Paulson: Free Trade Helps the Poor?
Greg Mankiw directs us to an endorsement of free trade from our Treasury Secretary:
Thus trade helps Americans provide for their families. When special interests seek protection in the name of low-wage workers, we should acknowledge that limitations on imports do not benefit the vast majority of Americans. They deny people the freedom to choose from a broader array of goods and services, and impose a cruel tax on people who rely on low prices to stretch their family budgets. The cost of protectionism falls most heavily on those who are least able to afford it – the poor and the elderly.
Greg notes that Paulson avoids:
the mercantilist rhetoric all too common in Washington, actually says nice things about buying goods from abroad
I trust Greg won’t see raising the Stopler-Samuelson theorem as mercantilist rhetoric. Formally put, this theorem states that an increase in the price of a good will cause an increase in the price of the factor used intensively in that industry and a decrease in the price of the other factor. In layman’s terms – while trade protection may raise the price of imported goods, it could also tend to raise the wages for workers in the import competing sector. So it is not clear from the Treasury Secretary’s remarks whether the working poor are hurt or helped by free trade. But let’s be fair to Secretary Paulson by noting a few other things that he said:
I understand that our dynamic economy, while generating wealth and opportunities for advancement and increasing our nation’s standard of living, does create dislocations and anxiety. Change can be difficult, and our economy seems to be changing ever more rapidly. As one of the sources of economic dynamism, expanding trade does result in some job losses and contributes to this sense of anxiety.
I tend to agree with most of Secretary Paulson’s remarks – in part because he was not so dogmatic that free trade benefits everyone.
Update: AB reader Divorced one like Bush directs us to Jared Bernstein and Josh Bivens and their The Wal-Mart debate: A false choice between prices and wages:
The benefits and costs of Wal-Mart’s expansion across the United States have been hotly debated. Critics of the retailer have documented the extent to which Wal-Mart uses its market power to undermine its workers’ compensation, squeezing suppliers and hurting local economies along the way. Supporters of Wal-Mart counter that the lower prices offered by the company more than compensate U.S. consumers for any depressing effect the company’s expansion has on wages … A key concern in the debate over the economic consequences of Wal-Mart’s expansion is the effect this has on workers’ wages. Most would grant that prices are lower at Wal-Mart than in many competing stores (although the magnitude of this price difference is often less than implied by company defenders). A critical question, however, is whether the benefits of lower prices are implicitly clawed back when Wal-Mart drives down wages not just of its own workers, but throughout the retail sector as a whole. Dube (2005) and Neumark (2005), in papers reviewed in Wrestling With Wal-Mart, present strong evidence that Wal-Mart’s expansion has driven down earnings for workers not just in competing retailers, but across stores throughout the region of Wal-Mart expansion.
It would seem Stopler-Samuelson is more than a theoretical idea.