Trade and prices: an attempted summary

Can we all agree on these?

1. Trade policy works through its effect on the relative prices of goods, not through the price level.
2. Depending on what side of the change in relative prices they find themselves, any specific group of consumers or producers can be made worse off by a move to free trade.
3. A corollary: there is no guarantee that free trade raises real wages.
4. The Carlos Diaz-Alejandro rule: For almost any particular conclusion you want to arrive at, there is some economic model that will take you there.
5. Throw in some scale economies (dynamic or otherwise), and then just about anything can happen (including free trade making some countries worse off).
6. The positive spin: This does not diminish the value of economic modeling; it simply means we have to be more careful with generalizations and be more explicit about the assumptions that lie behind our reasoning.
7. Bottom line: It is possible to have an illuminating (sometimes), intelligent (mostly), and entertaining (almost always) economic debate in the blogosphere.

Comments

[radek]

I've heard 4 before stated as:
"For any policy prescription there is SOME model of optimizing behavior which justfies it" and referred to as The Summers Meta Theorem.

[bill]

On the last point -- that's why your arrival at the blogosphere is such a great thing. Thank you dr Rodrik

[Michael Greinecker]

"Throw in some scale economies (dynamic or otherwise), and then just about anything can happen (including free trade making some countries worse off)."

While literally true, it kinda implies that free trade cannot make some countries worse off without scale economies. This depends on the social welfare function and the possibilities of redistribution.

[Stephen Gordon]

Doesn't freer trade have pretty much the same effect on the macroeconomy as technical change? So why not interpret the effects of freer trade as we would a positive supply shock (complete with an analysis of the winners and losers)?

[Michael Greinecker]

That´s true, but with scale economies you can also get in technological lock-in, being on the wrong path.

And technological transfer can work like negative supply shock, as Samuelson eloquently argued in "Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization".

Btw: How can one link in comments here?

[jim casey]

What about the environment? The discussion of relative prices is important, but what if those prices do not reflect the true costs of production and consumption?

[DM]

Let us say an new barber moves into my neighborhood. He offers the same quality service as my old barber, but is cheaper. So I use the new barber.

A factory in China can make the the same socks, but for less than a factory in North Carolina. So I decide to buy my socks from China.

Why is it that Dani wants interfere with my sock purchases, but not where I get my haircut? You can tell the same negative externality story for both the barber and the North Carolina sock maker.

Consider these other negative externalities created by free choice:

Foreign professors at Harvard create negative externalities for Americans who want to work there.

Foreign students create negative externalities by taking spots that could have gone to Americans.

My purchase of a book from Amazon.com and not my local bookstore created a negative externality in my home town.

I choose to take a ski trip in Colorado instead of Vermont. This created a negative externality in New England.

[Cassandra]

Mr Mclean - What about the vast and complex web of dependancies inherent in every step of purchasing and manufacturing? An admittedly unscientific, but intuitive examination exposes that there is far more interconnectedness amongst us, and our economic relations with out neighbors, and that so long as nation-states exist, and communities are tied by things other than geography, the complete impact of our actions (environmental and social externalities aside) are felt long after and by far more people , than the objection you raise of "why someone would want to interfere with my purchasing decision".

There is perhaps an immediate and overt welfare loss to you if you pay a few pennies for your Shanghai booties vs. Burlington , NC-print booties. But to what extent does that come back to YOU, as the fiber-suppliers, and their shippers, the textile machinery mfgs, their agents, and the textile machinery mechanics, and their machinery company's subcontractors, the dyer-seller, and their supply-chain web,the NC factory employees, the NC mfgrs insurance co. and their bank, and the local catering businesses, co, as well as that of all the employees, and all the consumables used by everyone in the web, and at the end of it, yes maybe its just a pair of socks, but might the resultant economic cascade that is captured locally, regionally, nationally, feedback virtuously to oil THIS geographically local web, rather than "outsourcing it" abroad, and donating the entire web to China?

And there is (or should be) a rational hierarchial preference, where it may not matter who "owns" the enterprise , or the national origin of the professor, but it matters whether and how the dependancy web is fed in the local economy. For America, it IS objectively better to have a Toyota plant in Tennessee than import the fullly assembled cars from Aichi. And its even better if the supply chain manufactures local. And even better still if engineering, design , marketing and finance are local. The richer and more localized this web across a variety of dimensions, the healthier and more virtuous the feedback loop across many sectors of the large economy. And then there are the externalities that cut across many dimensions as well.

Yes, maybe it's a just a pair of socks, but being presumptuous, I don't think Dani wants to interfere as much as highlight that what goes around comes around...

[DM]

Cassandra,

Thanks to trade with China, I spent less last year on socks, so I took my savings and I went out to dinner in Boston. The web of losses that you describe in NC are offset by a web of gains in Boston. Restrict trade, and I pay more for my socks, do not eat dinner in Boston, and the web of losses you described in NC happens in Boston.

I am better off because I have the socks and dinner, whereas if we did not trade I would only have the socks.

I can also apply your argument to my ski trip. I went to Colorado, so New England ski resorts and their supply chains suffered.

I moved from Boston to New York. Evil me! Now the grocery stores, restaurants, barber, dentist, landscaper, etc. in Boston that I use to do business with have suffered, as will everyone that they do business with, and who they do business, with and so on.