Globalization and Low-Wage Labor
It’s a good bet that most of the clothing you are wearing as you read this came from a
country far poorer than the United States. The rise of manufactured exports from developing
countries has been one of the major shifts in the world economy over the last generation;
even a desperately poor nation like Bangladesh, with a per-capita GDP less than
5 percent that of the United States, now relies more on exports of manufactured goods
than on exports of traditional agricultural or mineral products. (A government official in a
developing country remarked to one of the authors, “We are not a banana republic—we
are a pajama republic.”)
It should come as no surprise that the workers who produce manufactured goods for export
in developing countries are paid very little by advanced-country standards—often less than
$1 per hour, sometimes less than $0.50. After all, the workers have few good alternatives in
such generally poor economies. Nor should it come as any surprise that the conditions of
work are also very bad in many cases.
Should low wages and poor working conditions be a cause for concern? Many people
think so. In the 1990s the anti-globalization movement attracted many adherents in
advanced countries, especially on college campuses. Outrage over low wages and poor
working conditions in developing-country export industries was a large part of the movement’s
appeal, although other concerns (discussed below) were also part of the story.
280 PART TWO International Trade Policy
It’s fair to say that most economists have viewed the anti-globalization movement as at
best misguided. The standard analysis of comparative advantage suggests that trade is
mutually beneficial to the countries that engage in it; it suggests, furthermore, that when
labor-abundant countries export labor-intensive manufactured goods like clothing, not
only should their national incomes rise but the distribution of income should also shift in
favor of labor. But is the anti-globalization movement entirely off base?
The Anti-Globalization Movement
Before 1995 most complaints about international trade made by citizens of advanced
countries targeted its effects on people who were also citizens of advanced countries. In
the United States, most critics of free trade in the 1980s focused on the alleged threat of
competition from Japan; in the early 1990s there was substantial concern in both the
United States and Europe over the effects of imports from low-wage countries on the
wages of less-skilled workers at home.
In the second half of the 1990s, however, a rapidly growing movement—drawing considerable
support from college students—began stressing the alleged harm that world
trade was doing to workers in the developing countries. Activists pointed to the low wages
and poor working conditions in the third world factories that produced goods for Western
markets. A crystallizing event was the discovery in 1996 that clothes sold at Wal-Mart,
and endorsed by television personality Kathie Lee Gifford, were produced by very poorly
paid workers in Honduras.
The anti-globalization movement grabbed world headlines in November 1999, when a
major meeting of the World Trade Organization took place in Seattle. The purpose of the
meeting was to start another trade round, following on the Uruguay Round described in
Chapter 10. Thousands of activists converged on Seattle, motivated by the belief that the
WTO was riding roughshod over national independence and imposing free trade ideas that
hurt workers. Despite ample warnings, the police were ill prepared, and the demonstrations
brought considerable disruption to the meetings. In any case, negotiations were not
going well: Nations had failed to agree on an agenda in advance, and it soon became clear
that there was not sufficient agreement on the direction of a new trade round to get one
started.
In the end the meeting was regarded as a failure. Most experts on trade policy believe
that the meeting would have failed even in the absence of the demonstrations, but the antiglobalization
movement had achieved at least the appearance of disrupting an important
international conference. Over the next two years, large demonstrations also rocked meetings
of the International Monetary Fund and the World Bank in Washington, as well as a
summit meeting of major economic powers in Genoa; at the latter event Italian police
killed one activist.
In a relatively short period of time, in other words, the anti-globalization movement had
become a highly visible presence. But what was the movement’s goal—and was it right?
Trade and Wages Revisited
One strand of the opposition to globalization is familiar from the analysis in Chapter 3.
Activists pointed to the very low wages earned by many workers in developing-country
export industries. These critics argued that the low wages (and the associated poor working
conditions) showed that, contrary to the claims of free trade advocates, globalization
was not helping workers in developing countries.
For example, some activists pointed to the example of Mexico’s maquiladoras, factories
near the U.S. border that had expanded rapidly, roughly doubling in employment, in
CHAPTER 12 Controversies in Trade Policy 281
the five years following the signing of the North American Free Trade Agreement. Wages
in those factories were in some cases below $5 per day, and conditions were appalling by
U.S. standards. Opponents of the free trade agreement argued that by making it easier for
employers to replace high-wage workers in the United States with lower-paid workers in
Mexico, the agreement had hurt labor on both sides of the border.
The standard economist’s answer to this argument goes back to our analysis in Chapter 3
of the misconceptions about comparative advantage. We saw that it is a common misconception
that trade must involve the exploitation of workers if they earn much lower wages than
their counterparts in a richer country.
