More Notes on Trade

Thanks to everyone for the great comments on my (albeit reluctantly offered) “Notes on Trade” post. I thought I should take the time to try to answer some questions and address some concerns that came up. My response ran too long to be practically included in the comments, so I thought I’d put them up as a new post.

Here is a partial list of some of the good points made by commenters, along with my reactions, in no particular order (sorry if I missed your point or question; it was hard addressing 60+ comments in a reasonable space):

• Through no fault of their own, a few people were fooled by my choice of scale on the graph that I provided, which seemed to indicate that median income has been rising less quickly than the increase in US import penetration in recent years. Since the two measures are fundamentally different (different units, different scales), that graphical suggestion was simply an artifact of the range that I selected for the graph; if I had chosen to make the left-hand axis cover the range from 5%-20% of GDP instead of 7% to 15%, it would have looked like real income has grown more quickly in recent years than import penetration.
• A few people also noted that the graph was not convincing evidence that trade leads to higher income, because causality is unclear, perhaps trade or income are measured incorrectly, and there are lots of other things affecting both trade and income. These points are all quite true, which is why I said that the graph proves nothing. The graph was simply intended to illustrate that it’s certainly not obvious that more imports have reduced the welfare of the median American family. In fact, the prima facie evidence probably puts the burden of proof on those who think that trade lowers median income.

  To really discern the relationship is a very tricky econometric problem – but one that careful economists have made some pretty good attempts at solving. Those sophisticated econometric studies are what I was referring to when I said that the empirical evidence suggests that trade raises income. (If I have time in the next couple of days I’ll try to provide a reading list of such studies, for those masochists among you…) My chart, however, was no attempt to provide such evidence.

• A few people also accepted my suggestion that the benefits from trade is ultimately an empirical question, and followed up by arguing that this means that the benefits from trade should be examined on a case-by-case basis. I would just like to note that this is extremely difficult – perhaps impossible – to do.

  In a narrow sense, every international transaction is of course beneficial for both sides of the deal, otherwise the parties involved wouldn’t agree to the deal in the first place. But to determine how any particular import or export will affect the broader economy, one would need to be able to trace the effects of one individual transaction (say, one US company shifting its sourcing of T-shirts from a factory in North Carolina to a factory in Sri Lanka) on the entire economy – something that is probably impossible to do, since the US economy is so huge and each particular transaction is so tiny. And if you’re going to do that, why not examine the economy-wide impact of every particular business deal, not just those that happen to cross a political border?

• Several people mentioned that the trade imbalance may be a significant source of worry, even if trade by itself is not a bad thing. This is true; however, this is really a separate issue. If the US imported less, the trade imbalance would be exactly the same as it is, because the US would also export less. If we could magically cut our imports by $500 billion overnight, we would find that our exports also fall by $500 billion. That’s because the trade imbalance is due to a fundamental imbalance between what Americans produce and what they consume, or, put another way, how much Americans save compared to how much people in other countries save. Until US savings rise, the trade imbalance will remain, no matter how high or low imports are. (Note that this is not an economic theory; this is an accounting identity, and is as true as the fact that night follows day.)
• There are losers from trade, and I think it’s lousy when bad things like that happen to people through no fault of their own. As I mentioned before, many American economists (such as yours truly) are probably losers from trade, as well as some of the people commenting on the post. Unfortunately, there are losers from just about every economic transaction that one can think of, and lots of losers from things like new technology. But it is unclear to me why we should do things to only help the losers from trade, and ignore the losers from new inventions, or industry change, or anything else. That doesn’t make any sense to me. That’s why I advocate things like wage insurance, and a stronger social safety net… things that are not specific to people who lose out from trade. Furthermore, if we try to help the losers from trade by limiting trade, then we will just create new economic losers, in industries that depended on the imports. Why is one set of people more deserving of help than another?
• What’s the difference between trade and new technology? Both increase productivity, not just in the exporting country, but in the importing country, as well, since the importing country can now produce more stuff with a smaller expenditure of resources.

  But some commenters referred to Bivens’ argument that technology may help low-skilled workers or high-skilled workers, but trade always hurts low-skill workers. This may be true, though I’d need to see some evidence before I accept such an assertion. (It’s hard for me to think of any technological changes that have helped low-skill workers in the past half-century, at least.) But even if it is tue, that to me makes the case for providing more help to the least-skilled among us, not a case for limiting trade.

  In addition, Bivens notes that the prices of consumer goods have risen more quickly than the prices of all other goods, which suggests that workers have lost out from trade. But while he’s right that there is a difference in price increases between consumer goods and all other goods, that difference is due entirely to the fact that the price of IT equipment has fallen so dramatically in price since the 1970s. Firms buy lots more IT equipment than consumers, so it looks like prices for firms have risen more slowly than prices for individuals. In other words, the reason for that gap is technological change, not trade.

Finally, let me address a deeper question: if it’s not trade, what then accounts for the stagnation in incomes among the less educated in the US over the past 25 years? Or, put another way, why has the balance of power between workers and large corporations seemed to shift?

The biggest force behind this phenomenon that the best econometric studies have identified is technological change that benefits more-skilled workers at the expense of less-skilled workers (e.g. computers that replace poorly-educated workers but create new jobs for those who build, design, and run them). Personally, I think that there’s also been an increase in corporate power because anti-trust regulation has steadily diminished over the past two decades, leaving firms subject to less competition and with more individual power.

If that’s true, what do we do about the plight of the lower-income, less-educated workers in the US? My answers would be: more public resources spent on educating those at the bottom of the economic ladder; more income redistribution more generally; a stronger social safety net to help those who have the bad luck to be on the wrong side of international trade or technological progress – a safety net that should include wage insurance (more about that later this week) as well as national health insurance; and a new vigor from the government in promoting competition and limiting the power of individual corporations.

Do these things, and then I’ll be happy. Fail to do these things, and there will continue to be people who suffer needlessly from the constant process of economic change, trade or no trade.

Kash