A Trade Policy for the Workers Begins from Within

By Yong Kwon

After decades of pushing back against free trade agreements that advanced corporate interests, labor advocates in the United States have developed a reflexive disdain for treaties that expand commercial ties with other countries. As a consequence, the left has shied away from criticizing the Trump administration’s imposition of trade barriers.

This is a mistake. Privileged classes throughout history have employed protectionism and trade liberalization interchangeably to safeguard their economic dominance. Labor must be similarly flexible to counter the malign influence of capital.

Moderating capital’s influence in trade negotiations is a key component of building a more equitable society. This can be partly achieved by amplifying labor’s voice at the firm level through the establishment of profit-sharing institutions. Therefore, a leftist administration should see unionization, employee participation on companies’ board of directors, and alliances between workers of different industries and nations as prerequisites to crafting a just trade policy.

The left is already familiar with critiques of past free trade agreements – acceleration of outsourcing, heightened powers of the financial sector, insufficient consideration of ecological ramifications, etc. Three historical case studies exemplify the negative consequences of protectionist policies: Hungary in the 19th century, the United States during the Gilded Age, and the country under the Reagan administration.

During the 19th century, Hungary was one of the most unequal places in the world and trade barriers played a key role in preserving this social order. The top 600 noble families owned approximately a quarter of all arable land in the kingdom and dominated food production within the Austro-Hungarian Empire. When improvements in trans-Atlantic shipping and American cereal challenged this privilege, the Hungarian nobility asked the imperial government in Vienna for protection. The empire’s response was to steadily raise wheat tariffs by 419 percent between 1882 and 1906.

Permitted to rely on the insulated internal market (sales to Austria rose from 54 percent of total flour exports in 1882 to 95.8 percent by 1913), Hungary’s nobility faced little pressure to breakup their increasingly inefficient estates or invest in improvements. As late as 1906, only 12 percent of the mills in Hungary were powered by steam – even though these proto-factories were responsible for 57 percent of the agricultural sector’s total output of refined goods.  

Reflecting the aristocracy’s chokehold on productive assets, the country generated only 38 percent per hectare of Denmark’s agricultural output by 1909-13. Consequently, Hungary’s per capita GDP was approximately half that of Denmark. The lasting impact of Austro-Hungary’s protectionist measures, put in place to preserve the fortunes of its aristocratic class, was the impoverishment of average Hungarians and the backwardness of the whole empire.

Hungary exemplified how elites pushed protectionist policies and imposed greater drudgery on the people. But this was hardly a unique case. Protectionism also underwrote the excesses of American robber barons during the Gilded Age.

Building on the Hamiltonian argument that protection of infant industries from foreign competition ensured the nation’s long-term economic prosperity, industrialists lobbied the US government to maintain high customs duties after the Civil War. As a result, American factories were able to compete domestically even though their products were often more expensive than pre-tariff foreign goods. The cost of providing capitalists with this subsidy was passed down to consumers in the form of higher prices for everyday goods.

In a 1882 report commissioned by Congress, Norman Colman – the future Secretary of Agriculture – described the effects of the tariff policy on farmers:

The manufacturer when he buys the material has to pay high prices, and when he makes wagons, carriages, plows, thrashers, reapers, mowers… and everything that is used on a farm, he has to charge this additional price [to farmers]… [Furthermore] the farmers have to pay a high transportation [for their harvest] on account of the high prices for building railroads, locomotives…

Assigning a quantitative figure to the far-reaching repercussions of tariffication, Chairman of the House Ways and Means Committee Roger Mills noted in 1888 that the government’s policies added  $6.92 per ton to foundry iron, bringing the cost to $11 per ton.

Arguably, the trade-off between industrial growth and consumer welfare was calculated. What policymakers may not have anticipated was the exploitation of the market insulation by a handful of large companies to collude, fix prices, and monopolize whole sectors of the economy. The resulting concentration of market power around conglomerates like Carnegie Steel Company had a particularly disastrous consequences for the advancement of workers’ rights.

Because these companies controlled vital nodes of the economy such as rail and steel, the government became increasingly prone to representing the owners’ interests, even if this meant suppressing protests against capital’s exploitation of labor. In Pennsylvania alone, the National Guard was deployed at least 150 times between 1886 and 1895 to suppress workers’ demands for a living wage and an 8-hour work day. The political power that trade barriers endowed to a handful of people was one of the reasons why Congressman Victor Berger – one of the founders of the Socialist Party of America – opposed tariffs.

Corporate demand for tariffs declined in the aftermath of the Second World War as US industrial goods faced little competition from devastated economies of Europe and Japan. Nonetheless, large corporations maintained an upper hand in influencing trade policy with a detrimental effect on public welfare.

