Paul Krugman: Winners and Losers from Trade

Paul Krugman follows-up his column "Divided over Trade" (see the post below this one) with a discussion of the winners and losers from trade:

Notes on 5/14 Column, "Divided Over Trade", by Paul Krugman, Money Talks: A few notes on trade and wages.

Many people think that Economics 101 says that trade is good for everyone. Alas, it isn't so. Way back in 1941 Paul Samuelson and Wolfgang Stolper pointed out that even the most conventional economic analysis suggests that some group within a country - and possibly a large group - actually loses from trade. It's even in Wikipedia.

Intuitively, here's the logic. Imagine that America exports stuff that is produced mainly by college-educated workers, while those industries that compete with imports mainly employ less-educated workers. Now suppose the price of imports falls. Then in order for import-competing industries to cope, the wages of less-educated workers have to fall — in fact, they have to fall more than the price of imports, because other costs of import-competing production, namely the wages of highly educated workers, will actually rise. So if import prices fall, say, 10 percent, wages of less-educated workers will fall, say, 15 percent.

But don't these workers gain from cheaper imports? Yes, but not enough. Imports are only part of what people consume, so while wages fall more than import prices, the overall cost of living falls less than import prices — say, 15 percent fall in wages, only 5 percent fall in the cost of living. Trade reduces the real wages of low-education workers.

So why did people like me say in the '90s that globalization wasn't a big problem for U.S. workers? Because the numbers didn't look big enough. Bill Cline of the Institute for International Economics posted a pretty good overview of that discussion here.

Since then (Cline's numbers ran through 1993), however, the numbers have grown. You can get a sense of the changes from the World Trade Organization data. U.S. imports from China, Mexico and the "six Asian traders" went from about 3 percent of G.D.P. in 1995 to almost 5 percent in 2005. What's more, the center of gravity of those imports has shifted to the lower wage countries. Estimates of labor costs are calculated by the Bureau of Labor Statistics, Table 1 and p. 5 for China.

The growth of China's exports, in particular, has undermined one of the arguments I and others (including Cline) made for not worrying too much: we thought the low-wage manufacturing exporters would, as their own education levels increased, place less pressure on low-education workers here. Well, the original group of exporters did move "upscale" — but along came China (and to a lesser extent Mexico), taking their place and then some. The overall wage rate of U.S. trading partners relative to the U.S., calculated in that B.L.S. report, rose through 1990, but it has stagnated since then — and the index doesn't include China. Add that in, and our trade is increasingly with low-wage countries. So the problem has gotten bigger.

As I said in the article, however, the big problem is what to do about it. And a return to protectionism would just have too many negative effects.