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.   

Comments

[robertdfeinman]

One thing that seems to be overlooked in trade discussions is what happens to the labor force when production priorities change.

As manufacturing has left the US there has been a drop in the skills needed by these industries. These skills have moved to where the jobs are. Students shift their course choices to reflect job prospects. So not only don't we make "stuff" any more we don't even know how to make it.

This works both ways. If you are trained as a doctor in a third world country, but want to work on research you have to move. This causes a brain drain which just makes things worse.

The US has now a large focus on training people in finance and law. Those in engineering and the physical sciences are more likely to be involved in work related to militarism rather than in basic research.

Biological research is more likely to be motivated by producing new drugs than by studying fundamental processes.

The US has not only lost much of its non-military manufacturing, but much of its basic research as well. I don't think the slack has been taken up elsewhere.

How do you model the change in priorities as an opportunity cost when discussing the benefits and costs of trade?

It's hard to put a price on the invention that didn't happen because the bright guy devoted his energies to creating new financial instruments instead.

[pat toche]

Very interesting post, thanks.

Please let's emphasize that whatever is true of the pains of trade is true of anything that causes relocations and reorganization in the workplace, such as the invention of computers or the "tertiarization" of society.

So why should we emphasize trade?

In fact, just about anything that improves the lot of some deteriorates the relative lot of others, which could be put right by some redistributive scheme or some protectionary measure.

As Romer put it, "everybody wants growth but nobody wants change". (I'm quoting from memory here)

I vote for growth, I vote for change, I vote for free trade! I also vote for progressivity, but certainly not specifically because of "globalization".

[Kenneth]

I've always been curious about the claim that for non-supervisory workers, benefits have been rising faster than wages. How does that square with the fact that fewer companies provide health insurance and pension programs than did companies in, say, the 1980s? And of those that still provide them, they have deteriorated through higher employee contributions (health insurance) and the shift from defined benefit to defined contribution plans. Just what benefits are increasing for these workers?

[Barry]

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

Are you actually ignorant of the reasons *why* a lot of these activities *shut down* in the USA? And why this process continues?

[wjd123]

It seems to me that free trade has caused more displacement than the economic profession allow for. When economist say things such as much of the displacement has already happened how can they be sure? How can they know what will happen if they don't know what is happening?

For instance, it's been a maxim of conventional wisdom that the more you can spread around risk the safer financial markets are. However the recent mortgage crisis and credit crunch has shown that this is not true. When the financial markets are allowed to slice and dice housing loans and create special entities that are contaminated with worthless paper and sold around the world it can lead to a financial pandemic.

This is hardly a situation where spreading risk caused greater financial stability. Without centers for disease control, read, regulating institutions, what we end up is chaos. Already the EU is looking at the damage done to its investors, and financial institutions by lax U.S. financial regulations. For instance, if our rating agencies can't be trusted then how good is any of our financial paper.

How much displacement will workers who own pension funds infected by septic financial paper suffer? We have a dysfunctional system of free trade that preys on the powerless and the ignorant. And the very financial institutions that spread infection around the world are fighting to see that no disease control centers are built. They would rather stay behind the walls built by their apologists while their enemies grow in number.

Lead in the toys our children play with, infection in the financial instruments investors buy, there is no way of knowing where the next danger lies without a free trade system subject to international regulations. Without them free trade is nothing but the next disaster waiting to happen. Displacement numbers are just the most recent snap shot of continuing bad news.

[tp]

"For instance, it's been a maxim of conventional wisdom that the more you can spread around risk the safer financial markets are. However the recent mortgage crisis and credit crunch has shown that this is not true"

This makes no sense in light of the idea that the mortgage crisis and credit crunch are a result of the fact that the complex instruments we developed DIDN'T spread risk effectively... What follows from the premise is thus basically irrelevant to any intellectually honest debate

[wjd123]

tp,

It's only irrelevant, if you want to beg the question. It was said that these entities spread risk by widening ownership and this made for a more secure financial market. My argument is, that this didn't happen and therefore the conventional wisdom was wrong. You are arguing that these entities didn't spread risk effectively therefore they can't be counted against the conventional wisdom. Does that mean that every bit of evidence I present that the conventional wisdom was wrong can't be used if it doesn't support the conventional wisdom. What?

