The New Old Economics of Free Trade World Wide

Does economics still believe in free trade? The discipline has urged the case for open markets since its earliest days, but lately not so much. Recent research is seen as calling the faith into question.

When Mitt Romney recently attacked Donald Trump for threatening a trade war that would plunge the U.S. back into recession, Paul Krugman, a leading authority on the economics of trade, assaulted Romney for his misunderstanding:

Now suppose we have a trade war. This will cut exports, which other things equal depresses the economy. But it will also cut imports, which other things equal is expansionary.

Set aside the idea that a trade war, “other things equal,” would have no effect on world demand — a questionable claim (even if it comes from a Nobel laureate who assures his readers, “I really, truly know what I’m talking about”). What’s striking is that Krugman thought it more useful to attack Romney for his flawed thinking on trade than Trump for his. On the Trans-Pacific Partnership, Krugman has described himself as a “lukewarm opponent,” and has said that the case for more trade agreements is “very, very weak,” adding:

And if a progressive makes it to the White House, she should devote no political capital whatsoever to such things. So much for Adam Smith.

Free Trade Feud

The lack of expert enthusiasm for trade liberalization isn’t confined to Krugman. Contributing to it most recently is a new strand of the trade literature that looks carefully at the costs of adjusting to foreign competition. This work, notably papers by David Autor of MIT and collaborators, has attracted attention.

The Economist, which has campaigned for free trade since it was founded in 1843, discussed the findings in an article ominously titled “Trade in the balance.” It said the results “provide convincing evidence that workers in the rich world suffered more from the rise of China than economists thought possible.”

Well, Autor and his co-authors find that some workers have suffered more from Chinese competition than most economists would have thought likely. That’s still an important thing to know, and policy prescriptions follow from it. But those prescriptions aren’t new, and they sure don’t include raising trade barriers. This research doesn’t come close to refuting the traditional case for liberal trade — and its authors are careful never to suggest otherwise.

Adjusting to competition is difficult

Autor’s work draws on masses of data to show that for workers in affected industries and localities, adjusting to foreign competition is a surprisingly hard, slow business. One of the papers finds that competition from China caused net job losses in the U.S. of between 2 and 2.4 million from 1999 to 2011.

Uncertainty still attaches to the estimates of Autor and his colleagues. Their reckonings require many supporting assumptions. The authors have made them conservatively — that is, in a way that’s likely to understate rather than overstate the costs. On the other hand, the studies can’t easily measure some of the gains. Trade with China didn’t just destroy jobs; it also created jobs. Identifying and measuring the new ones is harder to do.

Despite such uncertainties, the new research is the best and most exhaustive available. The question is, what’s new here?

The traditional case never said that free trade makes everybody better off, let alone that it makes everybody better off immediately. The consensus view always acknowledged that there would be winners and losers. (Why would the demand for trade barriers arise if competition from imports didn’t hurt somebody?) The argument has only ever been that free trade raises real incomes in the aggregate — that the gains exceed the losses. The new work leaves this claim intact.

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Post from Bloomberg