The New Old Economics of Trade
Does economics still believe in free trade? The discipline has urged the case for open markets since its earliest days, but lately not so much. Recent research is seen as calling the faith into question.
When Mitt Romney recently attacked Donald Trump for threatening a trade war that would plunge the U.S. back into recession, Paul Krugman, a leading authority on the economics of trade, assaulted Romney for his misunderstanding:
Now suppose we have a trade war. This will cut exports, which other things equal depresses the economy. But it will also cut imports, which other things equal is expansionary. For the world as a whole, the cuts in exports and imports will by definition be equal, so as far as world demand is concerned, trade wars are a wash.
Set aside the idea that a trade war, "other things equal," would have no effect on world demand -- a questionable claim (even if it comes from a Nobel laureate who assures his readers, "I really, truly know what I'm talking about"). What's striking is that Krugman thought it more useful to attack Romney for his flawed thinking on trade than Trump for his. On the Trans-Pacific Partnership, Krugman has described himself as a "lukewarm opponent," and has said that the case for more trade agreements is "very, very weak," adding:
And if a progressive makes it to the White House, she should devote no political capital whatsoever to such things.
So much for Adam Smith.
The lack of expert enthusiasm for trade liberalization isn't confined to Krugman. Contributing to it most recently is a new strand of the trade literature that looks carefully at the costs of adjusting to foreign competition. This work, notably papers by David Autor of MIT and collaborators, has attracted a lot of attention.
The Economist, which has campaigned for free trade since it was founded in 1843, discussed the findings in an article ominously titled "Trade in the balance." It said the results "provide convincing evidence that workers in the rich world suffered much more from the rise of China than economists thought was possible."
Well, Autor and his co-authors find that some workers have suffered more from Chinese competition than most economists would have thought likely. That's still an important thing to know, and policy prescriptions follow from it. But those prescriptions aren't new, and they sure don't include raising trade barriers. This research doesn't come close to refuting the traditional case for liberal trade -- and its authors are careful never to suggest otherwise.
Autor's work draws on masses of data to show that for workers in affected industries and localities, adjusting to foreign competition is a surprisingly hard, slow business. One of the papers finds that competition from China caused net job losses in the U.S. of between 2 million and 2.4 million from 1999 to 2011. Another shows that the impact on local labor markets was especially severe:
Labor-market adjustment to trade shocks is stunningly slow, with local labor-force participation rates remaining depressed and local unemployment rates remaining elevated for a full decade or more after a shock commences.
For the U.S. as a whole, Chinese imports meant lower prices and higher real incomes. But, consistent with the prolonged albeit local dislocation, America's short-run net gains from greater trade with China are estimated to have been small -- still positive, please note, but not much above zero. In the long term, the gains comfortably outweigh the costs. According to another study cited by Autor, the rise in trade with China yields an increase in long-term U.S. welfare of more than 6 percent.
Uncertainty still attaches to the estimates of Autor and his colleagues. Their reckonings require many supporting assumptions. The authors have made them conservatively -- that is, in a way that's likely to understate rather than overstate the costs. On the other hand, the studies can't easily measure some of the gains. Trade with China didn't just destroy jobs; it also created jobs. Identifying and measuring the new ones is harder to do.
Despite such uncertainties, the new research is the best and most exhaustive available. The question is, what's new here?
The traditional case never said that free trade makes everybody better off, let alone that it makes everybody better off immediately. The consensus view always acknowledged that there would be winners and losers. (Why would the demand for trade barriers arise if competition from imports didn't hurt somebody?) The argument has only ever been that free trade raises real incomes in the aggregate -- that the gains exceed the losses. The new work leaves this claim intact.
The force of Autor's findings actually has little to do with trade policy as such. Its value lies, or ought to lie, in the emphasis it puts on helping workers, towns and regions adjust to economic dislocation. Trade is only one cause of such dislocation, and usually not the most powerful, China notwithstanding. Bear in mind, manufacturing employment has been declining in the U.S. for decades, since long before the Chinese export machine started up. The most disruptive force in any economy is technology.
The new research matters because it shows that the U.S. labor market is a lot less flexible than its reputation has suggested. Workers are more likely to get trapped, with or without work, in depressed towns and regions. They find it hard to switch to good alternative occupations. It's true that this inflexibility adds to the costs of free trade -- but it adds to the costs of all kinds of economic disruption. Labor-saving automation and other forms of innovation are more costly if workers can't move; so is domestic competition. Those forces involve dislocation too; they also create winners and losers.
Rather than try to block trade, technological progress and competition, it seems more promising to make labor markets more adaptable by helping workers move from job to job and place to place -- and to give more support to those who can't make the transition even with the extra help.
It's fair to say that free-trade evangelists have often too blithely assumed that helping the losers is not a first-order concern, and in some cases no concern at all. That has always been a mistake, which the new research may help to correct. But it would be strange to make providing such help a condition for supporting free trade -- unless you also make it a condition for supporting competition and technological progress.
Incidentally, it's worth noting that the gains China reaped from trade have been vastly greater than the gains derived by the U.S. Hundreds of millions of Chinese have been lifted out of poverty, supporting one of the greatest surges in economic and social progress the world has ever seen. If distribution matters -- a point that's often emphasized by progressive free-trade skeptics -- the enormous relief of poverty outside the U.S. should presumably count for something.
The debate over TPP introduces new complications, and involves more than the traditional presumption in favor of free trade. This new pact involves new kinds of trade -- not just goods but also services, investment and intellectual property -- and therefore different economic trade-offs apply. One thorough study of its effects predicts global gains of roughly half a trillion dollars a year by 2030, with the U.S. claiming the biggest share. In the aggregate, it will raise U.S. wages but "impose adjustment costs on some workers."
Again, winners and losers. Here, though, the research mentioned earlier isn't directly relevant. The mechanisms explored in that work are about trade in manufactures. From the U.S. point of view, the case for TPP is stronger, not weaker, than the case for ordinary trade liberalization. Last year, in an article for the Washington Post, none other than Autor and his co-authors explained why. TPP has "little downside" for the U.S., they said; it would allow American companies to "excel in the sectors where they are strong," and "give a substantial boost to U.S. trade."
That would seem to call for strong expert support of TPP, rather than the apologies, shuffling of feet, and lukewarm opposition that has characterized so many responses. Surprisingly, the general public remains relatively well disposed toward trade: Voters may have a better grasp of the issue than many commentators and most politicians.
That's something. But the prevailing mood of expert disenchantment with free trade is still disappointing. It misconstrues important new research, directs attention to the wrong questions, and supports the adoption of bad policies. It does the country a grave disservice.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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