Arguing for Free Trade in a Post-Trump World

Anti-trade and anti-globalization positions helped elect Donald Trump, and economists’ traditional arguments for free trade are being ignored. In fairness to the anti-traders, the outcomes of extended trade (especially with China) have left many workers in manufacturing worse off.

In teaching about the gains from trade, how do we get students to understand the benefits of trade, while addressed the undesirable outcomes for many affected players? Noah Smith had an exceptional article for Bloomberge Views early in 2016 (“Economists Love Free Trade: Except That They Don’t“) that beautifully summarizes the pro and con argument, drawing on the work of Harvard economist Dani Rodrik.

There is empirical evidence “that industries and regions … more exposed to Chinese import competition since 2000 – the year China joined the WTO – have been hit hard and have not recovered. Workers in these industries … shuffle from low-paid jogs to low-paid jobs, never recovering the prosperity they had …”

There are always winners and losers from trade, but the pro-trade argument is that the gains of winners outweigh the losses of losers, so there is a net benefit. Smith makes a familiar point that “Efficiency says nothing about fairness, and almost any model of trade will show you that some people, industries and regions lose out.”

For me, the most “teachable” insight comes from the claim that our economies “may simply be much worse at adjusting to give changes than most economic models assume. It is expensive and time-consuming for workers to train for new jobs and to move to new locations. It also takes time and money for businesses … to change …. The adjustment costs might overwhelm the gains from trade.”

When we present a simple gains from trade model with linear production possibilities frontiers, we assume a (efficient) starting point on a frontier, and after specialization, moving along the frontier to a different, efficient outcome. Then we allow trade along a trade line reflecting the terms of trade, and each country ends up being able to consume outside its production possibilities frontier. This is a powerful image for students.

But the model assumes that all adjustments are along the frontiers. We can incorporate the adjustment costs by having the point after specialization be inside the country’s frontier.  Applying the trade line to that point of specialization may not get the county outside the original frontier.

This alternative story is also a useful example of the power of assumptions in economic models, and how those assumptions are often invisible. A first year student is not going to know that a move to specialization along a frontier is an assumption based on the full employment of all resources, including labour. Pointing out how the model works (and doesn’t) to realize gains from trade will make student more analytical and conscious of the power, and limitations, of the models we teach them.

While opinions will differ on the best policy options, I would argue for a pro-trade position, but with a more generous retraining and social safety net package  to help the losers.

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