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There's Only So Much That Foreign Trade Can Do


Washington Post Sunday, June 2, 2002 By Alan Tonelson

America's leaders view trade as a key instrument in the global war on terrorism. By opening U.S. markets wider to Third World products, they hope to alleviate poverty abroad and thus turn destitute people away from terrorism and violence. Trade policy as anti-terror weapon is an understandably appealing idea. It doesn't put American soldiers in harm's way. It is nonviolent, market- friendly and holds the promise of "draining the swamp" where terrorists are assumed to thrive. And it doesn't require a line in the federal budget.

If only it worked.

Contrary to the view of globalization supporters and even some critics, trade with the United States does not automatically provide Third World workers with the keys to wealth and happiness. In a recent survey, the Reston-based consulting firm Werner International Inc. has compiled nearly a decade's worth of hard data on actual wages paid to workers in an industry that is seen as crucial to Third World hopes for industrialization -- apparel. Perhaps no other industry has profited more from exporting to the United States. And yet the figures show that there has been almost uniform wage meltdown in the apparel industry in the Third World.

Take Pakistan, a front-line combatant in the anti-terror campaign that has complained bitterly about supposedly miserly U.S. trade breaks. Yet from 1990 to 2001, Pakistan's annual apparel exports to the United States rose nearly 400 percent, to more than $1.5 billion. Nonetheless, between 1990 and 1998, the period covered by the Werner study, nominal wages for Pakistani apparel workers stayed absolutely flat, at 24 cents per hour. Because inflation in Pakistan totaled 137 percent from 1990 to 1998, the wages of apparel workers fell way behind the cost of living.

NATO member Turkey is clamoring for trade breaks, too, as a reward for buttressing U.S. strategy in the Middle East and Central Asia.Turkey is already a significant apparel exporter to the United States, with shipments rising 168 percent between 1990 and 1998, and growing even faster through 2001. Yet from 1990 to '98, while Turkish apparel wages increased by 36.3 percent, the country was gripped by near-hyperinflation that saw living costs soar by more than 1,800 percent. A similar pattern holds in countries such as the Philippines, Egypt and Peru. Wage trends for apparel workers are grim, even allowing for the dollar's appreciation against many local currencies in the developing world. In some countries, the pattern extends far beyond the apparel industry.A 1999 report from the Harvard Institute of International Development and the World Economic Forum revealed falling real wages, in local currency, across all sectors of the economy in China, Indonesia and the Philippines between 1990 and 1997. This backsliding occurred well before the region's financial collapse.

All of this contradicts the prevailing theory of the moment. "America's trade leadership" can help provide answers for Third World allies "who ask for economic hope to counter internal threats to our common values," U.S. Trade Representative Robert Zoellickwrote a week after Sept. 11. The virtues of trade for developing countries have also been endorsed by the World Trade Organization, the World Bank, Oxfam International and a U.N. anti-poverty summit.

But in the real world, the answers are anything but clear-cut. In theory, the solution to developing countries' problems might be to send yet more apparel to the United States. But the experience, whether from Pakistan, from Turkey or from Mexico, is not encouraging. Mexico is rapidly becoming America's largest source of apparel imports -- $9 billion worth in 2001. Yet Mexican apparel wages have risen less than one-seventh as fast as that nation's living costs.

Critics of today's trade policies and even supporters who acknowledge the wage problem offer several plausible explanations, ranging from low productivity rates in developing countries to a lack of worker rights. Yet the reasons are more fundamental.

First, greater trade cannot be even a near-panacea for global poverty because this condition has many other roots. None is more central than bad and often crooked governance, which prevents scores of developing countries from organizing themselveswell enough to exploit trade opportunities when they are offered. Second, the developing world literally is drowning in labor. The economic liberalization wave that swept major Third World countries, starting with China's reform program in the late 1970s, has made an unprecedented number of workers available to international businesses. In particular, the Asian and Latin American regions that have opened economically feature not only huge, rapidly growing populations and workforces, but towering rates of unemployment -- an estimated 20 percent in China alone. Sub-Saharan Africa and low-wage East European countries such as Ukraine are waiting in the wings.