[Per Kurowski]

“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”

Great stuff, for small town isolationists and that completely manages to ignore the long term consequences of isolation… let our grandchildren worry about that!

The paper says that “while integration is indeed “win-win” in between countries, it is pitilessly “win-lose” in terms of individual outcomes within countries” but it does so without showing how much is the "win" so that we can compare with their quite detailed "lose".

The world is getting to be a small town and at the end of the day we must never forget that we are all indigenous to this planet earth… no matter how much we want to call some people alien.

[Dominic]

Barry,

I think the point Danny was making is exactly the point your trying to make. You should re-read the post. The point is that trade (or as Pat Toche pointed out, anything which changes the optimal production function) is experienced as a cost to people embodying the skills which aren't cost effective (or at least not in a location which suits that person). The point was that trade has largely been liberalised already, so most of the redistribution has already happened. So no, Danni is not ignorant of why. His whole post is about why.

WJD, to answer your rhetorical question, this means that you can't use evidence to show the conventional wisdom was wrong if your evidence actually points to something else. What you've done (if we accept tp's comment that risk infact wasn't spread around) is known as a straw man argument.

[Dominic]

Danni,

So how do you teach trade in your class? Do you begin with the standard 2x2 and then talk about all the problems, or do you take a standard approach and begin with the 2x2 HOV then talk about Rybczynski (sp?) then Stolper-Samuelson etc?

A second question. What actually happens to all these employees? Clearly they find jobs again or unemployment rate in all developed countries who have liberalised trade over the past few decades would by sky high. I suppose they just accept (grudgingly and noisily) lower real wages?

We don't seem to have so much of this problem at the moment in Australia. Probably because we never had a major manufacturing industry. Our primary industry has actually enjoyed a major boom thanks to free trade, especially with China. I guess this is partly because you can't outsource mining jobs if the ore is stuck in your own country. And maybe partly because free trade seems to have increased the price of primary sector output by expanding global manufacturing productivity (higher factor demand).

In any case, it seems the best defence against low wage growth for unskilled labor in developed countries is make sure your workforce is as educated as possible.

[wjd123]

"WJD, to answer your rhetorical question, this means that you can't use evidence to show the conventional wisdom was wrong if your evidence actually points to something else. What you've done (if we accept tp's comment that risk infact wasn't spread around) is known as a straw man argument."

Barry and tp,

I see what you mean. So I'll change my conclusion to globalization doesn't spread risk around as the conventional wisdom predicted therefore it makes global finance less stable.

My apology to tp, and the rest of my argument stands as is with the provision that globalization adds to risk.

[wjd123]

That should be Dominic and tp.

[paine]

god bless those willing
to descend to computable
ge
models
even in toy form

this is of course a bivens miracle mirge

where ricardo meets HO

since the factors are pure
labor
no rents on scarce resources enter as incomes (true at the margin they don't
but howz bought
the infra margin ...eh ??)
lets wave that off however

there's still a magic trick
and like most
good magic tricks
the fool-em-ship
occurs
right up front
at the outset
(even once we burst
the barter barrier here
and assign
accounting prices to these products )
we have only two bins to collect
added exchange value in

non skilled and skilled
labor
why ??
cause this is comp statics

THERE ARE NO PROFITS OF ENTERPRISE

whereas the real game is
labor vs capital
and all about dynamic opportunity
and profits of enterprise

that never end because
innovation keeps em going

capital per se is the ghost in the machine here
and
i don't mean
in the real machines either
which in the long run
are made valuable
only by the marginal labor in their production

oh well
social philosophy might find this important
and class politics
but not econ cons
driven by
use of their logical toys
to obfuscate the obvious

trade across borders
is all about gains catured by the corporations

NOT PASSED ON TO
THE FINAL CONSUMERS
IN LOWER PRICES
OR TO THE ACTUAL PRODUCERS
IN HIGHER WAGES

SKILLED OR UNSKILLED

smart folks like bivens and baker
are diverting the struggle
from all producers
on either side of the trade lines
against all the corporate cross border arbitrageurs

[dale]

Biven's former boss, Jeff Faux, did "frame" the issue as Global Class War Paine. And as much as I respect and use Dean Baker's work- I do find his dialectic of winners and losers being production workering class vrs professional class to be short sighted as to the larger struggles that shall not be named.

