The 95 percent trade illusion

The strongest argument for Congress granting President Obama sweeping authority to negotiate new trade deals seems indisputable: Americans make up only 5 percent of the world’s population. Consequently, agreements that reduce barriers to selling to the 95 percent of global consumers who live outside the U.S. matter greatly.

Look closely, though, and the 95 percent figure reveals itself to be about 95 percent phony. 

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Its most frequent users — who include the president’s top economic aides, Congress’s leading trade policy voices and America’s most powerful business groups — either don’t know or won’t acknowledge that very few of these potential customers have any meaningful ability to buy products or services from the United States.

The latest World Bank research reports that 17.5 percent of the world’s population lived on the equivalent of $1.25 per day or less in 2010. And most of the rest weren’t doing much better than these hundreds of millions trapped in “extreme poverty” — another 18 percent of humanity lives on between $1.25 and $2 a day. 

Economist Charles Kenny of the Center for Global Development pegs global median income at $3 to $4 per day, meaning that half the world’s population earns less than those totals.

Yet are the world’s workers faring better than the overall population? Not enough to offer much opportunity for U.S. exporters.

A recent report from the International Labor Organization (ILO) found that some 15 percent of this group fell below the extreme poverty line of $1.25 per day, 18 percent more earned between $1.25 and $2 per day, and another 25 percent earned between $2 and $4 per day. In other words, more than 58 percent of the globe’s total workforce makes less daily on the job than the price of a tall Starbucks Frappuccino. 

To be sure, just above 30 percent of third-world workers are “middle class,” according to the ILO. But that label can easily mislead. These workers live on the equivalent of between $4 and $13 per day. That puts the very best paid of them at roughly the U.S. poverty line in 2005 — and nearly 90 percent of the total below it.

At the same time, even these figures greatly overstate the consuming power and potential of overseas markets for U.S. exporters. For they measure third-world incomes according to the purchasing power parity (PPP) method, which adjusts their dollar earnings for the much cheaper conditions in third-world economies. 

In other words, PPP figures tell us how many goods and services third-world populations could afford to buy if they were offered them reflecting very low, local costs prices.

That’s useful for measuring progress within third-world economies. But PPP figures tell us nothing about how much these people can afford to buy in the way of U.S.-origin goods and services, which reflect much higher U.S. price levels. It’s obvious that a third-world worker living on $1.25 per day in PPP terms is earning much less per day if measured based on U.S.-level purchasing power — i.e., by what economists call market exchange rates.

Institutions such as the World Bank don’t calculate poverty rates according to market exchange rates. But an idea of how significant the difference could be comes from measurements of gross domestic product (GDP) — the size of national economies measured as the value of output.

For example, the World Bank judges China’s GDP to have reached $12.27 trillion in PPP terms in 2012. India’s was $4.72 trillion — bigger than Japan’s or Germany’s. But measured via market exchange rates, these figures fall to $8.23 trillion and $1.84 trillion, respectively.

Global incomes, including third-world incomes, have kept rising. But the ILO expects ongoing economic woes to slow this progress, at least for the near future. In fact, the financial crisis’ punishing aftermath has already led many developing countries as well as high-income economies like Japan’s to downplay importing in favor of growing through exports. Thus the potential for increasing U.S. exports through trade deals looks even dimmer.

The Big Business lobby’s motives for pushing these agreements and the 95 percent claim are unmistakable. Poorly paid, third-world workers in particular are much cheaper and can be made at least as productive as their American counterparts. By guaranteeing access to the lucrative U.S. market for factories businesses move abroad to reap these gains, trade deals guarantee that offshoring will remain a profit booster.

But why is Obama apparently so keen on practices that have drained so much valuable production and employment from America?

If he were truly interested in using trade policy to spur faster recovery and job creation, the president would stop obsessing with foreign markets unable to and unenthusiastic about “Buying American” even in the best of times. Instead, he should focus on a huge target of opportunity right under his nose: the American customers who have been lost in recent decades to imports. In advanced manufacturing alone, this market is worth hundreds of billions of dollars annually; American businesses know it better than any others and face no tariffs or other trade barriers. 

Regaining these customers would genuinely benefit the president, his party and his country — unlike fostering the 95 percent illusion. 

Tonelson is a fellow at the U.S. Business and Industry Council, which is an association of small and medium-sized manufacturers. He is the author of The Race to the Bottom.