Worsening income equality in the U.S. linked to free trade and economic globalization.
Surging imports have caused substantial job losses and stagnating income for working- and middle-class Americans.
Trade liberalization has not helped income inequality in developing countries (just as it has not helped in developed countries).
The top 1-10% have been the primary benefactors of increased trade and imports into the United States.
Tariffs are a progressive policy that reverse the negative economic effects of free trade, creating good-paying jobs, boosting working-class income, and reducing income inequality.
Rising Inequality in the United States
Since about 1980, the United States has suffered from increasingly worse income inequality. Income growth for most Americans have been largely flat compared to the massive wealth gains among the rich. As shown in Figure 1, in 1979 average compensation for the top 1% was about 9 times more than the average compensation for the bottom 90% of Americans, and the top 0.1% earned about 21 times more. By 2019, this income inequality exploded, with the average income for the top 1% now 19 times more than the bottom 90%, and the top 0.1% earning 74 times as much.
Figure 1:(1)
In additional to the wage inequality, the top 1% have also substantially increased their share of total wealth. According to the Federal Reserve, the top 1%’s share of total net worth has increased from 22.8% in 1990 to 30.2% today.
How ‘Free Trade’ has Worsened Income Inequality
One of the primary causes behind this rising inequality in the United States since about 1980 has been economic globalization. As manufacturing jobs were outsourced in favor of cheaper production overseas, Americans lost millions of good-paying manufacturing jobs. According to a study by the National Bureau of Economic Research (NBER), much of this decline in manufacturing employment is directly caused by import competition. The study states, “Our central estimates suggest net job losses of 2.0 to 2.4 million stemming from the rise in import competition from China over the period 1999 to 2011.”(2)
Figure 2:(3)
These job losses were heaviest in industries most exposed to surging imports, and workers who lost their jobs found little to no good employment alternatives. According to the same NBER study, “Our estimates show sizable job losses in exposed industries, and few if any offsetting job gains in non-exposed industries.”(4)
These job losses were especially detrimental to U.S. income inequality due to the high wages of manufacturing jobs, especially compared to alternative jobs for those workers. U.S. Bureau of Labor Statistics data shows that the average hourly earnings in the manufacturing sector ($34.42) are far above earnings in sectors requiring a similar educational background, such as Leisure and hospitality ($22.25) and Retail trade ($24.56).(5)
The effect of economic globalization and free trade on inequality has been wide-spread in developed countries. According to the Institute for Fiscal Studies, “Evidence from Europe and the United States shows that trade has increased inequality not just between workers of different skill levels, but also between those of different industries and those of different geographic regions. Growing import competition from China caused declines in both employment and wages for workers in trade-exposed industries and locations.”(6)
These inequality effects also have spill-over to many other societal issues. The Institute for Fiscal Studies study also found that, “Regions with greater exposure to import competition experienced higher crime rates, a deterioration of health outcomes, [and] a dissolution of traditional family structures.”(7)
‘Free Trade’ Globalization Largely Only Benefits the Very Rich
If free trade and economic globalization is so bad for the working class in developed countries, then who is it for? Does it help inequality in developing countries? No.
“Our findings reject the argument that globalisation contributes to reducing income inequality in developing countries as the results for developing countries also point to small-to-moderate positive effects of globalisation on income inequality (just as in the advanced country group).” states a Vienna Institute for International Economic Studies meta-analysis combining 1,254 observations from 123 primary studies.(8)
Then who benefits from free trade? It is the very richest, primarily those who own or invest in capital, technology, and transnational corporations, that benefit from reduced trade barriers. According to a Harvard University study, “We conclude that the import channel is the dominant force linking trade to earnings inequality, with the largest gains from trade occurring at the top of the income distribution.”(9)
Indeed, since 1980 and the beginning of the U.S.’s manufacturing outsourcing and trade liberalization policies, household income growth has far outpaced the comparatively flat income growth of the average American as shown in Figure 3.
