Trade (usually) has winners and losers


There’s a discussion of international trade at Martin Wolf’s forum.

Larry Summers writes:

The normal argument is that a more rapidly growing global economy benefits workers and companies in an individual country by expanding the market for exports. This is a valid consideration. But it is also true that the success of other countries, and greater global integration, places more competitive pressure on an individual economy. Workers are likely disproportionately to bear the brunt of this pressure.

Lawrence Marsh writes:

We all seem to have forgotten basic economics in general and international trade theory in particular. What happen to the issue of the efficient allocation of resources? Since when do tariffs, trade restrictions and other methods of distorting prices help increase the welfare of society?

Free trade brings in more competition forcing businesses to improve their productivity and efficiency and to lower prices…

Since everyone is a consumer, everyone benefits from lower prices.

Tim Worstall attempts a summary:

I should of course approach the debates amongst those greatly better versed than I in the subject under discussion, the economics of trade and globalisation, with a certain humility… So, without that necessary timidity, here goes…

They’re talking past each other. Summers is putting the American political case for the support of further globalisation. Within the limits of American politics he may well be correct. Marsh is making a very different case: not having been in the political system (Summers was Treasury Secretary under Clinton), only the academic, his view of the matter is more straightforward. We’re economists and this is what economics has to say about trade. As far as I’m aware, what he says is correct too.

Not quite. Why would Larry Summers write a column that merely capitulated to protectionist sentiments contrary to economic insight?

They’re talking past each other because they have different models of international trade in mind. Larry Summers is alluding to a Heckscher-Ohlin-Viner type of model with multiple factor inputs, while Marsh’s story about price competition looks more like an oligopolistic model of trade.

In Summers’ world, the claim that “since everyone is a consumer, everyone benefits from lower prices” is flat out wrong — trade changes relative prices, and in the n &times n HOV model, Stolper-Samuelson holds for at least one factor!

What does Marsh have in mind? In a basic model of oligopolistic competition, à la Brander (1981), there is only one factor of production, so distributional concerns (other than firms vs consumers) don’t apply. Moreover, it’s partial equilibrium, so you can’t really say much about welfare. If Marsh’s story relies on an oligopolistic general equilibrium model of trade, then it’s a long way from “basic economics.”

Most trade produces winners and losers. Not always, but that’s how Paul Krugman would summarize econ 101. That’s why most economists will back Larry Summers over Lawrence Marsh. Sorry, Tim.

[Of course, there can be stories without losers: Krugman (1979) features monopolistic competition, so that moving from trade to autarky simply doubles the size of the economy, leaving all firms the same and improving consumer welfare via gains from variety.]