The power imbalance between capital and labor also drove trade policy in the 1980s when the Reagan administration responded to economic challenges by shielding conglomerate-dominated sectors like steel from foreign competition. The US government negotiated a quota agreement with the European Community in October 1982, capping steel imports from Europe at roughly 5.5 percent of market consumption, down from 7.3 percent. Similarly, the administration inked a voluntary steel export restraint with Japan to bring the latter’s share of the US steel market down from 6.8 percent to 5 percent. These measures were followed in 1984 by a wider set of restrictions in response to growing imports from emerging markets that had begun to substitute Japanese and European supplies.

Although the rationale behind these actions was to provide large integrated mills with breathing room to reassert themselves, capacity in those mills dropped from 138 million tons in 1980 to 90 million by 1987. Even within an insulated domestic market, they were uncompetitive against more efficient mini-mills, which increased their share of wire rod production from 45 percent in 1980 to 86 percent by 1990. Operating profits for the integrated mills, however, turned from a loss of $186 million in 1984 to a gain of $3.5 billion by 1988 after reducing employment in the sector by nearly 300,000 between 1976 and 1986. The government facilitated this displacement by actively repressing collective bargaining. Tariffs, sold to the public as vital to protect both profits and jobs, prioritized the former and did nothing for the latter.

As wages stagnated across the country, import taxes and quotas on steel and other goods acted as a regressive tax. Research by the Federal Reserve revealed that the price hike from trade barriers established during President Reagan’s first term alone forced Americans in the lowest income bracket ($7,000 to $9,350 per year) to pay an extra 66 percent on their income tax by 1985. This burden represented a transfer of wealth from average citizens to a politically-sheltered class of business owners.

Reviewing these historical case studies, the question of whether the United States should or should not negotiate free trade agreements is posed in bad faith. As Victor Berger underscored in his 1911 speech to Congress, neither free trade or protectionism is a panacea to workers who are powerless.

The root of the problem has always been a national political economy that favors capital over labor. The state advocated or rejected trade deals to maximize profits for the largest domestic industries, but not to ensure that labor had a guaranteed share of that increased revenue. This imbalance can be moderated by the establishment of profit-sharing agreements that amplify the workers’ voice within firms: formal union recognition, agreements that wages will rise with profits, and industry-wide unionization.

Labor unions today frequently cite free trade as a major threat to the welfare of American workers. However, this skepticism is a reflection of the unions’ disenfranchisement from the policymaking process, not a denunciation of trade liberalization as a principle. Again, history shows us that workers who enter into profit-sharing agreements with their employers are likely to be more supportive of policies that expand market access for their respective firms.  

Labor enfranchisement became more common in the United States after the successful strike at the General Motors plant in Flint, Michigan by the United Automobile Workers union in 1937. A vast majority of industrial workers during this time were unskilled and employed in export-competitive industries such as steel and automobiles. With widespread adoption of profit-sharing institutions, the Congress of Industrial Organizations became supportive of the United States engaging in greater trade liberalization because it directly benefited its members. Labor’s endorsement played a critical role in swaying the US Congress to extend the Reciprocal Trade Agreement Act in 1945. The legislation not only curtailed US tariffs but also prompted other countries to lower duties and work towards international trade governance. Concurrently, between 1950 and the election of Ronald Reagan in 1979, labor compensation as a share of the GDP stayed between 63 and 66 percent.

Since President Reagan’s efforts to weaken collective bargaining, except for a brief period between 1999 and 2002, labor’s share of the national income has never climbed above 63 percent and reached a nadir of 59.5 percent in 2010. This decline occurred despite an overall upward growth of US exports. Academics continue to debate the cause of this divergence – and many factors may play a role – but there is substantial research attributing the cause to monopolies, capital’s oversized leverage, and the concentration of wealth among the super-rich.

Democratizing the policy discussion on trade is good for not only the principle of enfranchising workers, but also reclaiming the workers’ share of the economy. Union participation ensures that the gains to export-competitive industries are more equitably distributed. It will also spotlight the need to elevate the discussion on how to support displaced workers. And by inducing a more socially conscious policy discussion, the shift in management-labor relationship will also have  the added benefit of reassuring our trade partners that an agreement reached at the negotiating table would not face challenges during ratification due to public backlash.

After reviewing the long history of trade-labor relations, an administration truly dedicated to improving the lives of working Americans must recognize that state-level laws that weaken collective bargaining such as the so-called “right-to-work” legislation are detrimental to crafting progressive trade policies. A trade policy for the workers begins from within.

Yong Kwon moderates the subreddit r/EconomicHistory. He is currently the Director of Communications at the Korea Economic Institute of America, which is registered in the United States under the Foreign Agents Registration Act as an agent of a public corporation established by the Government of the Republic of Korea. Views in this post are his own and do not represent the official position of the Korea Economic Institute of America.

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