Table 12-3 repeats that analysis briefly. In this case we assume that there are two countries,
the United States and Mexico, and two industries, high-tech and low-tech. We also assume
that labor is the only factor of production, and that U.S. labor is more productive than
Mexican labor in all industries. Specifically, it takes only one hour of U.S. labor to produce a
unit of output in either industry; it takes two hours of Mexican labor to produce a unit of lowtech
output and eight hours to produce a unit of high-tech output. The upper part of the table
shows the real wages of workers in each country in terms of each good in the absence of trade:
The real wage in each case is simply the quantity of each good that a worker could produce in
one hour.
Now suppose that trade is opened. In the equilibrium after trade, the relative wage rates
of U.S. and Mexican workers would be somewhere between the relative productivity of
workers in the two industries—for example, U.S. wages might be four times Mexican
wages. Thus it would be cheaper to produce low-tech goods in Mexico and high-tech
goods in the United States.
A critic of globalization might look at this trading equilibrium and conclude that trade
works against the interest of workers. First of all, in low-tech industries, highly paid jobs
in the United States are replaced with lower-paid jobs in Mexico. Moreover, you could
make a plausible case that the Mexican workers are underpaid: Although they are half as
productive in low-tech manufacturing as the U.S. workers they replace, their wage rate is
only 1/4 (not 1/2) that of U.S. workers.
But as shown in the lower half of Table 12-3, in this example the purchasing power of
wages has actually increased in both countries. U.S. workers, all of whom are now employed
in high-tech, can purchase more low-tech goods than before: two units per hour of
work versus one. Mexican workers, all of whom are now employed in low-tech, find that
they can purchase more high-tech goods with an hour’s labor than before: 1/4 instead of 1/8
Because of trade, the price of each country’s imported good in terms of that country’s
wage rate has fallen.
TABLE 12-3 Real Wages
(A) Before Trade
High-Tech Goods/Hour Low-Tech Goods/Hour
United States 1 1
Mexico 1/8 1/2
(B) After Trade
High-Tech Goods/Hour Low-Tech Goods/Hour
United States 1 2
Mexico 1/4 1/2
282 PART TWO International Trade Policy
The point of this example is not to reproduce the real situation in any exact way; it is
to show that the evidence usually cited as proof that globalization hurts workers in developing
countries is exactly what you would expect to see even if the world were well
described by a model that says that trade actually benefits workers in both advanced and
developing countries.
One might argue that this model is misleading because it assumes that labor is the only
factor of production. It is true that if one turns from the Ricardian model to the factorproportions
model discussed in Chapter 5, it becomes possible that trade hurts workers in
the labor-scarce, high-wage country—that is, the United States in this example. But this
does not help the claim that trade hurts workers in developing countries. On the contrary,
the case for believing that trade is beneficial to workers in the low-wage country actually
becomes stronger: Standard economic analysis says that while workers in a capitalabundant
nation like the United States might be hurt by trade with a labor-abundant country
like Mexico, the workers in the labor-abundant country should benefit from a shift in
the distribution of income in their favor.
In the specific case of the maquiladoras, economists argue that while wages in the
maquiladoras are very low compared with wages in the United States, that situation is inevitable
because of the lack of other opportunities in Mexico, which has far lower overall
productivity. And it follows that while wages and working conditions in the maquiladoras
may appear terrible, they represent an improvement over the alternatives available in
Mexico. Indeed, the rapid rise of employment in those factories indicated that workers
preferred the jobs they could find there to the alternatives. (Many of the new workers in the
maquiladoras are in fact peasants from remote and desperately poor areas of Mexico. One
could say that they have moved from intense but invisible poverty to less severe but conspicuous
poverty, simultaneously achieving an improvement in their lives and becoming a
source of guilt for U.S. residents unaware of their former plight.)
The standard economist’s argument, in other words, is that despite the low wages earned
by workers in developing countries, those workers are better off than they would have been
if globalization had not taken place. Some activists do not accept this argument—they
maintain that increased trade makes workers in both advanced and developing countries
worse off. It is hard, however, to find a clear statement of the channels through which this is
supposed to happen. Perhaps the most popular argument is that capital is mobile internationally,
while labor is not; and that this mobility gives capitalists a bargaining advantage.
As we saw in Chapter 4, however, international factor mobility is similar in its effects to
international trade.
