Paul Krugman wonders if it is harder to make the case for free trade these days. There are more losers from trade liberalization, he thinks, and it is much less clear that the losers are in some sense undeserving. Mark Thoma writes:
Economist's View: Krugman: Distribution and Trade Policy: Paul Krugman adds a few more thoughts via email related to the recent trade policy discussion:
Paul Krugman: Another thought or two on distribution and trade policy: The problem of losers from trade isn't new, obviously, either as a fact or concept. But if you look at the history of trade policy - say, in Matt Destler's book it's hard to avoid the sense that the issue has gotten bigger and harder. His final chapters have a definite sense both of nostalgia for the good old days and foreboding.
I'd put it like this: in the old days, when GATT negotiations were mainly with other advanced countries, the groups hurt tended to be highly specific and local - the left-handed widget makers of Northern South Dakota, worried about competition from their counterparts in Upper Lower Swabia. Economists could in good conscience argue that while individual groups were hurt by trade liberalization in their specific sector, the great majority of Americans benefitted from general trade liberalization. And politicians made trade deals by packaging together the interests of exporters, to offset the parochial interests of import-competing industries
But now we're talking about broad swaths of the population hurt by trade. It's a good bet that almost all US workers with a high school degree or less are hurt by Chinese manufactured exports, at least slightly. You could in principle put together win-win packages - say, trade liberalization together with an increase in the EITC paid for with higher taxes on high-income Americans, who come out winners from trade. But the reality is that we don't make those deals.
For those who like their jargon, by the way, I'm basically saying that the right model for thinking about this has gone from many-good specific factors to Heckscher-Ohlin.
I don't have answers to this. The moral case for open markets is their importance to poor countries: America would do OK even in a highly protectionist world, but Bangladesh wouldn't. The domestic politics of trade, however, are now very hard, and getting harder.
Well I think I have answers:
- The kinds of win-win deals that Paul says we don't make are in fact deals that Democratic presidents do make--when they aren't blocked from making them, that is.
- In an American family, both potential workers have to be working in export or import-competing manufacturing for the family as a whole to be injured by imports of manufactured goods from China. Construction workers benefit from expanded trade with China both through higher relative wages and through lower relative prices. Service-sector workers benefit through lower relative prices.
- The losers are not undeserving of their previous relative good fortune, but the winners are not unjustly enriched either--and odds are that there are more and bigger winners.
- Politics is much healthier when everybody knows that trade restrictions are temporary and fragile than when people believe that trade restrictions are permanent and durable--and thus really worth lobbying for when they are to your material advantage.
- A richer world is a safer world for Americans: foreigners working making textiles for export to the United States are not foreigners in caves planning to attack the Great Satan. One important import that we buy through freer trade is a safer, richer, more peaceful world.
The narrow pure-economics case for freer trade is harder to make thsee days because it is less true than it was in the 1960s or the 1950s or the 1930s or the 1910s. But the broader political-economy case for freer trade is still strong and true.
