I’ve been thinking about trade a lot because of recent discussions regarding the Trans-Pacific Partnership. Turns out I’m not alone, so iet’s break things down here.
As put forth by economists, strictly speaking, I’m not even sure that I buy the “trade is good” argument. I know, I know, but hear me out. For the most part, economists focus on efficiency (i.e. what maximizes the size of the economic pie to go around) rather than equity or distribution (i.e. what is fair). The reason for this is simple- what is efficient has a (relatively) scientific answer, whereas what is fair is a matter of opinion and values (read, no right answer). In a perfect world, economists would be leveraged in two ways:
- Tell us what is efficient and we’ll try to make it work for everyone.
- Tell us how much value we sacrifice to make things fair so we can decide whether the tradeoff is worthwhile (or where the appropriate balance is).
This division of labor, if you will, is usually not how things work. Instead, this last step is omitted and the economists’ contributions to the discussions are rejected. Case in point: the observation that trade is efficient. To see how, let’s work through the logic.
Consider a good where the US would want to import from foreign countries if it were opened to trade. (This will happen when foreign producers can offer the good at a lower price than domestic producers.) Opening up to trade helps consumers via lower prices, but it hurts producers due to low-priced competition. That said, consumers win more than producers lose, making trade the efficient outcome. (More technically, introducing trade satisfies the Kaldor-Hicks criterion.) BUT…trade creates a clear distribution problem, where there are a large number of consumers who gain a little and a smaller number of producers (or, somewhat equivalently, workers) that lose a lot on a per-producer basis. It’s not exactly a convincing argument, for example, to tell the auto worker to be happy about losing his job because it makes cars cheaper for a lot of other people. Unfortunately, it’s also not really reasonable to cost consumers $160,000 to save the job of one auto worker. (This is what the tradeoff was estimated to be during the voluntary export restrictions of the Reagan era.) It’s also not reasonable to remind the worker that he ends up being the winner in other trade scenarios so it totally balances out (it kind of does, but probably not entirely). so we have the economist talking about how trade is efficient and a decent number of people affected being like uh, @#$! no.
This doesn’t have to be the case- the fact that the winners win more than the losers lose means that the winners could compensate the losers and create a situation where everyone is better off. BUT…this doesn’t happen automatically, and the transfer probably introduces its own inefficiency. Overall, thankfully, the distribution of gains and losses isn’t likely an unsolvable problem that makes “to hell with trade” the right answer. Yes, I recognize the hyperbole, so let me try again- the distribution of gains and losses isn’t likely an unsolvable problem that makes “institute trade restrictions so that potentially displaced workers are essentially receiving consumer-financed work-based welfare.” (I know how much everyone loves the “w” word.) Yes, it requires creativity to think about what form the redistribution (I know you love that word too) should take- job training? (hasn’t had spectacular results) Enhanced unemployment? (how do you determine whether a layoff was trade based?) It may be an intellectual challenge (especially since a solution has to involve preserving the perceived dignity of displaced workers and such), but this is a worthwhile thought exercise and a conversation that we should be having.
Mankiw’s article points out that opposition to trade isn’t simply the result of losing parties objecting to lack of compensation, but it’s hard to believe that this consideration doesn’t play a role in some fashion. I also think that people often equate foreign producers producing cheaply as “cheating,” and behavioral economists know that people have a tendency to sacrifice their own well being in order to punish parties that they think are behaving unfairly. (see, for example, the ultimatum game) In the context of trade, this tendency results in giving up some economic value in order to prevent low-cost foreign producers from benefiting, and this is achieved by restricting trade. Lastly, many people seem to view the trade outcome as “regulation” rather than the other way around, perhaps because explicit free trade agreements frame, well, unfree trade as the default option. This doesn’t exactly garner support for free trade when people don’t like to feel like they are being regulated.
tl;dr: “Screw you, worker” and “let’s shoot ourselves in the foot so this guy gets to do a particular job” don’t have to be the only two options on the hypothetical policy table.
FAQ: But what about exports? Easy- just switch the outcomes of consumers and producers in the above discussion, as in “producers win more than consumers lose”.