Labor Standards and Trade Negotiations
Free trade proponents and anti-globalization activists may debate the big questions
such as, is globalization good for workers or not? Narrower practical policy issues are
at stake, however: whether and to what extent international trade agreements should
also contain provisions aimed at improving wages and working conditions in poor
countries.
The most modest proposals have come from economists who argue for a system that
monitors wages and working conditions and makes the results of this monitoring available
to consumers. Their argument is a version of the market failure analysis in Chapter 10.
Suppose, they suggest, that consumers in advanced countries feel better about buying
manufactured goods that they know were produced by decently paid workers. Then a system
that allows these consumers to know, without expending large efforts on information
gathering, whether the workers were indeed decently paid offers an opportunity for mutual
CHAPTER 12 Controversies in Trade Policy 283
gain. (Kimberly Ann Elliott, cited in the Further Readings list at the end of the chapter,
quotes a teenager: “Look, I don’t have time to be some kind of major political activist
every time I go to the mall. Just tell me what kinds of shoes are okay to buy, okay?”)
Because consumers can choose to buy only “certified” goods, they are better off because
they feel better about their purchases. Meanwhile, workers in the certified factories gain a
better standard of living than they otherwise would have had.
Proponents of such a system admit that it would not have a large impact on the standard
of living in developing countries, mainly because it would affect only the wages of workers
in export factories, who are a small minority of the work force even in highly export-oriented
economies. But they argue that it would do some good and little harm.
A stronger step would be to include formal labor standards—that is, conditions that
export industries are supposed to meet—as part of trade agreements. Such standards have
considerable political support in advanced countries; indeed, President Bill Clinton spoke
in favor of such standards at the disastrous Seattle meeting described above.
The economic argument in favor of labor standards in trade agreements is similar to the
argument in favor of a minimum wage rate for domestic workers: While economic theory
suggests that the minimum wage reduces the number of low-skill jobs available, some
(though by no means all!) reasonable economists argue that such effects are small and are
outweighed by the effect of the minimum wage in raising the income of the workers who
remain employed.
Labor standards in trade, however, are strongly opposed by most developing countries,
which believe that the standards would inevitably be used as a protectionist tool:
Politicians in advanced countries would set standards at levels that developing countries
could not meet, in effect pricing their goods out of world markets. A particular concern—
in fact, it was one of the concerns that led to the collapse of the talks in Seattle—is that
labor standards would be used as the basis for private lawsuits against foreign companies,
similar to the way antidumping legislation has been used by private companies to harass
foreign competitors.
Environmental and Cultural Issues
Complaints against globalization go beyond labor issues. Many critics argue that globalization
is bad for the environment. It is unmistakably true that environmental standards in
developing-country export industries are much lower than in advanced-country industries.
It is also true that in a number of cases, substantial environmental damage has been and is
being done in order to provide goods to advanced-country markets. A notable example is
the heavy logging of Southeast Asian forests carried out to produce forest products for
sale to Japanese and Western markets.
On the other hand, there are at least as many cases of environmental damage that has
occurred in the name of “inward-looking” policies of countries reluctant to integrate with
the global economy. A notable example is the destruction of many square miles of rain
forest in Brazil, the consequence partly of a domestic policy that subsidizes development
in the interior. This policy has nothing to do with exports and in fact began during the
years that Brazil was attempting to pursue inward-looking development.
As in the case of labor standards, there is debate over whether trade agreements should
include environmental standards. On one side, proponents argue that such agreements can
lead to at least modest improvements in the environment, benefiting all concerned. On the
other side, opponents insist that attaching environmental standards to trade agreements
will in effect shut down potential export industries in poor countries, which cannot afford
to maintain anything like Western standards.
284 PART TWO International Trade Policy
An even trickier issue involves the effect of globalization on local and national cultures.
It is unmistakably true that the growing integration of markets has led to a homogenization
of cultures around the world. People worldwide increasingly tend to wear the
same clothing, eat the same food, listen to the same music, and watch the same films and
TV shows.
Much but not all of this homogenization is also Americanization. For example,
McDonald’s is now found almost everywhere; but so is sushi. Hollywood action films
dominate the global box office; but the stylized fight scenes in Hollywood blockbusters
like The Matrix are based on the conventions of Hong Kong martial arts films.
It is hard to deny that something is lost as a result of this cultural homogenization. One
can therefore make a market failure argument on behalf of policies that attempt to preserve
national cultural differences by, for example, limiting the number of American films that
can be shown in theaters, or the fraction of TV time that can be taken up with programming
from overseas.
