Thursday, August 25, 2016

In this Econtalk podcast, Russ Roberts interviews David Autor on the impact of trade with China on US workers. The interview discusses Dr. Autor's research showing that there are distributional consequences of trade with China.
It is important to stress that Dr. Autor supports free trade for the reasons we will discuss in the opening weeks of the class: it improves allocation of resources, it improves competition, it improves innovation, and so on.
The basic idea that these gains from trade are based upon is comparative advantage. For example, New England Patriots head coach Bill Belichik majored in economics, but his ability to coach football far exceeds his advantages in analyzing economic issues (and in fact he has applied economics to his coaching philosophy!).
Trade clearly creates winners and losers in the short run. Russ Roberts argues that even though some people lose in the short run, many people (even the losers) would take that trade because trade also leads to competition and innovation and growth that makes everyone better off in the long run (even if some groups might be relatively worse off). Autor Challenges this claim by arguing - and supporting with data - the view that trade has had dramatic long-run consequences. Importantly, he has shown that some groups have not only lost in the long run in relative terms, but also in absolute terms.
A policy implication of this is that when we look at things like trade adjustment assistance it might be the case that it would be unwise to make this assistance "temporary." More permanent wage subsidies may be more necessary to maintain the political feasibility of free trade. Whether taxpayers will foot the bill is an open question.

The Gains from Trade to Britain

The article, "Collateral Damage," from the Economist, reinforces the argument that the gains from trade are large to Britain, overall. A summary of the empirical evidence by Nick Crafts pegs the growth effects of the UK's membership in the EU estimates the growth effects of membership in the range of 8-10 percent. Importantly, these growth effects almost completely ignore the gains to consumers.
The article from the Economist also reinforces the flip side to trade, which is that the gains from trade are very unevenly distributed, and even leads to some regions, sectors, firms, and individuals losing out from trade. Most research supports the claim that employment and wages have suffered for manufacturing workers in the UK. Moreover, there have been impacts to mental health, and the UK has not done well to mitigate the effects of globalization through trade adjustment assistance. 
We will discuss in class how under certain "fairly reasonable" assumptions, free trade will lead to greater aggregate welfare than the alternative of highly restricted trade or autarky. However, the standard trade model we will start with, and even the Ricardian model we will continue with in Chapter 2 of the textbook, may mask the distributional consequences of trade. In Chapter 3 we will see some of the distributional consequences of trade in the short run with the "specific factors" model, and we will see how some of these consequences may persist in the long run with the Heckscher-Ohlin model in Chapter 4.