Friday, December 28, 2007

Trade: It's an empirical question 

When thinking about policy questions where there are heated debates, I try sometimes (not often enough, I suspect) to step back and ask whether my own position is consequential or philosophical. That is, if the good outcomes for an economy I saw happening from policy X could be shown to me to be not the case, would I still support policy X? For example, if you could show me that 20 people more die each year because of second-hand smoke, would I change my mind about smoking bans? No, I would answer. Smoking occurs in a physical space, and people can choose whether to be in spaces where secondhand smoke occurs or not. The science on second hand smoke isn't really that important to me. The market can assess the risk and people can choose where to work, eat, drink, etc. (The science might matter to me concerning SHS and a home child care facility, but I'd argue the parents can choose the level of risk they are willing to assume for their children.)

When it comes to international trade, however, I suspect my position is not philosophical. It's not that "anyone, anywhere in the world has the ABSOLUTE RIGHT to trade with anyone else in the world" regardless of harms imposed on certain parties. Economists make the case for comparative advantage that trade is "Pareto optimal" (at least potentially), which is a consequentialist argument. When trade occurs between nations, we teach, both nations are better off. If we couldn't draw the proper before-and-after diagrams with production possibility curves or whatever other pedagogic device we might use, what would we say? Would we really assert it's an absolute right of man? I don't think so.

So as Paul Krugman reflected on international trade, he posited an empirical question to address those who make the consequentialist argument. Here's an example: between countries at very different levels of economic development tends to create large classes of losers as well as winners.

Although the outsourcing of some high-tech jobs to India has made headlines, on balance, highly educated workers in the United States benefit from higher wages and expanded job opportunities because of trade. For example, ThinkPad notebook computers are now made by a Chinese company, Lenovo, but a lot of Lenovo�s research and development is conducted in North Carolina.

But workers with less formal education either see their jobs shipped overseas or find their wages driven down by the ripple effect as other workers with similar qualifications crowd into their industries and look for employment to replace the jobs they lost to foreign competition. And lower prices at Wal-Mart aren�t sufficient compensation.

All this is textbook international economics: contrary to what people sometimes assert, economic theory says that free trade normally makes a country richer, but it doesn�t say that it�s normally good for everyone. Still, when the effects of third-world exports on U.S. wages first became an issue in the 1990s, a number of economists � myself included � looked at the data and concluded that any negative effects on U.S. wages were modest.

The trouble now is that these effects may no longer be as modest as they were, because imports of manufactured goods from the third world have grown dramatically � from just 2.5 percent of G.D.P. in 1990 to 6 percent in 2006.

The statement about textbook international econ is certainly true. But the part that follows is an assertion based on data not placed in evidence. Greg Mankiw tells us Krugman is writing a paper in which that data might be forthcoming. We will see. Dani Rodrik thinks Mankiw hasn't shown the proper respect for Krugman's conjecture. But what Mankiw seems to say to me is that there's not enough here to reject the textbook view yet. And that those that reject the textbook view as a philosophical position rather than an empirical question may be called "protectionist". I think that's correct. And it is fit and proper for Krugman to go back and ask, does the received wisdom we held about trade when it was 2.5% of GDP still apply to a world where trade is 6%?

Don Boudreaux points that way as well, noting that a "pauper labor" theory of increasing inequality has already been shown to hold no water ... by Krugman himself. Boudreaux writes:
A famous trade economist argues that this concern is misplaced. In a 1996 essay, this economist - responding to a protectionist who fretted that western trade with low-wage countries would harm workers in the west - wrote that this protectionist "offers us no more than the classic 'pauper labor' fallacy, the fallacy that Ricardo dealt with when he first stated the idea, and which is a staple of even first-year courses in economics. In fact, one never teaches the Ricardian model without emphasizing precisely the way that model refutes the claim that competition from low-wage countries is necessarily a bad thing, that it shows how trade can be mutually beneficial regardless of differences in wage rates."
We don't know what evidence Krugman has, so let's wait and see. But a consequential argument is always going to view both "anti-globalists and knee-jerk free traders" (Rodrik's words) as having a different argument. None of the economists cited here fit either of those camps.