Figure 3:(10)
Despite promises that free trade can benefit everyone and that the gains offset any losses, the average American has experienced stagnating income and wide-spread job losses in manufacturing hours while the top earners have seen disproportionate income gains. The top 10% benefit do not experience the job losses from import competition that the working class suffers from. And those at the top of the corporate ladders benefit from the lower wages needed to pay workers in developing countries compared to what they would have to pay Americans.
How Tariffs Revitalize Manufacturing and Benefit the Working Class
Since economic globalization and free trade has worsened income inequality, the converse of this can also be true. Meaning, trade policies that reverse the effects of economic globalization (namely tariffs and quotas) can help reduce income inequality. Tariffs and/or quotas in the manufacturing sector provide long-term economic benefits by encouraging investment in domestic production, creating good-paying manufacturing jobs in the U.S. The income from these new U.S. manufacturing jobs creates spending flows into other adjacent domestic suppliers and service industries in a multiplier effect, further stimulating the domestic economy and median income.
This policy effect is demonstrated well in CPA’s model simulation of the impact of a worldwide 10% tariff. In this study, CPA found that a global 10% tariff on all U.S. imports would stimulate domestic production and manufacturing, totaling economic growth of $728 billion and 2.8 million additional jobs. Tariff policy reduces the import competition that kills manufacturing jobs and exacerbates income inequality in the United States. The manufacturing jobs gained from such a policy would substantially raise income for those workers, as manufacturing jobs have much higher wages than comparable sectors. This provides a much-needed income boost for the working class and reduces income inequality. In total, the model simulation shows that the 10% tariff would raise real household incomes by 5.7%, equivalent to $4,252.
The effect of tariff policy on income inequality can be further enhanced with an effective use of the tariff revenue. Our CPA analysis shows that the tariff revenue from a 10% global tariff would generate $263 billion in new revenue. This revenue could be used to provide a substantial $1200 tax refund to lower-income households and refunds of 3%-4% of income for middle-income households.
These modeled effects mirror what we’ve seen in real-world examples. The 25% Section 232 steel tariffs enacted in 2018 provided a significant boost to the U.S. steel industry and greatly benefitted U.S. workers in the industry. According to the Economic Policy Institute, “Following implementation of Sec. 232 measures in 2018—and prior to the global downturn in 2020—U.S. steel output, employment, capital investment, and financial performance all improved. In particular, U.S. steel producers announced plans to invest more than $15.7 billion in new or upgraded steel facilities, creating at least 3,200 direct new jobs…In addition, more than $5.9 billion was invested by nine firms in plant acquisitions as part of industry restructuring to increase efficiency, preserving additional jobs at those facilities.(11)
Conclusion
Tariffs can and must play a crucial role in reducing income inequality in the United States. Revitalizing the American manufacturing sector is indispensable to the prosperity of the American working class. The rise of economic globalization and free trade has only exacerbated income disparities, disproportionally favoring the wealthy and leading to wide-spread job losses of good-paying U.S. manufacturing jobs.
Tariffs can help reverse these trends. By stimulating domestic production and creating higher-paying jobs, tariff policies reverse the negative impacts of import competition and income inequality. Furthermore, the additional revenue generated from tariffs can be strategically utilized to provide financial support to lower- and middle-income households, further boosting household income. As demonstrated by real-world examples like the 2018 Section 232 steel tariffs, a well-implemented tariff strategy can lead to significant improvements in domestic industries, job creation, and income growth, proving to be an effective progressive policy for addressing income inequality in the United States.
