How Large Are the Distributional Effects of Increased Trade?

Dani Rodrik suspects that they are smaller than Josh Bivens thinks they are:

Dani Rodrik's weblog: The pains from trade: The workhorse model of international trade (the 2x2 Heckscher-Ohlin model) has very stark implications for the effect of trade with poor, labor-abundant countries. Low-skilled workers in rich countries (read the U.S.) must end up as losers--not in relative terms, but in absolute terms.  Moreover, the larger the overall gains from trade, the bigger must this adverse distributional effect be.  In that world, it is inconsistent to claim there are large gains from globalization while downplaying the distributional impacts. Which is why many economists teach the model in their classrooms, but shift to other, more complicated models when they engage in the public debate about the effect of trade on wages.

A recent paper by Josh Bivens carries out a quantitative simulation of the basic 2x2 model which suggests that the increase in U.S. trade with the developing countries between 1995 and 2006 would have reduced labor earnings by 4 percent while increasing the payment for skills by 3 percent, for a 7% increase in the differential altogether.  This is an interesting exercise, to be compared to that undertaken by my colleague Robert Lawrence. The latter gives much less of a role to trade, in large part because it finds there is little reduction in real earnings once adjustments for productivity, prices and benefits are made. 

One clear difference between the two perspectives is the extent to which one thinks of trade with developing countries as competing directly with U.S. production.  Lawrence says that developing country exports hardly displace any domestic production anymore because much of that activity has already shut down.  So whatever adverse impact may have existed in the 1980s, the current situation is much more benign. (But of course, less impact on productive re-allocation means fewer overall gains from trade too!). In Bivens' world (and that of the standard 2x2 model), by contrast, head-to-head competition is critical in driving the distributional effects.

I am on Dani's side, only more so. Two additional points are important, I think:

1. For competition to be head-to-head, the two countries have to be making very similar goods with similar production processes. Hand-spinners in Pakistan don't compete with labor here in the United States but with the capital embodied in our large automated spinning mills.

2. What trade does to our distribution of income can be undone by normal domestic redistributionist policies. The right way to deal with the issue is to (a) maximize the third world's ability to take advantage of our demand to spur its own growth, and (b) use domestic redistribution here to compensate for any adverse distributional impact.

Comments

[y]

It seems a bit disingenuous to propose (a) and (b) when we all know that (b) isn't going to happen.

[But we don't know that: elect Democrats, and (b) will happen.]

[Colin Danby]

I disagree, y, because (a) is still good in itself. Moreover while we could and should do much better on (b) including national health insurance, it's not like there's no (b) at all -- subsidized higher education, for example, is not a negligible channel of redistribution and a route for a lot of folks to better jobs.

[Rob]

Subsidized higher education is not anywhere close to doing (b). Even job retraining isn't, taking a 45 year old, retraining her to restart a career basically is destroying her main earning years.

As to (a), I'm not sure why you think they have to be using the same production means. So you take away jobs from people using high capital to people using little capital.

[Ponzi Q. Globalization]

"Hand-spinners in Pakistan don't compete with labor here in the United States but with the capital embodied in our large automated spinning mills."

When American capital is used for overseas production, who or what is competing with who or what?

"It seems a bit disingenuous to propose (a) and (b) when we all know that (b) isn't going to happen."

Hear! Hear!

It's funny when well-meaning neoliberal economists (WMNLEs) push for policies that destroy political power in working men and woman and then expect policies to be implemented that benefit that same group. These WMNLEs don't seem to realize that the strongest supporters of policies tend to be the people who would actually benefit if those policies are put into practice, not WMNLEs.

[Colin Danby]

The funny part is that people who argue aprioristically that trade immiserizes U.S. labor have even more faith in the smooth functioning of mkts than most neoliberal economists.

[Julian Elson]

Of course, one must bear in mind that while the U.S. is a fairly skilled and capital-intensive country, not every sector in which we have a comparative disadvantage is labor-intensive, nor is every sector in which we have a comparative advantage skill or capital-intensive.

If your objective in trade policy is to minimize American inequality, then I suppose one could protect industries in proportion to their demand for unskilled and semi-skilled labor relative to other factors of production, since these industries are the ones that help poorer workers, while lifting any protection from industries that are demand higher skill.

