The Free Trade Benefits Everyone Canard Again

The latest version is courtesy of James Surowiecki. When I try to make the Stolper-Samuelson argument that wages in the apparel sector fall by more than apparel prices fell, James insists that Christian Broda and John Romalis addressed that in Inequality and Prices: Does China Benefit the Poor in America?:

The debate on trade and wages in the U.S. has entirely focused on the impact that trade with developing countries has on the wages of the unskilled in America. This debate has overlooked the impact that trade has on prices of the goods consumed by different income groups. In particular, since developing countries typically produce low quality goods that are disproportionately consumed by the poor in America, this implies that inequality measures that do not correct for differences in the basket of goods consumed by rich and poor neglect this “price” effect of trade.

While I concede we should look at both the price effect and the wage effect, doesn’t the Stolper-Samuelson effect consider both? James did offer this comment:

As for quoting Stolper-Samuelson, there are fewer than 900,000 apparel workers left in the U.S. There are 30 million+ low-income American consumers, the vast majority of whom don’t now and in fact never did work in industries that compete with China, who reap sizeable benefits — as Broda and Romalis document — from the lower prices that free trade with China has empirically brought. If you want to make the case that the costs to those apparel workers today (and to those who used to work in the apparel industry)outweigh the benefits to the consumers, then do it empirically, documenting the costs and benefits. Merely citing S+S doesn’t help you.

Well, it is true that BLS cites that there were only 540,000 workers as of April 2008 in the following sectors: textile mills, textile mill products, apparel, and leather and allied products. This is down from 1,822,000 as of January 1990 as our apparel sector has laid off many workers who likely found employment elsewhere but often at even lower wages. As Paul Krugman noted:

In 1995 I also believed that the effects of trade on inequality would eventually hit a limit, because at a certain point advanced economies would run out of labour-intensive industries to lose – more formally, that we’d reach a point of complete specialisation, beyond which further growth in trade would have no further effects on wages. What has happened instead is that the limit keeps being pushed out, as trade creates “new” labour-intensive industries through the fragmentation of production. For example, the manufacture of microprocessors for personal computers is clearly a highly sensitive, skill-intensive process. Intel’s microprocessor production, however, now takes place in two stages: the “fabs,” which print the circuits on disks of silicon, are all located in high-wage advanced countries, but the assembly and testing, in which those disks are cut into individual chips and tested to be sure that they work, is conducted in China, Malaysia, and the Philippines. Outsourcing of services, in both directions, adds to the possibilities of unequalising trade. The skill-intensive pieces of production processes that mainly take place in the third world are often now located in the OECD – for example, Lenovo, the Chinese computer company, has its executive headquarters in North Carolina. What all this comes down to is that it’s no longer safe to assert, as we could a dozen years ago, that the effects of trade on income distribution in wealthy countries are fairly minor. There’s now a good case that they are quite big, and getting bigger.

Simply put – focusing on those 540,000 apparel workers to access the impact on wages is incomplete and highly misleading.

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