As soon as one advances this argument, however, it becomes clear that there is another
principle involved: the right of individuals in free societies to entertain themselves as they
like. How would you feel if someone denied you the right to listen to the Rolling Stones or
watch Jackie Chan movies, on the grounds that American cultural independence must be
safeguarded?
The WTO and National Independence
One recurrent theme in the anti-globalization movement is that the drive for free trade and
free flow of capital has undermined national sovereignty. In the extreme versions of this
complaint, the World Trade Organization is characterized as a supranational power able to
prevent national governments from pursuing policies in their own interests. How much
substance is there to this charge?
The short answer is that the WTO does not look anything like a world government; its
authority is basically limited to that of requiring countries to live up to their international
trade agreements. However, the small grain of truth in the view of the WTO as a supranational
authority is that its mandate allows it to monitor not only the traditional instruments
of trade policy—tariffs, export subsidies, and quantitative restrictions—but also domestic
policies that are de facto trade policies. And since the line between legitimate domestic
policies and de facto protectionism is fuzzy, there have been cases in which the WTO has
seemed to some observers to be interfering in domestic policy.
On page 241 we described a well-known example that illustrates the ambiguity of the
issue. As we saw, the United States amended its Clean Air Act to require imported gasoline
to be no more polluting than the average of gasoline supplied by domestic refineries.
The WTO ruled that this requirement was a violation of existing trade agreements. To critics
of the WTO, this ruling exemplified how the institution could frustrate an attempt by a
democratically elected government to improve the environment.
As defenders of the WTO pointed out, however, the ruling was based on the fact
that the United States was applying different standards to imports and to domestic
production. After all, some U.S. refineries supply gasoline that is more polluting than
the average, yet they are allowed to remain in operation. So the rule in effect prevented
the sale of polluting gasoline from Venezuela in U.S. markets but permitted the
sale of equally polluting gasoline from a domestic refinery. If the new rule had applied
the same standards to domestic and foreign gasoline, it would have been acceptable to
the WTO.
CHAPTER 12 Controversies in Trade Policy 285
Case Study
Bare Feet, Hot Metal, and Globalization
“New York manhole covers, forged barefoot in India.” That was the headline on a
New York Times report published on November 26, 2007. Accompanying the story
was a striking photo of barefoot, bare-chested men holding ladles of glowing,
molten metal.
The story illustrated in particularly stark form the dilemmas and moral ambiguities
of the debate over globalization.
It turns out that many of the manhole covers purchased by Con Edison, New York’s
power company, are produced by Shakti Industries, a foundry in the Indian province of
West Bengal, and that Shakti’s employees work under primitive conditions. Shoeless
men, often stripped to the waist, catch molten iron as it emerges from a furnace, then
pour it into molds.
Although the firm’s director claimed that the factory never has accidents, the risks
are obvious. Here’s how the Times described the scene:
“Often, sparks flew from pots of the molten metal. In one instance they ignited a
worker’s lungi, a skirtlike cloth wrap that is common men’s wear in India. He quickly,
reflexively, doused the flames by rubbing the burning part of the cloth against the rest
of it with his hand, then continued to cart the metal to a nearby mold.”
The workers aren’t paid much for taking these risks. The Times stated: “Workers at
foundries in India are paid the equivalent of a few dollars a day, while foundry workers
in the United States earn about $25 an hour.”
The immediate reaction of some Times readers to this story was outrage. One
letter writer demanded that the city ensure that it “buys products made under humane
conditions.” For its part, Con Edison said that it would rewrite its contracts to require
that overseas manufacturers “take appropriate actions to maintain a safe and healthy
workplace.”
But was all this outrage actually doing the barefoot workers of West Bengal a favor?
Another letter writer warned that it was actually counterproductive:
“American foundry workers enjoy a much higher standard of living than their Indian
counterparts. They get paid much more, and their safety standards are (and should be)
correspondingly higher. . . . To enforce similar standards in India would mean spending
more on safety than is spent hiring the people themselves! . . . This unrealistic business
model would lead to the closing of Indian foundry shops and loss of jobs for the poor
people who need them most. . . . Of course safety is important, but such idealistic proposals
will ultimately harm those whose safety they advocate.”
Indeed, although the manhole cover producers of Shakti earn low wages for dangerous
work by U.S. standards, their pay is good by Indian standards. And as the Times
reported, “The men making New York City’s manhole covers seemed proud of their
work and pleased to be photographed doing it.”
So is the production of manhole covers by barefoot workers something to be condemned
or praised? Are demands for higher safety standards humane, or would they
have the effect of denying desperately poor people of job opportunities, merely to satisfy
our own fastidiousness?