[paine]

dale

you're right
faux made such noises

but to seem respectible
biv here takes the dean taunt route

calling our present system
a patch work of phoney rigs

open trade
for non skilled based products and imigros
and closed trade
and doors
for doctors and much else
on the human commodity markets
the nistake is to compare apples to apples

we need to unite all apples against the dynamic
border jumping
clepto incs

[mik]

"The world is getting to be a small town and at the end of the day we must never forget that we are all indigenous to this planet earth…"

I'm confused, is this an economics argument or a religious one?

You are a Free Trade and Global Warming Religion believer and that must be your best economics argument.

[Thomas]

I have always been struck (and somewhat puzzled) by the disjuncture between political economists (especially in political science) who emphasize the distributional consequences of the 2x2 model and trade economists who do not. It is good to see more economists paying greater attention to the distributional consequences of trade, even if they do disagree about their magnitude.

[David Johnston]

In literal thinking, Trade is one of the most important factors to promote a certain product or to develop a certain country. Trade exists for many reasons. According to some research, due to specialization and division of labor, most people concentrate on a small aspect of production, trading for other products. Trade exists between regions because different regions have a comparative advantage in the production of some tradable product or goods, or because different regions size allows for the benefits of mass production. As such, trade at market prices between locations benefits both locations. This is how important trade is.

[rado watches]

Why is everyone just montblanc watches willing to accept power cuts? Don't you think that patek philippe watches having continious power is your right? If people aren't going to demand rado watches 24X7 power, don't expect anything zenith watches to change. The government needs to look at other sources parmigiani watches of power generation. The only solution is more power panerai watches production. Nothing less.
http://www.watchvisa.com/montblanc-watches.html
http://www.watchvisa.com/patek_philippe-watches.html
http://www.watchvisa.com/rado-watches.html

[rolex watches]

People usually say :"Seeing is believing." http://www.tt88times.com
Each attempt has a corresponding gain, in part or obvious, or vague. At least we have the kind of satisfaction After I bought this watch ,in a sense,it means a great deal to me. http://www.fashionhairfu.com

[Nike Air Jordan]

The good news, thank you!

[louis vuitton]

I'm sure there are others. There is of course an extensive literature, but this requires you to search and read detailed articles, whereas I assume you're thinking of a blog format.
http://www.louisvuitton4love.com/louis-vuitton-galliera-pm-n55215-p-396.html
http://www.louisvuitton4love.com/
http://www.toplvstore.com/
8989

[louis vuitton]

I'm sure there are others. There is of course an extensive literature, but this requires you to search and read detailed articles, whereas I assume you're thinking of a blog format.
http://www.louisvuitton4love.com/louis-vuitton-galliera-pm-n55215-p-396.html
http://www.louisvuitton4love.com/
http://www.toplvstore.com/

775

[Account Deleted]

raf

Thanks a lot for article.

[Account Deleted]

celikraf
celikraf

Thanks ... I like it ;)

[Account Deleted]

Raf
raf

Thanks to you ...

[Account Deleted]

Many places and centers offer business and trade promotions to both buyers and supplier.What about the differences in skill intensities across industries? The job losses in the relatively unskilled-labor intensive battery industry should have little effect on the relatively skilled-labor intensive machinery
sexshop
sexyshop
sexshop online

[Account Deleted]

Amazing!I also wish him good luck to defend his gold medal. I like to share it with all my friends and hope they will also encourage him.

organic seo service