Notes on trade and globalization

I’ve been trying to revisit the arguments and evidence for global trade and trade liberalization recently. I want to post a few links so I don’t lose track of them.

Overall, I came away suspecting that the pro-trade side, which I’ve been sympathetic toward, is a bit overconfident relative to the evidence. But also that the anti-trade or trade-skeptical side has even less evidence to back it up. More liberal trade policies do seem, on net, economically positive — but with a lot of uncertainty around just how positive and when they might be less and more so. And, all things considered, trade seems slightly second-tier, behind say technology and good policy and political institutions and public health as a driver of prosperity. Plus, as left-leaning trade proponents have said forever, it’s incumbent on policymakers to put in place the complementary policies that make trade as positive for people as it can be.

That’s the TLDR. Here are some notes:

What are the arguments for trade?

I’m sticking just to the economic arguments here. Raghuram Rajan has a one paragraph summary in a recent Foreign Affairs piece that’s worth quoting (speaking in reverse about the losses from deglobalization):

“Deglobalization has many costs, some of which are already evident. They include the higher cost of goods and services as production no longer takes place in the most efficient locations, the loss of scale economies as production becomes fragmented, the increase in the power of domestic oligopolies as global competition is restrained, the decline of learning by doing as multinational corporations no longer spread best practices, and the rise in inflationary pressures as local supply-demand imbalances are no longer tempered by a global market.”

This paper runs through a very similar list: There is the traditional argument of comparative advantage, but also returns to scale, increased competition, more learning and therefore innovation, and more product variety.

How much does the US gain from trade?

There’s really not a satisfying answer. This paper tries to provide one but it’s powered by some very heroic theoretical assumptions about willingness to pay and elasticity. Basically, gains from trade are driven by how much you trade, and how easily you could find substitutes if that trade stopped. Fair enough, but a pretty simplified story. Nonetheless, the upshot: “Our analysis points towards welfare gains from trade ranging from 2 to 8 percent of GDP.” That’s meaningful! But it’s not everything, and it’s coming from the fairly trade-friendly assumptions of mainstream economics.

What about micro evidence?

If the estimate above didn’t do much to convince me, what about more traditional microeconomic evidence? For this, I read Our World In Data’s briefing on the subject which summarizes several papers but I did not read the papers myself. With that said, this type of evidence I find more convincing: It’s looking directly at the data on trade and trying to use econometrics to find plausibly causal relationships. Their upshot:

 “On the whole, the available evidence suggests trade liberalization does improve economic efficiency. This evidence comes from different political and economic contexts, and includes both micro and macro measures of efficiency.”

What about the China shock?

A lot of attention has been paid to a series of papers by David Autor and colleagues on the “China Shock” — basically the rapid increase of trade between the US and China. Those papers find concentrated job losses in a number of regions of the US. The Our World In Data briefing summarizes those papers, too.

But researchers at CSIS recently published a literature review of the various papers on the China shock, and I commissioned a shorter writeup for HBR. Here is their ultimate conclusion after comparing Autor’s results with two other research groups looking at similar questions with slightly different datasets:

So, what does a broader review of the data from multiple studies show? Scholars generally find that prior to 2010, imports from China negatively affected manufacturing jobs in the U.S. However, there are mixed findings on the net effect on the economy, the final balance of jobs lost in manufacturing, and the growth in service sector jobs. There is also no evidence of trade with China having a significant negative effect on jobs after 2010 — the job loss in manufacturing documented in the early 2000s due to trade with China is not continuing today. There is one other result that all scholars seem to agree on: better-educated, more economically diverse regions of the United States were affected far less by the surge in imports from China.

So very real job losses in some regions, but no clear evidence of net job loss for the US much less a net loss to the economy overall.

The Autor China Shock papers did overturn conventional wisdom — just not about the aggregate effects of trade. As his co-author Gordon Hanson writes in a different Foreign Affairs piece:

Our findings went against cherished economic frameworks, which predict that workers in struggling communities migrate in search of employment elsewhere and that new industries expand into downtrodden areas to take advantage of an idle labor pool. Neither type of recovery materialized. Overall, relatively small percentages of people left their communities, and businesses didn’t expand enough to absorb workers who had earlier lost their jobs. Economists still can’t explain why workers did not abandon regions in decline, but relationships may play a role. Moving can mean separating from family members, who care for children, provide support when times are tough, and offer a comforting social network.

The shock to conventional wisdom was how long-lasting and geographically concentrated the costs of trade were.

The upshot

As I said, I take all of this to be sort of a mixed bag for the conventional wisdom on trade. On the one hand, it really seems like we don’t totally know exactly how and how much the US economy has been affected by trade. I doubt we understand the variety of circumstances under which those effects could be larger or smaller. Caution is therefore in order. And the estimates of trade’s benefits to the US, such as they are, are large but not staggering. They’re a big deal but they’re not the thing that explains our overall level of prosperity at least according to the estimate I cited.

On the other hand… The arguments that trade helps an economy grow do make a lot of sense and do have considerable evidence behind them. At least on the economic merits it’s hard for me to come away from this review feeling skeptical about trade, except in the broader “It’s hard to know stuff for sure” sense of generic humility. Even the China shock, as persistently bad as it seems to have been for some parts of the country, was a very mixed bag that helped lots of people and probably grew the US economy somewhat.

The case for trade therefore seems fairly solid, provided it’s kept in perspective and made with some humility. And — as we’ve known forever — the public policy that surrounds it really matters. There’s a lot the government can do to make things better or worse.

Leave a comment

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s