This worldwide labor glut depresses the value of workers the way the oversupply of any product depresses the price of that product. These pressures are especially powerful in labor-intensive industries such as apparel, where international corporations seldom own factories and instead often shop from country to country for the lowest wages.

Third, the developing world's massive though still incomplete economic opening has greatly multiplied the number of countries pursuing export- led growth strategies. During the Cold War, U.S. trade breaks helped South Korea and Taiwan partly because those nations had the market for Third World manufacturing exports pretty much to themselves (and partly because they had strong central governments that instituted sound domestic policies).

Today, such smallish Asian export tigers are competing for shares of the U.S. apparel markets with neighboring population giants such as China, India and Indonesia, along with Mexico, the Caribbean Basin, Central America and sub-Saharan Africa. These countries continuously undercut each other; thus, most new U.S. trade agreements with Third World regions produce complaints from other regions.

In part, that's because the U.S. market is already well-saturated with imports. Imports currently make up at least 75 percent of the U.S. apparel market, 95 percent of the footwear market, and 95 percent of the market for computers, other office machines and their parts. Even those unworried about record and mounting U.S. trade deficits have to ask themselves: How much more export growth can take place in these areas?

In 1999, despite the surge of exports to the United States, 1.3 billion people still lived below the meager global poverty line of $1 per day in income, and nearly 2 billion others made less than $2 per day. Joblessness was still endemic throughout the developing world. Despite the fact that increased trade hasn't yet improved the plight of Third World workers, many remain enamored of trade as an anti-terror weapon. They might do better to turn their attention from the United States to press Europeans and the Japanese to start importing much more from developing countries. Although the globe's lone economic superpower will always be a lightning rod for economic grievances, the other industrialized countries have clearly erected the biggest trade barriers to Third World economic progress.

According to the Organization for Economic Cooperation and Development, the club of industrialized democracies, although the U.S. economy is twice as big as Japan's, it imports four times more in non-oil goods from 17 major Third World countries than does Japan. In addition, although the U.S. economy is 50 percent larger than the output of the European Union's four biggest countries (Germany, France, Italy, and the United Kingdom), it imports twice as many goods as they do from those 17 countries.

A 2001 International Monetary Fund (IMF) study concluded that stronger growth in the United States is not the major reason for the disparity. The IMF found that U.S. markets are so open to Third World imports that every 1 percent of American economic growth is associated with a 1 percent increase in Third World growth. By contrast, European and Japanese markets are so closed that even when they do grow, this growth has no "statistically significant effect" on Third World growth.

Unfortunately, the Europeans and Japanese have shown little interest in lowering their barriers. Indeed, Washington may be worsening matters by hinting that Japan should let the yen slide and try to export its way out of recession. The result can only make Japan even more closed to Third World goods.

Absent more burden-sharing, the United States simply will need to bring some order and strategy to its Third World trade policy by setting priorities. If President Bush wants to reward allies or lure fence- sitters in the anti-terror campaign, the kind of practically indiscriminate market-opening he has favored thus far cannot continue.

Further, the president's anti-terrorism priorities must be reconciled with other foreign policy considerations that have partly driven recent U.S. trade policy, such as stemming the flow of drugs and immigrants from Mexico and other hemispheric neighbors, engaging with China and meeting what the White House sees as humanitarian obligations toward sub-Saharan Africa. If every one of these aims is a priority, then none is a priority. Finally, the president will need to preserve his international legal authority to set priorities in Third World apparel trade, which will mean confronting an international agreement to eliminate apparel trade quotas by the year 2005. If the president fails, much world apparel production is expected to shift to China.

Above all, the administration must recognize that, for the foreseeable future, American security cannot responsibly be pinned on seeking millennial change in the developing world. Trade is not the only economic weapon. Investment and aid can also help. But even if industrialized nations are more generous, enormous numbers of people around the world will remain mired in desperate poverty for decades to come. The swamp that allegedly breeds and harbors terrorism, in other words, will be drained agonizingly slowly at best.

Alan Tonelson, a research fellow at the U.S. Business and Industry Council Educational Foundation, is the author of "The Race to the Bottom" (Westview Press). Kirk Raymond, a foundation research associate, assisted in preparing this article.

2002 The Washington Post Company



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