Yet the idea of protecting sectors in the proportion that they help working-class workers relative to shareholders and upper-class workers seems, if anything, less politically workable than the free-trade-and-redistribution formula Brad proposed. Who gets which protections seems like it'd be a function of K Street lobbying more than anything else.

So I guess the idea is that we create an environment conducive to protectionist politics, on the grounds that, although sometimes the protections will help rich people with connections to congress at the expense of the poor, overall it'll help the poor more, since trade allows for factor price equalization, and the U.S. is rich in factors possessed by the rich.

I suppose if it's really the best we can do to help working class Americans, maybe we should do it. I hope not, though.

[non_econ]

I'd be classified by economists as highly skilled. I work for a large multinational electronics firm.

It seems that multinational firms will gain from moving jobs OF ANY SKILL level to lowest cost. This movement happens until there is balance between output/$ in every location in the world (as skilled work becomes more easily distributed).

National efforts to prevent it or slow it down seem unlikely to be successful in my mind. It would require protectionism at the extreme which does hurt too many (working and skiled).

I agree with Brad - you redistribute the gains. Education and national investments in infrastructure (clean energy, comms, transport, schools, health, parks, etc) are the best places for re-distributive taxes to be spent.

What we have is much less trade, than really just fundamental labor arbitrage that is enabled by technology. I don't think we can stop it.

[Ponzi Q. Globalization]

"The funny part is that people who argue aprioristically that trade immiserizes U.S. labor have even more faith in the smooth functioning of mkts than most neoliberal economists."

Trade does not equal labor arbitrage. The current trading regime is not 'trade'.

The choice isn't between trade as we have today and no trade. This choice is a false dichotomy.

[low-tech cyclist]

Also, (a) is our leverage for bringing about (b). You don't give the other guy what he wants until you get at least some of what you want as part of the deal.

Once you've given away (a) for free, the game's over and you lost.

[Ponzi Q. Globalization]

Julian Elson: "Yet the idea of protecting sectors in the proportion that they help working-class workers relative to shareholders and upper-class workers seems, if anything, less politically workable than the free-trade-and-redistribution formula Brad proposed."

I don't know if I agree with you here. The current global trading/labor arbitrage system (Dean Baker has taught me not to call it 'free-trade') effectively makes larger and larger portions of the American labor force useless. Useless workers are weak workers for they have nothing to bargain with. When weak people make demands that cost strong people money, strong people make sure that these demands are ignored.

Contrast that with the fear that many Americans have of outsourcing. Don't overestimate the love of Americans for 'shipping jobs overseas'. It's just a matter of getting past the words 'free' and 'trade'. Make it clear that the term 'free-trade' is nothing but a neoliberal marketing phrase designed to cover up what is really going on and soon political support will grow.

Two last points. One, whether I'm right or wrong about the politics, the two approaches -- redistribution and modification of the current trading system -- are not mutually exclusive. Two, economists constantly singing the praises of shifting American production overseas to exploit cheaper labor and less stringent environmental regulations sure doesn't help bolster democracy in America.

non_econ: "What we have is much less trade, than really just fundamental labor arbitrage that is enabled by technology. I don't think we can stop it."

Slowing it down may actually be the best. Put a few bumps in the road as I believe Krugman said at one time. If too many people aren't eff'd over by globalization, the end result may be a much nicer world. The current race to the bottom is effing too many people over and is, thus, unsustainable politically without repression. A repression our elite is thankfully unwilling to engage in. In fact, I think the neoliberal system is breaking down as I type this. Hooray!

[JRoth]

"So whatever adverse impact may have existed in the 1980s, the current situation is much more benign."

And more history is swept under the rug. US textile jobs were lost in the late 90s - the very period under discussion - not the misty past of the 80s. So with a little hand-waving, the present recedes into the past, and "it's too late to do anything now."

How convenient for WMNLEs for whom it's always jam - sorry, redistributive domestic policies - tomorrow, never jam today.

When I see a procession of WMNLEs marching up to Capitol Hill to demand that no further "free trade" agreements be signed until domestic redistribution is locked into place, then I will stop believing that WMNLEs are, at best, pawns being used as useful... stand-ins for the elites who actually benefit from "free trade."

[save_the_rustbelt]

"b) use domestic redistribution here to compensate for any adverse distributional impact."

