The Truth About Free Trade: Small Net Gain, Big Redistribution

Consider the ironies in the discussion of free trade. It’s widely depicted by economists to be a good thing, and anyone who opposed it is considered to be economically illiterate. Yet the system we have deviates considerably from the free trade ideal and is more accurately called managed trade. And in this system of managed trade, other countries seem to do a better job of protecting their labor markets and achieving trade surpluses than we do.

In particular, Harvard’s Dani Rodrik has shed a good deal of light on this topic. In one post, he set forth the conditions that have to be in place for trade liberalization to enhance economic performance (short answer, a lot); in another, he reviewed the analyses that claimed that our current trading system produced large economc gains and found the logic to be badly flawed.

The advocates of more open trade are particularly upset at the growing backlash against globalization, which they see as retrograde and self-destructive (funny how the same citizens who are viewed as savvy economic actors when they function as consumers are regarded as morons as far as their labor market attitudes are concerned). But if you are, say, an auto worker, being against more open trade is a perfectly sensible position.

The trade liberalization advocates would say that anti-trade auto worker and call center employees are simply selfish. Yes, they wind up as losers, but the collective gains outweigh the losses. But since there are not mechanisms to make sure the gains are shared, the losers have legitimate concerns.

Dani Rodrik turns to this topic via comments on a new paper by Robert Driskill, “Deconstructing the Argument for Free Trade.” Driskill find the arguments for more open trade to be doctrinaire and dismissive of the impact of redistribution. As Rodrik tells us:

Driskill is a distinguished economist who knows the theory of comparative advantage as well as anyone else. And his argument is not against trade per se, but about the manner in which economists present their arguments in public and in their textbooks. His main argument is that the standard renditions

gloss over a key issue the resolution of which is anything but obvious: What does it mean for a change in economic circumstances to be “good for the nation as a whole”, even when some members of that nation are hurt by the change?

In other words, instead of sticking to what they are good at–analyzing trade-offs–economists typically engage in amateur normative political theorizing about what is good for society.

Driskill also makes a more fundamental point:….

My point is not that the economics profession is not on the side of angels in the policy debate over trade liberalization–although I will argue that a more careful argument should lead to a more nuanced view–but that the argument is poorly made. This reflects negatively on the credibility of the economics profession as a whole: critical thinkers might believe all economic arguments are as poorly supported as is the one in support of free trade; others might believe economists are mere propagandists and handmaidens in service of some philosophical or political goal. Furthermore, it obscures some key ideas that should be part of a persuasive argument in support of free trade. And finally, it has confused many people into false beliefs about what economic analysis really says about the effects of international trade.

A pervasive such false belief, for example, is that trade necessarily benefits more people than it hurts.

Driskill illustrates his arguments by drawing on the writings of a range of economists, from Deirdre McCloskey to Paul Krugman.

George Borjas, a fellow Harvard professor, sees Driskill’s comments on redistribution relative to net gains as relevant to the immigration debate:

The same argument applies to immigration–except there’s more to the story. The textbook model of how immigration changes labor market productivity implies that the dollar gain accruing to the persons who gain from immigration (employers and eventually consumers) exceeds the dollar loss suffered by the losers (competing workers). But all available estimates suggest that the net gain is small, while the redistribution that takes place from workers to employers is large. If one were to believe recent estimates, the net gain is probably around $30 billion.

And even putting aside the cultural impact of immigration (which is mostly irrelevant when talking about free trade), there is the non-trivial matter of the fiscal impact. By much does the cost of the social services provided to immigrants exceed the taxes they pay? Given the predominance of low-skill immigration in recent decades, it is almost inevitable that there is a net fiscal burden. This is how I summarized the evidence from the 1997 National Academy of Science study on the short-run fiscal impact of immigration in Heaven’s Door:

The typical native household pays somewhere between $166 and $226 in additional taxes because of immigration. There are approximately 90 million native households in the United States, so that the national fiscal burden lies somewhere between $15 billion and $21 billion per year.

Adjust these numbers for a larger population and for inflation, compare the numbers giving the net productivity gain and the net fiscal loss, and the conclusion is inescapable: On net, immigration is a wash. Yes, it is true that immigrants gain a lot from immigration. But it is hard to argue that the U.S. “as a whole” is worse off, and it is just as hard to argue that it is better off.

Returning to Driskill, let me rephrase his question in the immigration context: Why do some economists have such a strong bias for more immigration when the net impact is pretty close to an economic wash and there is probably a substantial redistribution that leaves many natives worse off?

The answer, I think, is obvious. The bias has nothing to do with economics. It is instead the implication of having a value system that attaches a greater weight to the gains accruing to immigrants than to the losses suffered by natives. There’s nothing wrong with having that ideology–but it would be extremely helpful if all cards were on the table before one goes off making policy pronouncements based on “science.”

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  1. a

    Well said, yet again. As to free trade, isn’t it arguable even that it benefits the nation as a whole? Isn’t this view based on: (1) limited historical evidence (e.g. English corn laws), and (2) simple economic models?

  2. Anonymous

    Regarding free trade (managed trade)..If the currencies of the the two countries participating in free trade converge to the same value, won’t there be more “fair” competition between the workers?–and if so, by extension, isn’t the problem more about how one currency’s value is determined by the market (Dollar) while the others (yuan, rupee etc) are being artificially pegged to the dollar?
    And regarding immigration, shouldn’t high skilled immigration be encouraged rather than being limped together with the low skilled immigration? This is because considering the same criteria which you apply to determine the net social gain, high skilled immigrant workers (H1B) are most desirable as they pay for a period of 6 years, taxes, Social security and medicare while being ineligible for any benefits whatsoever.


  3. Anonymous

    Interesting discussion on Democracy Now today. Amy Goodman had Alan Greenspan and Naomi Klein on the show.

    The thing that struck me is how little AG knows and how badly he communicates during a discussion as opposed to reading from a teleprompter or prepared notes. The other thing was he was an ideologue during his days as Fed chairman.


  4. Anonymous

    The element, and a significant one, that’s left out of the immigration analysis is that which Sweden is now facing. That country is encouraging immigration to offset the cost of government programs for an aging native population. Younger immigrants are seen as key to providing the future tax revenue that will allow benefits to be paid as the Swedish ‘boomers’ retire. The younger native population will be unable to meet that burden by itself. Sound familiar?

    Even the more hysterical ‘sky is falling’ assessments of future U.S. Social Security and Medicare/Medicaid responsibilities will be leavened by immigration. This leads me to wonder if there aren’t other ‘invisible’ factors of the immigration issue that current, narrow analyses aren’t taking into consideration.


  5. minka

    “It is instead the implication of having a value system that attaches a greater weight to the gains accruing to immigrants than to the losses suffered by natives.”

    I appreciate this point. It is true that America seems to hate its workers: declining pensions & health care, ever more expensive tuition, shrinking middle class. What the corporations want, they get. (And economists are for the most part thrilled to be the handmaidens and apologists.)

    A study a few years ago by the NSF found that 17K Americans die every year simply because they lack health insurance. What extraordinary hatred! Think of Bin Laden, and his victims: that we identify as hatred. But WE do this to OUR people. It’s nothing less than vicious.

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