Conventional wisdom on trade isn’t that bad

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I rarely defend the New York Times, but it’s Christmas Day, so I’ll give them the gift of defending their editorial on trade and prosperity from some of Dani Rodrik’s criticisms.

In brief, the NYT writes:

It would be unfortunate for the United States if the winner of the 2008 election elevated skepticism toward trade from a red-meat sound bite on the campaign trail to a new wave of protectionist policy.

Many Americans are experiencing economic anxiety. Wages for most workers are going nowhere. It is a sad fact that despite enormous gains in productivity over the past few decades, the wages of typical workers are only marginally higher than they were a quarter of a century ago. But throttling trade — say, by reconsidering existing agreements — would hurt a lot more people than it helped. There is scant evidence that trade has played a big role in holding down typical workers’ wages. There is abundant evidence that it has contributed substantially to America’s overall economic growth…

Trade, like technological change, can produce wrenching dislocations that hurt some workers. But trade barriers are not the proper tool to deal with these changes.

Professor Rodrik is dissatisfied. He writes:

[They claim] “There is abundant evidence that it has contributed substantially to America’s overall economic growth,” ignoring what every student of trade learns, which is that large gains from trade are possible only of [sic] there are also large amounts of income redistribution.

If I understand him correctly, then this claim is too strong. While it may be true in the baseline Heckscher-Ohlin model that we frequently use to think about trade, it does not hold generally. Models with a single factor of production (Ricardo 1817, Krugman 1979, Melitz 2003) demonstrate sources of gains from trade (technological comparative advantage, economies of scale, productivity selection effects) that cannot depend on income redistribution, as there is only one factor. And Bernard, Redding & Schott’s modern version of the 2x2x2 model shows that improvements in aggregate productivity triggered by liberalization can cause the scarce factor’s real wage to rise. We need not confine ourselves to the results of one popular model.

Moreover, as Bhagwati & Srinivasan remind us (pdf),

But, even in that model, complete specialization will lead to the possibility that real wages improve even if the price of labour-intensive goods falls. This is a possibility that is in fact very real since many labour-intensive goods are no longer produced in the rich countries.

So the NYT‘s claim that globalization produces gains from trade without significantly depressing wages is more plausible than Professor Rodrik implies.

Rodrik also complains that the NYT‘s argument is wrong because

It automatically equates any desire to reconsider trade agreements and take a breather on new agreements as “protectionist.”

I think it’s fair to say that most voters attracted to Democratic promises of re-opening trade agreements to add minimum labor standards are interested in protection for labor’s wages in the United States, not a step towards a well-coordinated global regulatory framework. And opposition to the Doha round based on income distribution concerns, rather than the fear that liberalizing too fast will produce a backlash that undermines free trade, is protectionist — it identifies protection as desirable due to its income distribution effects. This is an economically valid argument, but the “protectionist” label is a dirty word because economists have spent centuries explaining that trade protection usually decreases aggregate income and is a crude redistributive mechanism — so crude that we are surprised by its use (Rodrik 1995). There is at least some merit to this very conventional message.

Of course, the other criticisms raised by Rodrik are largely valid, and his caveats are worth mentioning. But I find it a bit harsh to say the “NYT doesn’t get it on trade.”

Along these lines, Dean Baker is more sympathetic to the NYT, though he wishes that they’d attack protectionism in professional services and patents rather than unskilled manufacturing.

Finally, read this interesting and well-researched article in Macleans for insights into the feasibility of reopening old trade agreements and the gap between Hillary Clinton’s campaign rhetoric and policy proposals. It’s the best take on Democrats and trade I’ve read recently.

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2 Responses to “Conventional wisdom on trade isn’t that bad”

  1. trade Says:

    Conventional wisdom on trade isn't that bad

    Nice, bookmarked it!

  2. The Custom-House Says:

    Where Senator Clinton Stands on Trade

    Luiza Savage takes a careful look at Clinton’s campaign rhetoric on trade: Where do the Democratic contenders really stand on NAFTA? (McLeans.ca, Dec 6).

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