I'm sitting in Michigan this morning, and the "any" is really hysterical.

Any? Michigan - seven years of recession. Ohio - six years of recession or near-recession.

I agree with Y and Ponzi.

Robert Rubin will get his bonuses, blue collar workers will get screwed.

[Barry]

"The funny part is that people who argue aprioristically that trade immiserizes U.S. labor have even more faith in the smooth functioning of mkts than most neoliberal economists. "

Posted by: Colin Danby

BS. I'm in Michigan, and just dug my winter coat out of the closet. I would have done that whether or not I had faith in weather forecasting. All that I need to believe in is rough trends which repeat.

[SERO]

Well-meaning neo-liberal economists teach in their classrooms the 2x2 Heckscher-Olin model, with its "stark implications" for low-paid workers but "shift to other, more complicated models when they engage in the public debate about the effect of trade on wages" How can they expect their professed faith in redistribution to be believed?

[Matt]

We cannot pick and choose our global issues. We have free trade, and it will expand, really, what right do we have to stop it?

Our problem is ours, we are trying to force fit a wealth distribution curve to match internal dreams and not external reality.

Price fixing, and the result is always the same,;we maintain a structural fixation out of sync with the world and we end up re-evaluating assets downward every 16 years or so. We hold on too long and cause over immigration, government grows out of cycle, interest groups grab power. It is a pain.

Better Mechanism Design!

[Dean Baker]

We need some economists who are as committed to free trade in highly skilled professional services (physicians services, lawyers, bankers) as they are to free trade in cars and textiles. It will be a great day when our doctors have to compete highly skilled doctors from India on an equal footing. Unfortunately, the boys and girls who practice medicine in the United States are not able to compete in a global economy -- and neo-liberal economists are just fine with giving them protection (in fact, if not in theory).

I can't wait until the day that trade does for Wall Street what it has already done for Detroit.

[Ponzi Q. Globalization]

"We cannot pick and choose our global issues."

What does this mean?

"We have free trade"

Only if you want to define 'free trade' to mean the current global trading/labor arbitrage system.

"and it will expand"

From your mouth to Robert Rubin's ear. Or maybe Robert Rubin's anus would be more appropriate.

"what right do we have to stop it?"

Americans have no right to determine the trade policy of their own nation?! Destroying American democracy today for a better world tomorrow seems to be one of the major goals of neoliberals.

I've said it before and I'll say it again. Destroying the value that massive numbers of individuals have to their society does not seem to be a good strategy for promoting the prosperity of those individuals.

[Dean Baker]

btw, Brad's "b" (redistributive policies)always imply economic distortions. In other words we have to raise taxes of some stripe on the winners to give money to the losers to ensure that they are made whole.

Where is the economic research that shows that the distortions from these policies are smaller than the distortions that were eliminated by trade liberalization? If this research exists, it is not widely publicized.

In other words, Brad is not just doing political handwaving -- referring to a hypothetical that has about zero chance of being a political reality -- he is also doing some economic handwaving. We don't know that trade liberalization coupled with redistributive policy is net gainer.

[Kenneth]

What does it take to get Brad or Dani to respond on this forum? Ponzi Q. sums it up nicely (see also Rogowski's *Commerce and Coalitions*): freer trade and greater capital mobility have weakened the labor movement, so how will labor have the political strength to achieve the policies Brad/Dani and so many others think are the answer?

[Colin Danby]

Sero, it's a reasonable complaint that econ classes are over-reliant on the Heckscher-Ohlin-Samuelson 2x2x2 heuristic, and as I've noted aprioristic critics rely on the same theology; note how little reference to data and specifics there is in this blog's Protecionist Chorus, how much argument by assertion. Follow the links to Rodrik's blog and there are two papers linked which raise interesting, non-obvious empirical questions. But the chorus isn't interested in empirical questions.

Dean of course there should be free trade in professionals -- who has said differently? And what's up with this stuff on "distortions"? Brad doesn't use the term nor has anyone else on this thread. You don't need to be operating out of a neoclassical framework to suspect that protectionism is a profoundly stupid way to do social policy, and even a little reading of history will show you that almost every instance of real-world protectionism has been corporate welfare, bought and paid for by capitalists to protect profits from immobile capital.

