"The Forces Pushing for Global Wage Equalisation ... are Quite Weak": "Martin Wolf says high income countries should relax, the effect of globalization on the distribution of income is likely to be small. There's no reason to impose protectionist measures which would shift domestic production toward areas where Asia has a comparative advantage:



The answer to Asia’s rise is not to retreat, by Martin Wolf, Financial Times: How can the world’s rich countries compete with the rising Asian powers? ... Soon, it is alleged, the Asian giants will undercut every producer located in rich countries. ... But it is nonsense. The world is indeed suffering a huge supply shock, just as it did prior to the first world war. Then the shock was an increase in the effective supply of land, as the railway and steamship brought the “new world” into the global economy. This time, it is an expansion in the effective labour supply, which has tripled over the past two decades... (see charts).

In an integrated world economy, suggests Helmut Reisen..., equilibrium real wages in high-income countries should fall by about 15 per cent. We do not live in such a world. This is obviously true for labour, where tight controls on migration fragment the global market... average labour costs per hour in Chinese manufacturing were just $0.60 in 2002 against $24 in Germany (see charts). Yet Germany is still the world’s largest exporter of manufactures.

What is the impact of Asia’s entry into a world with such highly segmented pools of labour? ... What ... is the true impact of the labour supply shock? The short answer is that it generates a fall in the world relative prices of labour-intensive goods and services against those more intensive in ... resources of capital (both human and physical) and land. This has two consequences: shifts in the terms of trade, namely, changes in the relative prices of imports and exports ...; and changes in the distribution of income ... as prices of labour, capital and land adjust.

China’s terms of trade have deteriorated markedly since it opened up. Estimates suggest that prices of its exports have fallen by about 25 per cent relative to those of its imports. In this way, China’s exports make the rest of the world better off. That China has made the rest of the world better off, as a whole, does not mean it has made every single country better off. The more similar is a country’s comparative advantage to China’s the more likely it is to be a loser (and vice versa). ... For the high-income countries, Asia’s impact is mixed: it lowers the price of the goods and services they import from developing countries (which makes them better off), but raises the price of imported commodities [such as oil] (which makes them worse off). In recent years, the latter effect has outweighed the former for the US and Germany. The UK has gained, however, largely because it is self-sufficient in energy (see charts)...

For high-income countries, the bigger the gain from falling world prices of labour-intensive imports, the larger the shift in the internal distribution of income against unskilled labour. Thus the benefit also creates the challenge.

Fortunately, it should be a manageable one. The forces pushing for global wage equalisation through trade are quite weak. Nevertheless, the end result is likely to be employment of unskilled labour almost exclusively in the production of non-tradeable goods and services. But provided controls are maintained on immigration of unskilled labour, that need be no disaster. Other measures are also worth considering. Among them are lowering taxes on low-wage incomes; subsidies to the wages of unskilled workers; and support for education and training.

The world is indeed going through a huge supply shock. But for the high-income countries, the best advice is: relax. The internal redistribution of income caused by trade is likely to be modest. Above all, deliberately shifting their structure of production in the direction of Asia’s comparative advantage, through protection, would be mad...

I'm not as confident as he is that the "forces pushing for global wage equalisation through trade are quite weak" and that the "internal redistribution of income caused by trade is likely to be modest." Markets find ways to work and wage differentials such as $.60 versus $24 cannot persist.