Trade Leads to Expanded Purchasing Power for All American Families

In support of the Trans-Pacific Partnership (TPP), the Economic Report of the President (February 2015) reminds readers that expansion of trade and investment allows all participants to use land, labor, and technology more efficiently.

Part of the resulting benefit that can be expected to accrue to the United States comes from broader opportunities to penetrate foreign markets. As Peterson Institute studies show, dating back to David Richardson’s pioneering work in 1996–2001, US businesses that are able to expand exports pay their workers higher wages and offer higher benefits than similar nonexporting firms.¹

In addition, as the President’s Report points out, benefits to the United States come in the form of cheaper and more diverse imports. “International trade,” notes the Council of Economic Advisers, “helps US households’ budgets go further” (p. 291).

Altogether, as Gary Hufbauer et al. (2005) calculated, the integration of the United States with the world economy from the 1940s to 2004 added some $9,000 annually to the purchasing power of each American household.²

To offer concrete evidence of this expansion of purchasing power through 2013, Edward Gresser of the research program Progressive Economy examines US household expenditures on four of the items most exposed to trade competition—clothes, shoes, food, and other home goods—over the past two generations.³ Table 1 shows the share of family spending on these four basic items has steadily declined. In current dollars, the shift from 32.4 percent of annual spending in 1973 to 20.2 percent in 2013 means an extra $8,156 for families to save or spend on other things.

Source: Edward Gresser, “American families have cut their bills for food & home goods by 40 percent since the 1970s,” Progressive Economy, Trade Fact of the Week, February 4, 2015.

However, these figures do not mean that American families have cut back on the purchases of household items. Table 2 shows quite the contrary, according to the American Apparel & Footwear Association, at least for garments and shoes.

Gresser worries that this expanded purchasing power might be limited to higher-income families. For this reason he undertakes a separate calculation for single-parent households. This subgroup earned on the order of $35,000 per year in 2013. The share of income of this subgroup devoted to purchases of garments and shoes is naturally a higher proportion of their total income than for wealthier families but has fallen faster over time—from 11.6 percent of annual spending in 1973, to 8.1 percent in 1991, 6.8 percent in 2000, and finally to 4.4 percent in 2013.

The TPP, argues the Economic Report of the President, offers a huge opportunity for the United States to expand exports of goods and services. But the report concludes that it is also important to recognize the benefits that such trade agreements have brought, and will continue to bring, in terms of expanded purchasing power for everyday items needed by all American families and households.

Notes

1. See Howard Lewis III and J. David Richardson (2001), Why Global Commitment Really Matters!, Peterson Institute for International Economics; and J. David Richardson and Karin Rindal (1996), Why Exports Matter: More!, Peterson Institute for International Economics.

2. Scott C. Bradford, Paul L. E. Grieco, and Gary Clyde Hufbauer (2005), The Payoff to America from Global Integration, in The United States and the World Economy: Foreign Economic Policy for the Next Decade, ed. C. Fred Bergsten, Peterson Institute for International Economics.

3. Edward Gresser, “American families have cut their bills for food & home goods by 40 percent since the 1970s,” Progressive Economy, Trade Fact of the Week, February 4, 2015.