Just one more point, because this trope is so widespread. Note, in the song of the chorus above, that when capital hires labor in the United States, that's wholesome life-affirming employment, but when Godforbid capital hires labor in a country with lower incomes, that's exploitation. If people want to take a principled anticapitalist position, fine -- there's an intellectual tradition there and at least Marx never argued that workers in one country should try to do better by screwing over workers in another country. But if you are not opposed in principle to capital hiring labor, then you need to recognize that call-center jobs, for example, are great jobs: good pay, indoors and no heavy lifting, and training that makes it easy to switch employers. Not every job there, or here, is a great job, but it's difficult to see how you get the 1970-2000 improvements in income and life expectancy shown so clearly here http://www.gapminder.org/downloads/presentations/human-development-trends-2005.html
without lots of new jobs in places like Indonesia and India and China.

[John Emerson]

"Low-skilled workers in rich countries (read the U.S.) must end up as losers--not in relative terms, but in absolute terms. Moreover, the larger the overall gains from trade, the bigger must this adverse distributional effect be. In that world, it is inconsistent to claim there are large gains from globalization while downplaying the distributional impacts. Which is why many economists teach the model in their classrooms, but shift to other, more complicated models when they engage in the public debate about the effect of trade on wages."

I've been saying that for a few years here.

It's basic Econ 101, right? To me this seems like one of the cases when Econ 101 is basically right -- but oddly enough, it's also one of the cases when many economists suppress the Econ 101 truths.

If basic theory supports you, cite basic theory. If sophisticated theory supports you, cite sophisticated theory. If the data supports you, cite the data. If nothing supports you, cite some Reagan-type anecdotes about events that never actually took place. Neo-liberalism, one way or another.

[Ponzi Q. Globalization]

Colin Danby: "Note, in the song of the chorus above, that when capital hires labor in the United States, that's wholesome life-affirming employment, but when Godforbid capital hires labor in a country with lower incomes, that's exploitation."

You seem to be hearing songs that aren't being sung. Or maybe their just songs sung by straw men.

Colin Danby: "...there's an intellectual tradition there and at least Marx never argued that workers in one country should try to do better by screwing over workers in another country."

You assert that the only choice is between (1) a neoliberal pitting of workers around the globe against one another and (2) workers in the currently more affluent nations screwing workers in the less affluent nations. Yet another false dichotomy.

Can one have trade without it being under the current trading/labor arbitraging system? When we refer to the trade prior to the current regime as 'trade' are we using the wrong word? Maybe we should call this older trade -- or more broadly any 'trade' under a different system than the current neoliberal one -- something like 'the reciprocal transfer of goods and services' instead of 'trade'. Then the frequent neoliberal setting up of the anti-trade straw man would cease by redefinition. Granted, it's a big pain in the ass but if that's what it takes to discuss the topic...

[Kenneth]

John, you forgot one: If the data doesn't support you, change the data. I see that as the political motivation for the attack on BLS inflation statistics in the 1990s. Now BLS is going to quit collecting the series (real wages of non-supervisory workers) altogether, as I read in The Region (Minneapolis Fed).

Perhaps someone here can explain how it can be that data supposedly shows that benefits are growing faster than wages, for non-supervisory workers, even though there has been a sharp drop in the percentage of companies providing health insurance and pension benefits.

[josh bivens]

(b) may be an important point, but, it's not different from anything i wrote, and, unless this paper is the outlier in what i write on this stuff (don't have a copy at home, so, can't say for sure), i'm pretty sure it's explicitly said in there.

as to (a) i'm a little surprised that Dani is endorsing the Lawrence view, especially given that Dani has written an excellent paper on how far above their weight (ie, per capita income) China punches in terms of the sophistication of its exports. Peter Schott has written on this too.

i'm going to need some harder evidence that we're totally out of China's cone of diversification before i'm convinced.

lastly, i would note that arguing in terms of non-competitition of Chinese imports and the US market is correct if you're trying to examine marginal changes in import shares or product-price changes on American outcomes.

it may be true that, say, an increase in apparel imports from China in some cases are really only displacing apparel imports from Mexico, and, this marginal change has no real effect on US wages.

but, given that import shares in the aggregate are rising, and, that over the past couple of decades about 2/3 of this rise is from LDCs, it would be a neat trick if this happened with mininal displacement.