If global trade is good, why the blue collar blues and why is Trump president? International Trade D


US Steel Edgar Thomson Plant: photo from wikimapia.org

The castaways Eva and Ricardo made themselves better off by engaging in trade, each specializing in the endeavor in which they had the comparative advantage - Eva in fishing and Ricardo in bread baking. Eva's is the intriguing case, since she was better at fishing and baking. She had the absolute advantage in both. But still, if she did the fishing while Ricardo did the baking and they traded fish for bread, she was better off, and so was Ricardo.

But of course that can't be the end of the story on international trade. The Eva-Ricardo castaway story is too simple. It contains no workers separate from Eva and Ricardo, so while we may concede that the story supports the conclusion that trade is good for all traders, we cannot use it to ask, and to try to answer, the question, does anyone get hurt from trade. In particular, do workers who work in an industry that has to compete with imports from a foreign country get hurt?

Economists didn't stop developing international trade theory with David Ricardo's exposition of comparative advantage. They now have models that include workers and capitalists and hence offer opportunity to explore not only how overall international trade increases incomes of countries that trade, but how workers in import competing industries may lose as a result of reduced trade barriers and the resulting increase in trade. As early as 1941, the Nobel Prize winning economist Paul Samuelson and his fellow economist Wolfgang Stolper presented a model that showed that there could be losers as well as winners from international trade, the losers, for example being workers who work in industries that compete with imports.

Newer economic models incorporate the fact that many goods, especially in manufacturing, get cheaper to produce when the market for the product is very large, and the larger the market the cheaper per unit is the cost of production, and hence the lower the price at which the product can be sold. When trade barriers come down and international trade increases, the market facing producers is suddenly much larger. Markets are now global rather than national. Successful producers expand and their costs of production fall and the prices they charge fall. Real incomes rise, as wages and salaries can now buy more because prices have fallen. This is a major reason why global trade has led to individual country real income growth and global real income growth over the last 40 years, as import quotas and tariffs have come down. These newer models of trade don't make the comparative advantage theory of trade obsolete, rather they add to the explanations of why international trade takes place and why it leads to increased national incomes.

As the Economist magazine put it when referring to the North American Free Trade Agreement (NAFTA) in April 2016, "Excluding food and energy, prices of goods have fallen almost every year since NAFTA. Clothes now cost the same as they did in 1986; furnishing a house is as cheap as it was 35 years ago."

Economist and New York Times columnist and blogger, Paul Krugman , was prominent in the development of the new theories of international trade. He got a Nobel Prize in economics for his work. And like Samuelson's and Stoper's earlier work, Krugman's indicated the possibility that some workers could be hurt from the expansion of international trade, primarily blue collar workers. But in work he did in the 1990s, Krugman concluded in work he did with fellow economist Robert Lawrence, that while this was a possible result, the evidence showed it was a minor factor in the wages of blue collar workers. However, by 2008, Krugman began to have some reservations. He expressed the view that the surge in United States imports from developing countries with large low wage labor forces may be causing blue collar wages in the United States more stress than he earlier thought.

And if he is right, it may be a major reason why we have Donald Trump as President of the United States, as it was Trump's unexpected win in heavily populated blue collar states like Michigan, Wisconsin, and Pennsylvania that put Trump over the top in the electoral college tally.

References:

Samuelson-Stolper theorem

https://docs.google.com/document/d/16fGJ4myv4orxDZYhtBQbw8WXn5ZWLWhcVLjZtHm4zGM/edit

Comparative advantage

https://www.economicpolicydebates.com/single-post/2017/05/22/Economists-do-it-with-models-International-Trade-Debate-II

Paul Krugman articles

Economist magazine

http://www.economist.com/news/united-states/21695855-americas-economy-benefits-hugely-trade-its-costs-have-been-amplified-policy

http://www.nber.org/papers/w4478.pdf

https://www.brookings.edu/wp-content/uploads/2008/03/2008a_bpea_krugman.pdf

https://www.princeton.edu/~pkrugman/scale_econ.pdf

Photo from US Steel Edgar Thomson Plant

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