[1] Wages for the top 1% skyrocketed 160% since 1979 while the share of wages for the bottom 90% shrunk: Time to remake wage pattern with economic policies that generate robust wage-growth for vast majority. (n.d.). Economic Policy Institute. https://www.epi.org/blog/wages-for-the-top-1-skyrocketed-160-since-1979-while-the-share-of-wages-for-the-bottom-90-shrunk-time-to-remake-wage-pattern-with-economic-policies-that-generate-robust-wage-growth-for-vast-majority/
[2] Daron Acemoglu, David Autor, David Dorn, Gordon H. Hanson, Brendan Price. “Import Competition and the Great U.S. Employment Sag of the 2000s”. National Bureau of Economic Research. August 2014. https://www.nber.org/system/files/working_papers/w20395/w20395.pdf
[3] All employees, manufacturing. (2024b, October 4). https://fred.stlouisfed.org/series/MANEMP
[4] Ibid.
[5] Employment and average hourly earnings by industry. (n.d.). U.S. Bureau of Labor Statistics. https://www.bls.gov/charts/employment-situation/employment-and-average-hourly-earnings-by-industry-bubble.htm
[6] David Dorn, Peter Levell. “Trade and inequality in Europe and the US”. Institute for Fiscal Studies Deaton Review of Inequalities. November 2021. https://ifs.org.uk/inequality/trade-and-inequality-in-europe-and-the-us/.
[7] Ibid.
[8] Philipp Heimberger. “Does economic globalisation affect income inequality? A meta‐analysis”. Vienna Institute for International Economic Studies. July 2020. https://wiiw.ac.at/does-economic-globalisation-affect-income-inequality-a-meta-analysis-dlp-5044.pdf
[9] Rodrigo Adão, Paul Carrillo, Arnaud Costinot, Dave Donaldson, Dina Pomeranz. “Imports, Exports, and Earnings Inequality: Measures of Exposure and Estimates of Incidence”. Harvard University, The Quarterly Journal of Economics. Volume 137, Issue 3. August 2022. Pages 1553–1614. https://doi.org/10.1093/qje/qjac012
[10] US Census Bureau. (2024, September 10). Historical Income Tables: Income inequality. Census.gov. https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-inequality.html
[11] Why global steel surpluses warrant U.S. Section 232 import measures. (n.d.). Economic Policy Institute. https://www.epi.org/publication/why-global-steel-surpluses-warrant-u-s-section-232-import-measures/
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
How Tariffs Benefit the Working Class and Reduce Income Inequality
KEY POINTS
Rising Inequality in the United States
Since about 1980, the United States has suffered from increasingly worse income inequality. Income growth for most Americans have been largely flat compared to the massive wealth gains among the rich. As shown in Figure 1, in 1979 average compensation for the top 1% was about 9 times more than the average compensation for the bottom 90% of Americans, and the top 0.1% earned about 21 times more. By 2019, this income inequality exploded, with the average income for the top 1% now 19 times more than the bottom 90%, and the top 0.1% earning 74 times as much.
Figure 1:(1)
In additional to the wage inequality, the top 1% have also substantially increased their share of total wealth. According to the Federal Reserve, the top 1%’s share of total net worth has increased from 22.8% in 1990 to 30.2% today.
