Global Policy Forum

By Mark Trumbull

Worries about the dark side of free trade are surfacing in the United States in ways that could affect the course of globalization worldwide. Don't expect an outright retreat from global commerce just yet, but it is becoming more likely that the US will act to temper and manage its impact. The reason: Free-trade brush fires have recently erupted on economic and political fronts:

• This week, the Commerce Department said America's trade deficit rose to $764 billion in 2006, as imports outstripped exports by a record amount for a fifth straight year.

• Democrats are in control of Congress, with new lawmakers in their ranks who are especially eager to do something about what they see as unfair trade practices by China. Bipartisan bills introduced this week could result in retaliatory tariffs or revocation of China's trade status with the US.

"There was a time 10 years ago when it seemed like globalization was consensual, and there were very few remaining questions about whether it was ... a good thing," says Jeffry Frieden, an expert on global economics at Harvard University. The reality, he says, includes a caveat: Trade "can make everyone better off, so long as you compensate the losers."

Concern about globalization is hardly limited to the US. From Europe to Latin America to China, the pattern is the same: Not everyone feels better off, and in those regions, political consequences can include riots or the rise of nationalist governments. But America, which as the world's largest economy has led the march toward expanding trade for decades, remains an important influence on the world. Most trade experts don't foresee an outright reversal of the trend. The world's biggest economies are now heavily reliant on trade. Exports account for about 40 percent of Germany's economic activity and a similar share in China, according to Joseph Quinlan, a Banc of America investment strategist in New York.

But the tenor in the halls of power has changed. Supporters of globalization are expending more energy to defend the concept – often calling for new policies to help compensate workers whose jobs migrate abroad.

"[To] retain support for policies of free trade ... we need to make sure that the gains and benefits from these powerful, growth-producing forces are broadly shared," Federal Reserve Chairman Ben Bernanke said this week in response to a question during congressional testimony.

Trade has always been always destabilizing for the workers in affected industries. What's new is the unprecedented scale and pace of change worldwide. In the 1980s and '90s, China, along with former communist nations and former post-colonial regimes on several continents, joined a global market for labor and goods. Communications technology has been a force of acceleration.

This has been hugely beneficial overall, most economists say. But it comes with strains on jobs and wages that are increasingly apparent. In a USA Today/Gallup poll last year, nearly two-thirds of respondents said trade "mostly hurts" US workers. One idea under review on Capitol Hill is wage insurance, which provides income as displaced workers transition toward new careers. The bills this week focus on trying to level what many lawmakers see as a tilted playing field – especially with export powerhouse China.

A bipartisan bill introduced Tuesday would rescind China's Permanent Normal Trade Relations (PNTR) status. It is sponsored by Sens. Byron Dorgan (D) of North Dakota, Lindsey Graham (R) of South Carolina, and Sherrod Brown (D) of Ohio. Another new bill, the Fair Currency Act of 2007, classified China as a currency manipulator in violation of US trade law. A tariff boost is threatened under this bill backed by Reps. Duncan Hunter (R) of California and Tim Ryan (D) of Ohio.

Meanwhile, the Bush administration and trade advocates in both parties are scrambling to build support for so-called "fast track" authority to negotiate new agreements to expand trade. Skeptics abound.

"We need to declare a moratorium on new trade agreements until we figure out how to do this right," says Alan Tonelson of the US Business and Industry Council, which represents companies concerned about the erosion of US manufacturing.

It remains unclear whether the advocates of a harder line on trade will gain traction. Some economists believe this will be a better year for US exports – and a narrowing in the trade deficit. And that deficit, they say, is not in itself a sign of economic decline. But it could be unsustainable if other nations grow less willing to finance that deficit by lending to the US.

"The real key is to take advantage of our educational system to acquire higher-value skills" and the jobs that go with them, says Paul Kasriel, an economist at the Northern Trust Co. in Chicago.