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Friday, February 18, 2011

"How Convincing Is the Case for Free Trade?"

Ewe (grrr) Uwe Reinhardt:

How Convincing Is the Case for Free Trade?, by Uwe E. Reinhardt: “Emerging Markets as Partners, Not Rivals,” a fine commentary ... by N. Gregory Mankiw ... prompted me to ... visit one of the economic profession’s intellectual triumphs: the theory that every country gains by unfettered international trade. ...

In his recent commentary, Professor Mankiw explained the gains from trade even more simply than is done in textbooks. Your driveway is covered in deep snow. Its removal is worth $40 to you. The boy next door, currently engrossed with a game on his Xbox, would give up the game and shovel your driveway for any payment exceeding $20.

So if you pay him $30 to shovel your driveway, you will both be better off by $10. Overall social welfare is unambiguously enhanced. ... As far as economists are concerned, how can anyone argue with that? ...

Now let us think again about ... manufactured scarves. Just as you were about to buy a scarf from your neighbor on the left for $50, your neighbor on the right, also a manufacturer of scarfs, offers you an identical scarf for $35. Economists would consider that fair and efficient... – as, I am sure, would most Americans.

But many Americans might balk at the lower-priced scarf if it were offered not by an American but by a low-cost manufacturer in Shanghai or Bangladesh. This nationalist sentiment sets many noneconomists apart from most economists. In their work, economists are typically are not nationalistic. National boundaries mean little to them...

I say most economists, because here and there one can find some who do seem to worry about how fellow Americans fare in the matter of free trade. In a widely noted column in The Washington Post, “Free Trade’s Great, but Offshoring Rattles Me,” for example, my Princeton colleague Alan Blinder wrote:

I’m a free trader down to my toes. Always have been. Yet lately, I’m being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation. When I say this, many of my fellow free traders react with a mixture of disbelief, pity and hostility. Blinder, have you lost your mind?

Professor Blinder ... says he is rattled by the question of how our country will cope with this phenomenon, especially in view of our tattered social safety net.

“That is why I am going public with my concerns now,” he concludes. “If we economists stubbornly insist on chanting ‘free trade is good for you’ to people who know that it is not, we will quickly become irrelevant to the public debate. Compared with that, a little apostasy should be welcome.”

What do you think?

Saying that everyone could be made better off with increased international trade is not the same as people actually being made better off. There are winners and losers from increased international trade, and while I agree that the gains exceed the losses in almost all cases, the gains haven't been distributed in a way that leaves everyone, or even most everyone, better off (see, e.g., widening inequality and where the costs of these kinds of adjustments fall). When some people are made better off and others made worse off at the same time, economists cannot say it is unambiguously better or worse. If we are going to make the argument that trade is good because everyone could potentially be made better off, we should do much more than we have to ensure that this potential is realized, i.e. that the gains from trade are distributed widely across the population rather than concentrated among a smaller set of winners.

    Posted by on Friday, February 18, 2011 at 09:27 AM in Economics, International Trade | Permalink  Comments (118)


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