Global Markets: Evaluating Some Risks the U.S. May Face

Publication Date: February 2003

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

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Abstract:

The last 30 years have seen a rapid expansion of trade in goods and assets and a general rise of economic interdependence across the world economy. Globalization is the popular term given to this ongoing process. To most economists, globalization is seen as a force that enhances the power of the market and gives greater scope for realizing the gains from trade. This is an enriching process, with improved economic well-being growing out of increased specialization of world production and elevated economic efficiency. To others, however, globalization is seen as a clear threat to their economic well-being, perceived to be retarding the growth of worker wages, increasing wage inequality, undermining domestic social relations, and raising the exposure of the American economy to foreign economic contagion.

The 108th Congress is likely to have to focus attention on trade liberalization initiatives with Singapore and Chile and, perhaps the Free Trade with the Americas initiative. Each of these initiatives will likely raise the heat under these simmering issues with globalization.

The concern that expanding trade erodes the wages of American workers stems from the observation of two recent trends in U.S. wage behavior. One, there has been a significant slowdown in the rate of advance of worker real wages. Two, there has been a marked increase in the inequality of wages between skilled and less-skilled workers. This report suggests, however, that there is likely little causality running from a rising level of trade to poor domestic wage performance. Slow average wage growth is fully and credibly linked to poor productivity growth. A small share of rising wage inequality can be linked to trade, but most of this trend appears to be more soundly rooted in a rising demand for skilled workers.

Nevertheless, there are industries and workers adversely affected by expanding trade. In these circumstances an increasingly urgent concern is that as more trade occurs with countries that do not play by the same economic and social rules as the U.S. , there will be a steady undermining of the economic position of workers in the U.S. and the undermining of important social conventions and institutions that frame the terms for acceptable economic competition. There is a strong sentiment that there is a difference between economic gains generated by a comparative advantage based on factor endowments or consumer preferences and gains generated by a comparative advantage based on institutional choices in the exporting country that conflict with the norms of the importing country. Where trade with a country that has different social standards inflicts economic harm on domestic workers, the case can be made that trade liberalization cannot be treated as an end in itself, without regard to how it affects broadly shared values at home. The economic benefits of larger and more integrated international capital flows are significant. But increased cross-border capital flows also carry the elevated risks of contagion from negative foreign economic shocks and financial market instability. The size, orderliness, and resiliency of U.S. financial markets leave the U.S. well disposed to take full advantage of the benefits of these asset flows with a minimum of risk.