How ‘Free Trade’ has Worsened Income Inequality
One of the primary causes behind this rising inequality in the United States since about 1980 has been economic globalization. As manufacturing jobs were outsourced in favor of cheaper production overseas, Americans lost millions of good-paying manufacturing jobs. According to a study by the National Bureau of Economic Research (NBER), much of this decline in manufacturing employment is directly caused by import competition. The study states, “Our central estimates suggest net job losses of 2.0 to 2.4 million stemming from the rise in import competition from China over the period 1999 to 2011.”(2)
Figure 2:(3)
These job losses were heaviest in industries most exposed to surging imports, and workers who lost their jobs found little to no good employment alternatives. According to the same NBER study, “Our estimates show sizable job losses in exposed industries, and few if any offsetting job gains in non-exposed industries.”(4)
These job losses were especially detrimental to U.S. income inequality due to the high wages of manufacturing jobs, especially compared to alternative jobs for those workers. U.S. Bureau of Labor Statistics data shows that the average hourly earnings in the manufacturing sector ($34.42) are far above earnings in sectors requiring a similar educational background, such as Leisure and hospitality ($22.25) and Retail trade ($24.56).(5)
The effect of economic globalization and free trade on inequality has been wide-spread in developed countries. According to the Institute for Fiscal Studies, “Evidence from Europe and the United States shows that trade has increased inequality not just between workers of different skill levels, but also between those of different industries and those of different geographic regions. Growing import competition from China caused declines in both employment and wages for workers in trade-exposed industries and locations.”(6)
These inequality effects also have spill-over to many other societal issues. The Institute for Fiscal Studies study also found that, “Regions with greater exposure to import competition experienced higher crime rates, a deterioration of health outcomes, [and] a dissolution of traditional family structures.”(7)
‘Free Trade’ Globalization Largely Only Benefits the Very Rich
If free trade and economic globalization is so bad for the working class in developed countries, then who is it for? Does it help inequality in developing countries? No.
“Our findings reject the argument that globalisation contributes to reducing income inequality in developing countries as the results for developing countries also point to small-to-moderate positive effects of globalisation on income inequality (just as in the advanced country group).” states a Vienna Institute for International Economic Studies meta-analysis combining 1,254 observations from 123 primary studies.(8)
Then who benefits from free trade? It is the very richest, primarily those who own or invest in capital, technology, and transnational corporations, that benefit from reduced trade barriers. According to a Harvard University study, “We conclude that the import channel is the dominant force linking trade to earnings inequality, with the largest gains from trade occurring at the top of the income distribution.”(9)
Indeed, since 1980 and the beginning of the U.S.’s manufacturing outsourcing and trade liberalization policies, household income growth has far outpaced the comparatively flat income growth of the average American as shown in Figure 3.
Figure 3:(10)
Despite promises that free trade can benefit everyone and that the gains offset any losses, the average American has experienced stagnating income and wide-spread job losses in manufacturing hours while the top earners have seen disproportionate income gains. The top 10% benefit do not experience the job losses from import competition that the working class suffers from. And those at the top of the corporate ladders benefit from the lower wages needed to pay workers in developing countries compared to what they would have to pay Americans.
How Tariffs Revitalize Manufacturing and Benefit the Working Class
Since economic globalization and free trade has worsened income inequality, the converse of this can also be true. Meaning, trade policies that reverse the effects of economic globalization (namely tariffs and quotas) can help reduce income inequality. Tariffs and/or quotas in the manufacturing sector provide long-term economic benefits by encouraging investment in domestic production, creating good-paying manufacturing jobs in the U.S. The income from these new U.S. manufacturing jobs creates spending flows into other adjacent domestic suppliers and service industries in a multiplier effect, further stimulating the domestic economy and median income.
This policy effect is demonstrated well in CPA’s model simulation of the impact of a worldwide 10% tariff. In this study, CPA found that a global 10% tariff on all U.S. imports would stimulate domestic production and manufacturing, totaling economic growth of $728 billion and 2.8 million additional jobs. Tariff policy reduces the import competition that kills manufacturing jobs and exacerbates income inequality in the United States. The manufacturing jobs gained from such a policy would substantially raise income for those workers, as manufacturing jobs have much higher wages than comparable sectors. This provides a much-needed income boost for the working class and reduces income inequality. In total, the model simulation shows that the 10% tariff would raise real household incomes by 5.7%, equivalent to $4,252.
The effect of tariff policy on income inequality can be further enhanced with an effective use of the tariff revenue. Our CPA analysis shows that the tariff revenue from a 10% global tariff would generate $263 billion in new revenue. This revenue could be used to provide a substantial $1200 tax refund to lower-income households and refunds of 3%-4% of income for middle-income households.