It’s a good bet that most of the clothing you are wearing as you read this came from a
country far poorer than the United States. The rise of manufactured exports from developing
countries has been one of the major shifts in the world economy over the last generation;
even a desperately poor nation like Bangladesh, with a per-capita GDP less than
5 percent that of the United States, now relies more on exports of manufactured goods
than on exports of traditional agricultural or mineral products. (A government official in a
developing country remarked to one of the authors, “We are not a banana republic—we
are a pajama republic.”)
It should come as no surprise that the workers who produce manufactured goods for export
in developing countries are paid very little by advanced-country standards—often less than
$1 per hour, sometimes less than $0.50. After all, the workers have few good alternatives in
such generally poor economies. Nor should it come as any surprise that the conditions of
work are also very bad in many cases.
Should low wages and poor working conditions be a cause for concern? Many people
think so. In the 1990s the anti-globalization movement attracted many adherents in
advanced countries, especially on college campuses. Outrage over low wages and poor
working conditions in developing-country export industries was a large part of the movement’s
appeal, although other concerns (discussed below) were also part of the story.
280 PART TWO International Trade Policy
It’s fair to say that most economists have viewed the anti-globalization movement as at
best misguided. The standard analysis of comparative advantage suggests that trade is
mutually beneficial to the countries that engage in it; it suggests, furthermore, that when
labor-abundant countries export labor-intensive manufactured goods like clothing, not
only should their national incomes rise but the distribution of income should also shift in
favor of labor. But is the anti-globalization movement entirely off base?
The Anti-Globalization Movement
Before 1995 most complaints about international trade made by citizens of advanced
countries targeted its effects on people who were also citizens of advanced countries. In
the United States, most critics of free trade in the 1980s focused on the alleged threat of
competition from Japan; in the early 1990s there was substantial concern in both the
United States and Europe over the effects of imports from low-wage countries on the
wages of less-skilled workers at home.
In the second half of the 1990s, however, a rapidly growing movement—drawing considerable
support from college students—began stressing the alleged harm that world
trade was doing to workers in the developing countries. Activists pointed to the low wages
and poor working conditions in the third world factories that produced goods for Western
markets. A crystallizing event was the discovery in 1996 that clothes sold at Wal-Mart,
and endorsed by television personality Kathie Lee Gifford, were produced by very poorly
paid workers in Honduras.
The anti-globalization movement grabbed world headlines in November 1999, when a
major meeting of the World Trade Organization took place in Seattle. The purpose of the
meeting was to start another trade round, following on the Uruguay Round described in
Chapter 10. Thousands of activists converged on Seattle, motivated by the belief that the
WTO was riding roughshod over national independence and imposing free trade ideas that
hurt workers. Despite ample warnings, the police were ill prepared, and the demonstrations
brought considerable disruption to the meetings. In any case, negotiations were not
going well: Nations had failed to agree on an agenda in advance, and it soon became clear
that there was not sufficient agreement on the direction of a new trade round to get one
started.
In the end the meeting was regarded as a failure. Most experts on trade policy believe
that the meeting would have failed even in the absence of the demonstrations, but the antiglobalization
movement had achieved at least the appearance of disrupting an important
international conference. Over the next two years, large demonstrations also rocked meetings
of the International Monetary Fund and the World Bank in Washington, as well as a
summit meeting of major economic powers in Genoa; at the latter event Italian police
killed one activist.
In a relatively short period of time, in other words, the anti-globalization movement had
become a highly visible presence. But what was the movement’s goal—and was it right?
Trade and Wages Revisited
One strand of the opposition to globalization is familiar from the analysis in Chapter 3.
Activists pointed to the very low wages earned by many workers in developing-country
export industries. These critics argued that the low wages (and the associated poor working
conditions) showed that, contrary to the claims of free trade advocates, globalization
was not helping workers in developing countries.
For example, some activists pointed to the example of Mexico’s maquiladoras, factories
near the U.S. border that had expanded rapidly, roughly doubling in employment, in
CHAPTER 12 Controversies in Trade Policy 281
the five years following the signing of the North American Free Trade Agreement. Wages
in those factories were in some cases below $5 per day, and conditions were appalling by
U.S. standards. Opponents of the free trade agreement argued that by making it easier for
employers to replace high-wage workers in the United States with lower-paid workers in
Mexico, the agreement had hurt labor on both sides of the border.
The standard economist’s answer to this argument goes back to our analysis in Chapter 3
of the misconceptions about comparative advantage. We saw that it is a common misconception
that trade must involve the exploitation of workers if they earn much lower wages than
their counterparts in a richer country.
