A Few Notes on Trade

You may have noticed (or you may not) that I have remained conspicuously silent on the excellent debate currently going on in the liberal blog world these days regarding the costs and benefits of international trade. It all started at the TPMCafe with a debate amongst Gene Sperling, Alan Blinder, and David Sirota, among others, with side commentary contributed by Atrios, Kevin Drum, and Josh Bivens, not to mention a nicely applied quote by PGL.

The reason for my silence is simply this: I’ve tried writing about this subject in the past, but the degree to which people on both sides seem to be unwilling to listen to each other and actually have a constructive argument, and instead simply throw around unsupported assertions, empty catch phrases, and ad hominem attacks just makes my head hurt.

So I’m going to keep my remarks on this subject strictly limited. Or at least, far more limited than they could be, given that I’ve spent a sizeable fraction of my life studying this subject. So I’m not going to try to argue in favor of free trade today. (If you want to hear some of the arguments I’ve put forward in the past, see here or here.)

Instead, let me just try to clear up a couple of misconceptions, with the goal of pushing the debate slightly away from idle speculation and closer to the issues that have actual relevance. Please consider the following attempts on my behalf to clarify a number of apparent points of confusion:

1. First, let me echo posts on Eschaton and MaxSpeak, which point out that indeed, there are winners and losers from trade, and that the losers are… well, losers. ALL ECONOMISTS discussing free trade readily acknowledge this. In fact, all economists learn about this theoretical reality, known as the Stolper-Samuelson theorem, in their very first course in international trade, and rehash it in every other course about trade that they ever take or teach during the course of their career.
2. Despite its theoretically interesting result, let me suggest that the Stopler-Samuelson theorem doesn’t really tell us anything about how harmful trade is. The only thing that S-S tells us is that gauging the benefit or harm from trade is an empirical question. There could be 1 loser from trade and 300 million winners, or the other way around; S-S simply provides us no good insight. (Okay, that’s a slight exaggeration, but only a slight one.) So in the end we have to look at the empirical evidence. That’s what the entire debate is about in economics regarding trade: it’s not about whether there are winners and losers, it’s about how large the negative effects are and who they fall on, and how large the positive effects are and who reaps them.
3. Just as S-S provides a solid (but pretty useless) theoretical result that there are winners and losers from trade, we also have lots of solid theoretical results that show that if you add up the dollars lost by the losers as a result of trade, they would be less than the dollars gained by the winners. Again, that is a somewhat useless theoretical result, because any economist worth more than their weight in cow manure really cares about a lot more than just the numbers of dollars earned in the economy, as Atrios also correctly points out.
4. Trade does increase productivity just as surely as technological progress does, and has exactly the same effects. An improvement in productivity means that a worker (or more generally, the economy) can produce the same amount of output using fewer resources. Better technology does that. And so does international trade. To continue with AB’s example: Just as tax software makes one accounting firm able to do many more tax returns in a given period of time, thus making each tax return cheaper, farming out tax returns to Indian accountants makes each accounting firm able to do many more tax returns in a given period of time, thus making each tax return cheaper. Trade is just another way to allow the economy to produce more using fewer resources. It is no different from technological progress. (See the UPDATE at the bottom of this post for more on this subject.)
5. Trade, and the threat of competition from foreign workers, may indeed alter the balance of power between workers and firms. And that may be a legitimate source of concern. But if one follows that line of reasoning, one must also acknowledge that trade, and the threat of competition from foreign firms, may indeed alter the balance of power between firms and consumers. Note that consumers and workers are the same people.
6. Economists who generally think international trade is a good idea are not idiots, idealogues, or evil blood-sucking vampires who want to drain the life out of individuals and give it to corporations. Most of them are people like me, who (as I hope you believe after reading my writing on this blog over the past 2 years) genuinely care about the welfare of individuals. In addition, economists are in general a group of very smart people (most much smarter than me), who have spent years – YEARS – studying this subject to come to the conclusions that they’ve reached. So please don’t dismiss Gene Sperling, Alan Blinder, Paul Krugman, or me, as brain-washed, dumb, heartless jerks just because we think trade generally is a good thing. (Okay, so maybe I was just gratuitously seizing the chance to include myself in the same sentence with those three… but can you blame me?)
7. Please understand that the vast majority of economists are not in favor of international trade simply because we have the luxury of being insulated from it. The market for professional economists is probably far more internationally integrated than most markets; we face enormous competition from foreign economists on both the teaching and research side. I can assert with confidence that if there was no international trade in economic research and teaching, my salary would be far, far higher than it is. But while it has harmed me personally, I still think the competition is a good thing for the country.

So now to the real question: Why do economists like me, who profess to care about individuals, continue to think international trade is generally a good thing? (Yes, I know I said I wasn’t going to get into this… but let me make just one point…)

Here’s the reason: The negative or positive impact of trade is ultimately an empirical question (see point #2 above), and the evidence I’ve seen in my years of researching this subject suggests that the negative effects are outweighed by the positive. Actually, to be more precise, the evidence I’ve seen mostly suggests that the effects of trade are pretty small in a country like the US. Some people win from trade, and some lose from trade (just as is the case with any new technology)… but overall, though the effects are small, trade seems to make life better for most people. Not just for corporations: for people.

As an example, let me just include one graph. This chart shows one measure of the relative importance of trade in the US economy: imports (excluding oil) as a % of GDP. Since the biggest fear about trade is that it depresses wages for workers and enriches capitalists, I’ve plotted real median household income against this measure of imports.

Source: Median income figures from Census. Since Census data only shows take-home pay, I’ve added benefits to this series by using the BEA’s data on personal income to estimate the total non-wage benefits received by workers as a % of income.

Obviously, there’s a strong correlation between these two variables: more imports are associated with higher household income. But this graph does not prove that trade causes higher income. In fact, it doesn’t really prove anything at all.

However, it does strongly suggest that if trade has a negative impact on median earnings, that impact is very small. More likely, trade may actually have a positive impact on the median household – and that’s what careful econometric research generally shows, and that’s why I think trade is generally beneficial.

I could go on, but I’ll stop here. Please try to keep these points in mind as you think about and debate this issue. And please try to respect people who have different opinions from you about this issue.

Okay, now that I’ve made these points, let the debate rage on.

Kash

UPDATE: For more about the subject of trade as a type of productivity improvement, see the post “Trade with China as Technological Revolution“.

For more about how there are winners and losers from trade protection just as there are winners and losers from trade, see the post “Free Trade, Jobs, and Choosing“.