, 1996-97. Armonk, NY: M.E. Sharpe. p. 196.
6. Teixeira, Ruy. 1997. “Support for Free Trade Agreements? Not So Fast!” The Polling Report, 13(4). July 14.
7. See Scott, Robert E., “Focusing on Workers in the Fast-Track Talk,” Los Angeles Times, November 2, 1997
8. See The Failed Experiment: NAFTA at Three Years, by EPI, the Institute for Policy Studies, the International Labor Rights Fund, Public Citizen’s Global Trade Watch, Sierra Club and the U.S. Business and Industrial Council Educational Foundation. Manuscript, June 26, 1977. Available on the Internet at: http://www.citizen.org/pctrade/tradehome.html
9. Official Statements from the Peoples Summit are available, in Spanish, on the Internet at: http://members.tripod.com/~redchile/indice2.htm