Table 12-3 repeats that analysis briefly. In this case we assume that there are two countries,
the United States and Mexico, and two industries, high-tech and low-tech. We also assume
that labor is the only factor of production, and that U.S. labor is more productive than
Mexican labor in all industries. Specifically, it takes only one hour of U.S. labor to produce a
unit of output in either industry; it takes two hours of Mexican labor to produce a unit of lowtech
output and eight hours to produce a unit of high-tech output. The upper part of the table
shows the real wages of workers in each country in terms of each good in the absence of trade:
The real wage in each case is simply the quantity of each good that a worker could produce in
one hour.
Now suppose that trade is opened. In the equilibrium after trade, the relative wage rates
of U.S. and Mexican workers would be somewhere between the relative productivity of
workers in the two industries—for example, U.S. wages might be four times Mexican
wages. Thus it would be cheaper to produce low-tech goods in Mexico and high-tech
goods in the United States.
A critic of globalization might look at this trading equilibrium and conclude that trade
works against the interest of workers. First of all, in low-tech industries, highly paid jobs
in the United States are replaced with lower-paid jobs in Mexico. Moreover, you could
make a plausible case that the Mexican workers are underpaid: Although they are half as
productive in low-tech manufacturing as the U.S. workers they replace, their wage rate is
only 1/4 (not 1/2) that of U.S. workers.
But as shown in the lower half of Table 12-3, in this example the purchasing power of
wages has actually increased in both countries. U.S. workers, all of whom are now employed
in high-tech, can purchase more low-tech goods than before: two units per hour of
work versus one. Mexican workers, all of whom are now employed in low-tech, find that
they can purchase more high-tech goods with an hour’s labor than before: 1/4 instead of 1/8
Because of trade, the price of each country’s imported good in terms of that country’s
wage rate has fallen.
TABLE 12-3 Real Wages
(A) Before Trade
High-Tech Goods/Hour Low-Tech Goods/Hour
United States 1 1
Mexico 1/8 1/2
(B) After Trade
High-Tech Goods/Hour Low-Tech Goods/Hour
United States 1 2
Mexico 1/4 1/2
282 PART TWO International Trade Policy
The point of this example is not to reproduce the real situation in any exact way; it is
to show that the evidence usually cited as proof that globalization hurts workers in developing
countries is exactly what you would expect to see even if the world were well
described by a model that says that trade actually benefits workers in both advanced and
developing countries.
One might argue that this model is misleading because it assumes that labor is the only
factor of production. It is true that if one turns from the Ricardian model to the factorproportions
model discussed in Chapter 5, it becomes possible that trade hurts workers in
the labor-scarce, high-wage country—that is, the United States in this example. But this
does not help the claim that trade hurts workers in developing countries. On the contrary,
the case for believing that trade is beneficial to workers in the low-wage country actually
becomes stronger: Standard economic analysis says that while workers in a capitalabundant
nation like the United States might be hurt by trade with a labor-abundant country
like Mexico, the workers in the labor-abundant country should benefit from a shift in
the distribution of income in their favor.
In the specific case of the maquiladoras, economists argue that while wages in the
maquiladoras are very low compared with wages in the United States, that situation is inevitable
because of the lack of other opportunities in Mexico, which has far lower overall
productivity. And it follows that while wages and working conditions in the maquiladoras
may appear terrible, they represent an improvement over the alternatives available in
Mexico. Indeed, the rapid rise of employment in those factories indicated that workers
preferred the jobs they could find there to the alternatives. (Many of the new workers in the
maquiladoras are in fact peasants from remote and desperately poor areas of Mexico. One
could say that they have moved from intense but invisible poverty to less severe but conspicuous
poverty, simultaneously achieving an improvement in their lives and becoming a
source of guilt for U.S. residents unaware of their former plight.)
The standard economist’s argument, in other words, is that despite the low wages earned
by workers in developing countries, those workers are better off than they would have been
if globalization had not taken place. Some activists do not accept this argument—they
maintain that increased trade makes workers in both advanced and developing countries
worse off. It is hard, however, to find a clear statement of the channels through which this is
supposed to happen. Perhaps the most popular argument is that capital is mobile internationally,
while labor is not; and that this mobility gives capitalists a bargaining advantage.
As we saw in Chapter 4, however, international factor mobility is similar in its effects to
international trade.
