The Lofty Promise and Humble Reality of International Trade

The Lofty Promise and Humble Reality of International Trade

Carlo Allegri

How should we feel about international trade? Should we applaud it for its ability to lift the world’s poor out of poverty, lower the price of goods, and increase the variety of products we can consume? Or should we be concerned about the effects it has on employment, inequality, and the availability of decent jobs within the US?

As we shall see, this is not an easy question to answer. But before turning to the consequences of trade for the US and other nations, it will be helpful to explain how economists approach these questions.

Economists are taught that if a particular policy makes some people better off without making anyone else worse off, then that policy can be endorsed. However, if a policy makes some people better off and others worse off, then we cannot take a stand on whether the policy is good or bad. That would involve a value judgment that hurting one group of people is okay because of the good it does for others. Even if a policy helps billions of people and hurts just a few, we cannot take a stand on whether the policy should or should not be enacted.

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Economists, however, have ways around this. If a policy such as opening our borders to more international trade has both positive and negative effects, but the positive effects exceed the negative, then it would be possible to distribute the benefits in a way that makes everyone at least as well off as they were before the policy change. So if billions are helped and just a few are hurt, we can redistribute some of the gains to more than compensate the losers. It doesn’t matter if the redistribution actually happens, so long as it’s theoretically possible the policy can be endorsed.

The second way around the problem of a policy creating winners and losers is to separate the short-run from the long run. While increased trade may cause difficult adjustment costs in the short-run, in the long run, according to this argument, trade “lifts all boats” such that the overall benefits are positive.

I think both of these arguments have problems, especially in recent decades, but before explaining why one last note on the evaluation of trade policy.  When making calculations about the winners and losers, we must first decide whose welfare matters. Should we limit our analysis to the consequences for people within the US, or should we be more cosmopolitan and also include residents of other nations, particularly those in developing nations struggling to overcome poverty? Or should we include both, but give more weight to those closest to us?

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Once again, this is a value judgment; it’s not something economics can tell us. I have a relatively cosmopolitan view, but I cannot be critical of those who care most about US citizens, their families, or those in their local community. I can question their values, but they can also question mine.

I don’t believe there’s any reasonable doubt that trade has helped people in developing nations. So for me the evaluation of trade policy comes down to whether it is a net positive or negative for groups within the US. If the impact is negative for some group of people, then I face a difficult choice about how to evaluate trade policy. Who should I care about the most? But if the impact is positive, if everyone is better off, then it’s easy. We are all winners.

Although there is disagreement about the magnitude, estimates on the impacts of trade find that it is a net positive for the US as a whole. Thus, in theory, we ought to be able to more than compensate the losers from trade so that everyone is better off. But in reality this rarely if ever happens due to the accumulation of political and economic power in the hands of those who would have to give up some of their benefits to compensate those who have been hurt.

To be fair, many trade advocates would argue that yes, there are short-run adjustment costs and they can be very difficult, but in the end, we will all be much better off. No pain, no gain. But to use a familiar phrase, “in the long-run we are all dead.” How long do we have to wait? Look at what has actually happened over the last several decades.

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Real wages for the middle and lower classes have been flat, economic insecurity has been rising, and inequality has gotten worse and worse as the gains from trade have been captured by those at the very top. All boats have not been lifted, and far too many households have ended up underwater from the accumulated weight of the economic changes over these decades.

While I have no doubt that trade has helped end poverty across the world, I also have no doubt that there have been losers within the US. Who should I care about most, the poor who have been helped by trade, or those closer to home who have paid the price?

What upsets me is that I shouldn’t face such a difficult choice. We could have and should have enacted policies to ensure that the gains from trade (and from technological change) are broadly distributed. But instead we moved in the other direction with policies such as tax cuts, diminished trade adjustment assistance, minimum wages that did not keep pace with inflation, and legislation to weaken unions that helped to concentrate the gains in the hands of a small group of very large winners.

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I blame Republicans far more than Democrats, but the “indifference of national ruling classes” to the struggles of typical households extends to both political parties. The ruling classes have benefitted greatly from opening borders to trade, and support of trade as a way to reduce poverty conveniently serves their self- interest. Meanwhile, the struggles of the working class have been all but forgotten.

I don’t want to slow the worldwide reduction in poverty by reducing international trade. For that purpose, more trade would be better. But I also do not want the costs of worldwide poverty reduction to be concentrated on vulnerable workers within the US, or anywhere else, while the much larger benefits flow to a relatively small group at the top. That does not have to happen.

If we continue on the present path, resistance to trade will grow and threaten the promise trade holds for both the developed and developing world. Closing our borders to trade, or even resisting further openness, is not the best way forward. Instead, we need to enact policies that ensure the promise of trade – mutual gains that are widely shared – is fully realized.

That will require those who have benefitted so much from economic change over the last several decades to be much more generous with those who have not. The pain this causes the winners, such as it is, will be more than offset by the benefits to all of us down the road.