These modeled effects mirror what we’ve seen in real-world examples. The 25% Section 232 steel tariffs enacted in 2018 provided a significant boost to the U.S. steel industry and greatly benefitted U.S. workers in the industry. According to the Economic Policy Institute, “Following implementation of Sec. 232 measures in 2018—and prior to the global downturn in 2020—U.S. steel output, employment, capital investment, and financial performance all improved. In particular, U.S. steel producers announced plans to invest more than $15.7 billion in new or upgraded steel facilities, creating at least 3,200 direct new jobs…In addition, more than $5.9 billion was invested by nine firms in plant acquisitions as part of industry restructuring to increase efficiency, preserving additional jobs at those facilities.(11)
Conclusion
Tariffs can and must play a crucial role in reducing income inequality in the United States. Revitalizing the American manufacturing sector is indispensable to the prosperity of the American working class. The rise of economic globalization and free trade has only exacerbated income disparities, disproportionally favoring the wealthy and leading to wide-spread job losses of good-paying U.S. manufacturing jobs.
Tariffs can help reverse these trends. By stimulating domestic production and creating higher-paying jobs, tariff policies reverse the negative impacts of import competition and income inequality. Furthermore, the additional revenue generated from tariffs can be strategically utilized to provide financial support to lower- and middle-income households, further boosting household income. As demonstrated by real-world examples like the 2018 Section 232 steel tariffs, a well-implemented tariff strategy can lead to significant improvements in domestic industries, job creation, and income growth, proving to be an effective progressive policy for addressing income inequality in the United States.
[1] Wages for the top 1% skyrocketed 160% since 1979 while the share of wages for the bottom 90% shrunk: Time to remake wage pattern with economic policies that generate robust wage-growth for vast majority. (n.d.). Economic Policy Institute. https://www.epi.org/blog/wages-for-the-top-1-skyrocketed-160-since-1979-while-the-share-of-wages-for-the-bottom-90-shrunk-time-to-remake-wage-pattern-with-economic-policies-that-generate-robust-wage-growth-for-vast-majority/
[2] Daron Acemoglu, David Autor, David Dorn, Gordon H. Hanson, Brendan Price. “Import Competition and the Great U.S. Employment Sag of the 2000s”. National Bureau of Economic Research. August 2014. https://www.nber.org/system/files/working_papers/w20395/w20395.pdf
[3] All employees, manufacturing. (2024b, October 4). https://fred.stlouisfed.org/series/MANEMP
[4] Ibid.
[5] Employment and average hourly earnings by industry. (n.d.). U.S. Bureau of Labor Statistics. https://www.bls.gov/charts/employment-situation/employment-and-average-hourly-earnings-by-industry-bubble.htm
[6] David Dorn, Peter Levell. “Trade and inequality in Europe and the US”. Institute for Fiscal Studies Deaton Review of Inequalities. November 2021. https://ifs.org.uk/inequality/trade-and-inequality-in-europe-and-the-us/.
[7] Ibid.
[8] Philipp Heimberger. “Does economic globalisation affect income inequality? A meta‐analysis”. Vienna Institute for International Economic Studies. July 2020. https://wiiw.ac.at/does-economic-globalisation-affect-income-inequality-a-meta-analysis-dlp-5044.pdf
[9] Rodrigo Adão, Paul Carrillo, Arnaud Costinot, Dave Donaldson, Dina Pomeranz. “Imports, Exports, and Earnings Inequality: Measures of Exposure and Estimates of Incidence”. Harvard University, The Quarterly Journal of Economics. Volume 137, Issue 3. August 2022. Pages 1553–1614. https://doi.org/10.1093/qje/qjac012
[10] US Census Bureau. (2024, September 10). Historical Income Tables: Income inequality. Census.gov. https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-inequality.html
[11] Why global steel surpluses warrant U.S. Section 232 import measures. (n.d.). Economic Policy Institute. https://www.epi.org/publication/why-global-steel-surpluses-warrant-u-s-section-232-import-measures/
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
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