Labor Standards and Trade Negotiations
Free trade proponents and anti-globalization activists may debate the big questions
such as, is globalization good for workers or not? Narrower practical policy issues are
at stake, however: whether and to what extent international trade agreements should
also contain provisions aimed at improving wages and working conditions in poor
countries.
The most modest proposals have come from economists who argue for a system that
monitors wages and working conditions and makes the results of this monitoring available
to consumers. Their argument is a version of the market failure analysis in Chapter 10.
Suppose, they suggest, that consumers in advanced countries feel better about buying
manufactured goods that they know were produced by decently paid workers. Then a system
that allows these consumers to know, without expending large efforts on information
gathering, whether the workers were indeed decently paid offers an opportunity for mutual
CHAPTER 12 Controversies in Trade Policy 283
gain. (Kimberly Ann Elliott, cited in the Further Readings list at the end of the chapter,
quotes a teenager: “Look, I don’t have time to be some kind of major political activist
every time I go to the mall. Just tell me what kinds of shoes are okay to buy, okay?”)
Because consumers can choose to buy only “certified” goods, they are better off because
they feel better about their purchases. Meanwhile, workers in the certified factories gain a
better standard of living than they otherwise would have had.
Proponents of such a system admit that it would not have a large impact on the standard
of living in developing countries, mainly because it would affect only the wages of workers
in export factories, who are a small minority of the work force even in highly export-oriented
economies. But they argue that it would do some good and little harm.
A stronger step would be to include formal labor standards—that is, conditions that
export industries are supposed to meet—as part of trade agreements. Such standards have
considerable political support in advanced countries; indeed, President Bill Clinton spoke
in favor of such standards at the disastrous Seattle meeting described above.
The economic argument in favor of labor standards in trade agreements is similar to the
argument in favor of a minimum wage rate for domestic workers: While economic theory
suggests that the minimum wage reduces the number of low-skill jobs available, some
(though by no means all!) reasonable economists argue that such effects are small and are
outweighed by the effect of the minimum wage in raising the income of the workers who
remain employed.
Labor standards in trade, however, are strongly opposed by most developing countries,
which believe that the standards would inevitably be used as a protectionist tool:
Politicians in advanced countries would set standards at levels that developing countries
could not meet, in effect pricing their goods out of world markets. A particular concern—
in fact, it was one of the concerns that led to the collapse of the talks in Seattle—is that
labor standards would be used as the basis for private lawsuits against foreign companies,
similar to the way antidumping legislation has been used by private companies to harass
foreign competitors.
Environmental and Cultural Issues
Complaints against globalization go beyond labor issues. Many critics argue that globalization
is bad for the environment. It is unmistakably true that environmental standards in
developing-country export industries are much lower than in advanced-country industries.
It is also true that in a number of cases, substantial environmental damage has been and is
being done in order to provide goods to advanced-country markets. A notable example is
the heavy logging of Southeast Asian forests carried out to produce forest products for
sale to Japanese and Western markets.
On the other hand, there are at least as many cases of environmental damage that has
occurred in the name of “inward-looking” policies of countries reluctant to integrate with
the global economy. A notable example is the destruction of many square miles of rain
forest in Brazil, the consequence partly of a domestic policy that subsidizes development
in the interior. This policy has nothing to do with exports and in fact began during the
years that Brazil was attempting to pursue inward-looking development.
As in the case of labor standards, there is debate over whether trade agreements should
include environmental standards. On one side, proponents argue that such agreements can
lead to at least modest improvements in the environment, benefiting all concerned. On the
other side, opponents insist that attaching environmental standards to trade agreements
will in effect shut down potential export industries in poor countries, which cannot afford
to maintain anything like Western standards.
284 PART TWO International Trade Policy
An even trickier issue involves the effect of globalization on local and national cultures.
It is unmistakably true that the growing integration of markets has led to a homogenization
of cultures around the world. People worldwide increasingly tend to wear the
same clothing, eat the same food, listen to the same music, and watch the same films and
TV shows.
Much but not all of this homogenization is also Americanization. For example,
McDonald’s is now found almost everywhere; but so is sushi. Hollywood action films
dominate the global box office; but the stylized fight scenes in Hollywood blockbusters
like The Matrix are based on the conventions of Hong Kong martial arts films.
It is hard to deny that something is lost as a result of this cultural homogenization. One
can therefore make a market failure argument on behalf of policies that attempt to preserve
national cultural differences by, for example, limiting the number of American films that
can be shown in theaters, or the fraction of TV time that can be taken up with programming
from overseas.
