Paul Krugman on The "Trouble With Trade"

Paul Krugman has not had much to say about trade (that I've seen) in his op-ed columns, but today he writes:

For the world economy as a whole — and especially for poorer nations — growing trade between high-wage and low-wage countries is a very good thing. Above all, it offers backward economies their best hope of moving up the income ladder.

But for American workers the story is much less positive. In fact, it’s hard to avoid the conclusion that growing U.S. trade with third world countries reduces the real wages of many and perhaps most workers in this country. And that reality makes the politics of trade very difficult.

...

So am I arguing for protectionism? No. Those who think that globalization is always and everywhere a bad thing are wrong. On the contrary, keeping world markets relatively open is crucial to the hopes of billions of people.

But I am arguing for an end to the finger-wagging, the accusation either of not understanding economics or of kowtowing to special interests that tends to be the editorial response to politicians who express skepticism about the benefits of free-trade agreements.

It’s often claimed that limits on trade benefit only a small number of Americans, while hurting the vast majority. That’s still true of things like the import quota on sugar. But when it comes to manufactured goods, it’s at least arguable that the reverse is true. The highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose.

As I said, I’m not a protectionist. For the sake of the world as a whole, I hope that we respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net. But those who are worried about trade have a point, and deserve some respect.

To some extent, it doesn't seem like he's saying anything new here, but rather just stating the obvious.  It is clear that imports do not help everyone, as they hurt those in import-competing industries.  The argument for free trade is not that everyone benefits, but rather that the benefits to consumers outweigh the harms to these workers.

But perhaps he does go further when he says:  "when it comes to manufactured goods ... [t]he highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose."  This strikes me as misleading.  Everyone benefits from low-priced imports, not just "highly educated workers."  In fact, this group probably benefits the least.  Rich people don't notice lower prices very much because this is such a small percentage of their income, whereas poor people find lower prices much more beneficial, allowing them to buy things they might not otherwise have been able to.  Elsewhere in the article he criticizes lower prices at Wal-Mart as insufficient compensation, but it seems to me he is underestimating these benefits.

Also, his distinction between the sugar quota and manufactured goods strikes me as odd.  It's not as though "manufactured goods" are subject to a uniform tariff.  Rather, there are hundreds of tariff lines, each with a different tariff.  If the sugar quota is bad, why is a high tariff on a particular manufactured good any less bad?

It's hard to delve fully into this issue without some detailed statistics, but I thought I'd offer some general thoughts anyway.

Oh, and one more thing.  Keeping out imports from poor countries can't be very good for those countries!

ADDED:  When Paul Krugman talks, people listen.  Some reactions from the blogosphere: Dani Rodrik, Greg Mankiw, Angry Bear, Don Boudreaux, the Economist's Free Exchange blog, Tyler Cowen.

Comments

[Sungjoon Cho]

Simon, many thanks for an excellent post. This is something we should teach in the first trade law class. Trade cannot bring everyone involved a plus (no Pareto optimality): it just increases the pie (Kaldor-Hicks efficiency), which means there are painful churning effect (dislocations etc.) I agree with you that some of his comments might be misleading. He seemed to have highlighted the "pain" side (producer side) of consequences of trade, which has been very salient in the American politics. This I-feel-your-pain posture seems to have eclipsed the "gain" side of the story (consumer side). I believe the U.S. should reform the health care and the pension system to ease the pain from trade, which seems the most painful to politicians. I know the world is not perfect. We academics are tempted to suggest solving the problem by shifting the huge sugar/corn subsidies to the social safety net. That might help revive the Doha round. I know this may sound like a fantasy...

[Bryan Mercurio]

Excellent posting, and the additional commentary on other blogs amusing.

I wonder if the developing country workers are sheding a tear for all the high school educated working class in the US work by trade who can only afford a five bedroom home with a three car garage and 180 stations on satelite TV.

[Bryan Mercurio]

Excellent posting, and the additional commentary on other blogs is rather amusing.

I wonder if the developing country workers are sheding a tear for all the high school educated working class in the US (presumably affected by trade) who can only afford a five bedroom home with a three car garage and 180 stations on satelite TV.

[Simon Lester]

What I've never understood is why the "pain from trade" gets treated any differently from other kinds of economic dislocations. Clearly, there are people who lose their jobs as the result of trade liberalization. But there are also people who lose jobs for lots of other reasons (and probably more of these than people who lose their jobs as a result of trade). Why do we need a special category of assistance for trade-related losses? It seems to me that, in part, it is simple nativism. If "foreigners" are the cause, it is perceived as unfair and unjust. There is much less outrage when it is due to, for example, technological change or changes in consumer preferences.

[Sungjoon Cho]

A good point. The same story goes with the antidumping remedy. If a domestic producer undersells another domestic producer, that is competition, which is fair (unless there is a predatory intent). But, if a "foreign" producer undersells a domestic rival, that may be "unfair" (dumping). Yes, all (trade) politicis is local.

[Bryan Mercurio]

Aren't all politics local?

Seriously, a vast amount of literature exists which shows that technoligical change and non-trade issues far exceed trade or foreign competition as reasons for displacing workers.

Of course, some people lose from trade (i.e. they lose their job when the plant closes...but as I pointed out, they may only have a job because of trade and have won from trade up to the point of losing their job) but most of those who rail against the job losses and trade leave it implicit that with protection (to keep the jobs) the remaining citizens will be the ones paying for the inefficient jobs/plant. There was some good literature in the 1990s which concluded that every Australian paid approximately 25% more per car due to protectionist policies which saved a few hundred jobs. These clearly inefficient statistics in part led to changes. If more black and white numbers and examples were made public and picked up by the wider media, then perhaps there would not be so much hype when jobs are lost due to overseas relocation (or competition)...but not in an election year.

[Sungjoon Cho]

Great points, Bryan. Economists call such 25% as the "protectionist tax." Millions of U.S. consumers are also paying the same protectionist taxes over foreign clothes, sugars, and other amenities. Your last point is also important. Anne Krueger, a pre-eminent economist and the former IMF official, once said that if U.S. citizens had voted over direct gains and losses of free trade, the U.S. trade policy would have been different. We cannot overemphasize the importance of "social marketing" on free trade, especially considering that people's perception on gains/pains from trade liberalization is subject to cognitive distortions (which social psychologists have studied).

[4eqt]

Excellent posting, and the additional commentary on other blogs amusing.

I wonder if the developing country workers are sheding a tear for all the high school educated working class in the US work by trade who can only afford a five bedroom home with a three car garage and 180 stations on satelite TV.

very good comment thanks Sungjoon Cho