As U.S. income stagnates, Democrats reject free trade (McClatchy Washington Bureau)

By Kevin G. Hall , McClatchy Newspapers

WASHINGTON — The Democratic-led Congress won't give President Bush the special authority he needs to negotiate future free-trade deals. The Senate is moving on retaliatory trade legislation against China. The House of Representatives won't approve deals with three small neighboring Latin American countries. Global trade talks are near collapse.

Washington's mood on free trade hasn't been this negative in at least two decades, and a pullback is evident. Whether this becomes a full-blown return to protectionism remains to be seen. But for now Americans, and the politicians they elect to represent them, are in no mood to expand international trade.

"For decades we took for granted that everyone agreed with us economists that free trade is good, protectionism is bad. Somewhere along the way, that stopped being the conventional wisdom," acknowledged U.S. Trade Representative Susan Schwab, in an interview with McClatchy Newspapers. "And whereas the default vote on a trade bill in Congress used to be a ‘yes' vote, the default vote on a trade bill now in Congress is a ‘no' vote." Why? Because lots of people are no longer convinced that a rising tide of trade lifts all boats — and there's evidence to back them up.

For three decades, the richest 10 percent of Americans have been growing even richer much faster than everyone else. Over the past five years, real wages for all the rest of American workers have been almost flat. Many blame globalization.

During a mid-July congressional hearing, Federal Reserve Chairman Ben Bernanke contended that education levels largely determine income inequality. But he was angrily interrupted by Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, who declared, "Mr. Bernanke, that's simply not true."

Frank said that the 29 percent of Americans who have bachelor's and even master's degrees haven't seen real income growth, on average, over the past five years. That's what Democrats in Congress are focused on, he said.

"As long as we have the current situation … you are going to see the kind of gridlock where trade promotion (authority), immigration and other issues don't go anywhere," he warned. "And I just urge people … help us diminish inequality or you will have continued economic gridlock."

Frank quoted repeatedly from a new report published by the Financial Services Forum, a think tank run by President Bush's close friend, former Commerce Secretary Donald Evans. The report was co-written by Matthew Slaughter, a former member of Bush's Council of Economic Advisers.

The report concluded that "over time, the pressures of global engagement spread economy-wide to alter the earnings of even those not directly exposed to international competition."

Since 2000, the report said, most American workers have seen meager income growth. Only "a small share of workers at the very high end has enjoyed strong growth in incomes." This occurred despite strong productivity growth, which in the past raised wages and salaries.

"Real income growth for workers has not been evenly distributed across all workers. That economic reality has an important political" consequence, Slaughter said in an interview.

Small but already negotiated trade deals with Panama, Colombia and Peru are being held up. While those deals wouldn't affect the U.S. economy greatly, given how small those economies are, they're important to those countries and their blockage sends signals worldwide about changing U.S. attitudes.

Meanwhile, Asian nations continue integrating into the fast-growing Chinese economy's sphere of influence.

For now, the only trade-related legislation moving on Capitol Hill tends toward protecting U.S. domestic interests at the expense of opening markets more to competition from overseas.

Last week, the Senate Finance Committee passed, by a 20-1 vote, bipartisan legislation to force the Commerce Department to weigh whether another country is deliberately undervaluing its currency when considering whether to impose unfair trade penalties against foreign goods. The target was China, but that standard could be applied to other Asian nations too.

By the end of September, Congress is expected to pass bills that would expand federal trade-adjustment assistance to a wider array of U.S. workers whose jobs have been lost to overseas competition. These could include engineers, software designers, accountants, call-center agents, even computer-aided architectural designers.

This shift in opinion against a long-dominant presumption that free trade provides broad net benefits to the U.S. economy is rooted not only in the experience of stagnant incomes, but it's also gaining intellectual respectability as economic theory. Alan Blinder, a Princeton economist and a former vice chairman of the Federal Reserve, was a lifelong free-trader, like most economists, until he began looking hard at how globalization is evolving.

Recently he shocked free-trade orthodoxy by warning that modern technology and trade practices will put at risk as many as 40 million American jobs within a decade or two.

Blinder doesn't champion a return to protectionism in the form of tariffs and trade barriers. Instead, he believes that government must do far more to help workers displaced by trade, that the U.S. education system must aim to train people for jobs that can't be performed abroad and that the tax code should give incentives to firms to produce here.

The Financial Services Forum report backs similar solutions as necessary to head off a turn toward outright protectionism, which helped prolong the Great Depression in the 1930s.

Yet with the 2008 presidential election looming and polls showing widespread public anxiety about globalization, neither party's candidates are trumpeting free trade.

"I think we definitely see evidence of anxiety. We see evidence unfortunately of a politicization of trade and increased partisanship about trade. … It is unfortunate and it does present real challenges," said Schwab, the U.S. trade representative.

Ironically, all the anguish about trade is occurring when U.S.-made exports are booming. The strong global economy and the dollar's slumping value helped U.S. exports to grow by 6.4 percent from April through June, which is definitely good for U.S. business.

Commerce Secretary Carlos Gutierrez said last Friday that U.S. exports have grown since 2004 at about an 8.3 percent annual rate, thanks in no small part to the Bush administration's free-trade policies. But Democrats are focused more on the lack of income growth among ordinary Americans, and therein lies the rub when Republicans and Democrats seek to set economic policies.

To read the Financial Services Forum report, go to Financial Services Forum , then click on "issues," then on "trade and globalization."

2007 McClatchy Newspapers