Trade agreements ratified since the early 1990s have helped create a global marketplace, expanding global trade by opening more markets to goods from around the world. Agreements such as the North American Free Trade Agreement (NAFTA) and institutions such as the World Trade Organization have played crucial roles in these globalizing trends that have removed trade barriers. Mainstream economic thought holds that world trade benefits all parties involved; however, trade has a downside as well. Negative effects of international trade include lost jobs and greater wage inequality.
The Economic Policy Institute (EPI), located in Washington, D.C., calls job losses the most easily understood negative effect of world trade, but concedes that the impact requires some explanation. In a 2008 issue brief, EPI analyst L. Josh Bivens writes that international trade creates jobs for exporting industries but eliminates them in other sectors, as cheaper foreign goods displace domestic products. Job losses are especially high in manufacturing. Noting an increase in the United States’ trade deficit, EPI reported a net job loss in the U.S. economy because job losses stemming from imported goods have exceeded jobs created by exports. Job quality is a related negative effect of world trade. Noting the disproportionate effect on manufacturing, Bivens writes that jobs in this sector generally pay higher salaries and better benefits, even for workers without a college education.
Labor represents one of the highest business costs in producing products. The EPI reported that expanded world trade -- which opens markets to goods produced in countries where workers earn far less than their domestic competitors -- depresses the wages of domestic workers as their employees try to reduce costs to compete more effectively with overseas firms. Opponents of expanded world trade contend that treaties such as NAFTA have created a worldwide “race to the bottom” in which companies reduce wages or even eliminate domestic jobs, then move operations offshore to take advantage of lower labor costs. Lower wages for domestic workers contribute to rising wage inequality across the economy, the EPI concludes.
Higher Foreign Debt
When imports exceed exports, a nation’s trade deficit rises. Using the U.S. as an example, Bivens wrote that each year the U.S. runs a trade deficit it must borrow from overseas lenders to finance the difference, which increases foreign debt that the nation must pay with interest. Higher foreign debts and their accompanying interest payments threaten long-term living standards, according to the EPI.
Rising Global Poverty
The World Trade Organization and the World Bank report that the years since 1980 have seen the most growth in liberalized trade, in which international trading activities expand as trade barriers fall. However, world poverty has risen during that same period. The World Bank reports that the number of people throughout the world living on less than $2 a day has risen by about 50 percent since 1980. In addition, a growing number of people are living on less than $1 a day.