Shanker Singham: Free Trade Doesn’t Hurt Middle Class

Shankhar Singham

Whether you call this a war on the middle class, as Lou Dobbs has, or whether you accept the notion that the middle class are facing lower real wages (inflation adjusted and taking into account healthcare and pension costs), many commentators have painted a very bleak picture of what the US middle class is currently experiencing. In other Western countries similar arguments are being made.

The reality is that incomes have been increasing (just as overall global GDP has in the last sixty years). But, what has also increased dramatically is the cost of certain services which we consider to be essential, such as healthcare. Indeed while real incomes have increased, wages (once you factor in healthcare payments) have indeed decreased in the last several years. However the correct way of dealing with this problem is to focus on why healthcare costs have risen so far.

Transportation costs have also risen dramatically this year, as a result of the skyrocketing oil price. These vastly increased transportation costs threaten the process of globalization itself as all tradable goods increase in price, and consumer product inflation becomes a reality. The very basis of globalization is low cost and easy transportation. This phenomenon has led to just-in-time manufacturing, competing global supply chains that span the globe. All of this is imperiled by the high costs of transportation.

The truth is that many of these high costs arise directly because of a lack of competitive markets in the provision of these key services. A true market in healthcare does not exist as long as doctors and patients are separated and neither knows much about the true cost of the provision of healthcare services. A properly competitive market in oil cannot exist as long as production levels are set by a cartel, and demand is skewed by inefficient use in large consuming countries (China uses almost eight times as much oil to generate the same level of economic growth as the US, for example).

There are many other factors where the application of competition policy as an organizing economic principle would lead to gains for the American middle class and reduce the “squeeze”. But we must not lose sight of the fact that the middle class in America as well as other countries has made gains in the last sixty years that would have been unimaginable in the previous two millennia of human civilization. Those gains are in part attributable to the elimination of inefficiencies and mis-allocation of the world’s resources as a result of free trade initiatives and the removal of trade barriers and other distortions to competitive markets.

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Shanker Singham is a partner in the economic regulation group of Squire, Sanders & Dempsey, LLP, where he leads the market access/WTO practice. Singham is also the chairman of the International Roundtable on Trade and Competition Policy, Inc. He is the author of
A General Theory of Trade and Competition: Trade Liberalization and Competitive Markets (2007, Cameron May).

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