As soon as one advances this argument, however, it becomes clear that there is another
principle involved: the right of individuals in free societies to entertain themselves as they
like. How would you feel if someone denied you the right to listen to the Rolling Stones or
watch Jackie Chan movies, on the grounds that American cultural independence must be
safeguarded?
The WTO and National Independence
One recurrent theme in the anti-globalization movement is that the drive for free trade and
free flow of capital has undermined national sovereignty. In the extreme versions of this
complaint, the World Trade Organization is characterized as a supranational power able to
prevent national governments from pursuing policies in their own interests. How much
substance is there to this charge?
The short answer is that the WTO does not look anything like a world government; its
authority is basically limited to that of requiring countries to live up to their international
trade agreements. However, the small grain of truth in the view of the WTO as a supranational
authority is that its mandate allows it to monitor not only the traditional instruments
of trade policy—tariffs, export subsidies, and quantitative restrictions—but also domestic
policies that are de facto trade policies. And since the line between legitimate domestic
policies and de facto protectionism is fuzzy, there have been cases in which the WTO has
seemed to some observers to be interfering in domestic policy.
On page 241 we described a well-known example that illustrates the ambiguity of the
issue. As we saw, the United States amended its Clean Air Act to require imported gasoline
to be no more polluting than the average of gasoline supplied by domestic refineries.
The WTO ruled that this requirement was a violation of existing trade agreements. To critics
of the WTO, this ruling exemplified how the institution could frustrate an attempt by a
democratically elected government to improve the environment.
As defenders of the WTO pointed out, however, the ruling was based on the fact
that the United States was applying different standards to imports and to domestic
production. After all, some U.S. refineries supply gasoline that is more polluting than
the average, yet they are allowed to remain in operation. So the rule in effect prevented
the sale of polluting gasoline from Venezuela in U.S. markets but permitted the
sale of equally polluting gasoline from a domestic refinery. If the new rule had applied
the same standards to domestic and foreign gasoline, it would have been acceptable to
the WTO.
CHAPTER 12 Controversies in Trade Policy 285
Case Study
Bare Feet, Hot Metal, and Globalization
“New York manhole covers, forged barefoot in India.” That was the headline on a
New York Times report published on November 26, 2007. Accompanying the story
was a striking photo of barefoot, bare-chested men holding ladles of glowing,
molten metal.
The story illustrated in particularly stark form the dilemmas and moral ambiguities
of the debate over globalization.
It turns out that many of the manhole covers purchased by Con Edison, New York’s
power company, are produced by Shakti Industries, a foundry in the Indian province of
West Bengal, and that Shakti’s employees work under primitive conditions. Shoeless
men, often stripped to the waist, catch molten iron as it emerges from a furnace, then
pour it into molds.
Although the firm’s director claimed that the factory never has accidents, the risks
are obvious. Here’s how the Times described the scene:
“Often, sparks flew from pots of the molten metal. In one instance they ignited a
worker’s lungi, a skirtlike cloth wrap that is common men’s wear in India. He quickly,
reflexively, doused the flames by rubbing the burning part of the cloth against the rest
of it with his hand, then continued to cart the metal to a nearby mold.”
The workers aren’t paid much for taking these risks. The Times stated: “Workers at
foundries in India are paid the equivalent of a few dollars a day, while foundry workers
in the United States earn about $25 an hour.”
The immediate reaction of some Times readers to this story was outrage. One
letter writer demanded that the city ensure that it “buys products made under humane
conditions.” For its part, Con Edison said that it would rewrite its contracts to require
that overseas manufacturers “take appropriate actions to maintain a safe and healthy
workplace.”
But was all this outrage actually doing the barefoot workers of West Bengal a favor?
Another letter writer warned that it was actually counterproductive:
“American foundry workers enjoy a much higher standard of living than their Indian
counterparts. They get paid much more, and their safety standards are (and should be)
correspondingly higher. . . . To enforce similar standards in India would mean spending
more on safety than is spent hiring the people themselves! . . . This unrealistic business
model would lead to the closing of Indian foundry shops and loss of jobs for the poor
people who need them most. . . . Of course safety is important, but such idealistic proposals
will ultimately harm those whose safety they advocate.”
Indeed, although the manhole cover producers of Shakti earn low wages for dangerous
work by U.S. standards, their pay is good by Indian standards. And as the Times
reported, “The men making New York City’s manhole covers seemed proud of their
work and pleased to be photographed doing it.”
So is the production of manhole covers by barefoot workers something to be condemned
or praised? Are demands for higher safety standards humane, or would they
have the effect of denying desperately poor people of job opportunities, merely to satisfy
our own fastidiousness?
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