Sunday, July 31, 2016

Is Free Trade Good for Everyone? (Reposting, because it seems relevant right now).

Greg Mankiw implies that it is (although not anymore), and that all economists agree that it is.  But it actually isn't.  Who says so?  Economists.

In particular, the workhorse theory of International Trade, the Hecksher-Ohlin Theorem, leads to the Stolper-Samuleson Theorem, which shows that when countries start trading with each other, the relatively abundant factor of production in each country becomes better off, while the relatively scarce factor becomes worse off.   In the US context, this implies that opening up trade will leave capital better off relative to labor, and skilled labor better off relative to unskilled labor.

Does trade increase the total size of economies?  Yes--this is something that economists do agree on. But in the absence of redistribution--something that seems to be anathema to we Americans--more open trade will make low skilled laborers worse off.

In my ideal world, we would pass the Trans-Pacific Partnership (TPP), a potential [quasi]-trade agreement among the US and 11 other countries of the Pacific Rim, and redistribute its bounty such that everyone would be better off.  There is no evidence that our political system would allow this to happen.

Despite all this, I do and will continue to support trade agreements such as the TPP because that there is some evidence that they prevent wars.  Of course, as someone who has had nothing but good fortune in life, it is easy for me to think that the abstract prevention of war is more important than the tangible reduction in other people's already low wages.  

1 comment:

David Barker said...

Hi Richard, sorry it took me so long to see it, but this is a good post.

A libertarian might say there is a natural right to trade, so it should not be conditioned on redistribution. But in the real world trade is a political question, so we should expect bargaining.

After a long period of trade liberalization, trade opponents now dominate US politics. Stigler's theory of regulation might have predicted this would happen sooner, since the costs of trade are somewhat concentrated and the benefits widely dispersed. As you point out, the benefits mostly flow to the well-off, so they have managed to overcome the Stigler effect. But when a political force with natural advantages is suppressed, it sometimes breaks through suddenly and unexpectedly.

In other words, years of free trade extremism without regard for the human costs has given us Donald Trump.