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Getting Trade Straight

Here’s a comment that I left this morning on this EconLog post by David Henderson:

David: Thanks for the pointer to Feenstra’s paper.

Here’s one elaboration on the point you make – and that Scott made in an earlier post – about the Autor, Dorn, & Hanson paper on American trade with China. Specifically, I’m led to offer this elaboration by your admission that you’re “a little surprised at the long-term reduction in U.S. employment.” (Note that what I say here is not meant to suggest that such surprise is inappropriate or, well, unsurprising. I share that surprise. And I agree with all that you write above.)

All predictions, even those that Hayek called “pattern predictions,” of course rest on ceteris paribus assumptions. When an economist predicts that increased imports will have no long-run effect on the number of jobs (or rate of unemployment) in the domestic economy, the empirical prediction that the data will reveal this theoretical prediction to be correct rests on countless assumptions about policies, preferences, physical constraints, even culture, remaining sufficiently unchanged so as not to prevent the creation of a large-enough number of new employment opportunities in the long-run to offset the jobs ‘destroyed’ by the increased imports. So stated, the above seems to be trivially true.

Yet over the course of the 17-year period studied by Autor, et al., ceteris was not paribus. It never is, of course. But when Russ, in his podcast with Autor, asked Autor about government-program changes that made being unemployed a bit easier – and, hence, perhaps explains much, or all, of Autor, et al.’s findings – Autor dismissed this possibility. Autor chose to conclude from the data that the cause of the increase in long-term joblessness that he and his co-authors found was Americans’ increased trade with China.

Perhaps Autor’s conclusion is correct, but note that not only is it not one that is ‘proven’ by the data, it demands some supplemental theoretical account to make it work. The very nature of the economists’ case for free trade – namely that free trade is simply one manifestation of economic competition, and that economic competition causes no lasting unemployment because the economy is assumed to be sufficiently robust to ‘create’ enough jobs to replace those that are ‘destroyed – demands that an observation that long-term unemployment increased following a change in trade patterns be explained by some account of a change in the economy or in government policy (and not just by a change in the intensity of trade).

Because international trade is just one particular manifestation of economic competition – and because economic competition incessantly changes the patterns of economic activity – why in the years 1990-2007 do we suddenly get an economy that apparently cannot create employment opportunities, in response to changes in trading patterns, as well as it did in the 200-plus years earlier? And why focus on increased trade with China? The 1990-2007 period was famously one of great technological change – change that itself ‘destroyed’ many jobs and that altered the manner in which people are able to earn livings. Is it really possible, empirically, to determine that the increased long-term unemployment is only of American workers who were competing with Chinese imports rather than also of American workers who lost jobs to new technologies – or, even, to changing demographics within the United States?

Pointing out, as Autor did, that the workers affected by increased trade with China were generally low-skilled and poorly educated is insufficient to conclude that the economists’ case for free trade now no longer holds. The 19th and 20th centuries were filled with many workers just as unskilled and as ill-equipped for ‘new’ jobs as were the years 1990-2007.

So, the surprising long-term unemployment [or reduction in jobs] that occurred in the U.S. just as American trade with China intensified cannot be explained simply by pointing to this increased trade with China (and then concluding that the standard economics of trade no longer applies). Its explanation demands some account of changes in the economy or policy that, for the first time in American history, make the economy unable to create, and to create in ‘good’ time, a sufficiently large number of new employment opportunities to replace those that are ‘destroyed’ by foreign trade.

The surprise about unemployment, in short, must be due, not to increased foreign trade, but to some underlying change in the economy. And this change, whatever it might be (call it “X”), means not only that we should now start to fear increased competition from imports but also fear any changes in production technologies and in the pattern of consumer expenditures. The reason is that these changes, too, will interact with X to create undesirable, long-lasting unemployment.

I’m not yet ready to conclude that the U.S. economy has changed in this way, although I might well be mistaken. But if the U.S. economy has indeed changed in this unfortunate way, the problem is not trade per se – and protecting ourselves from long-term unemployment will involve a great deal more than higher tariffs on imports.

At the risk of being too repetitive, I emphasize, as I said in this post from March, that if Autor’s, et al.’s, key finding is that many actual, flesh-and-blood workers were left permanently worse off by increased trade with China than these workers would have been, ceteris paribus, had Americans’ trade with the Chinese people not increased, then this finding is not in the least inconsistent with conventional economic theory or with standard economic policy prescriptions that are based on conventional economic theory.  Such a finding is simply not newsworthy.  And a main reason why such a finding isn’t newsworthy is that the economic case for market competition – of which the case for free trade is simply a part – does not assume that actual, flesh-and-blood individuals are never made permanently worse off, ceteris paribus, by the many changes that are incessantly wrought by competition.

If instead the main finding of Autor, et al., is taken to be that Americans’ trade today (unlike in the past) with large, low-wage, and liberalizing countries such as China leads to a permanent reduction in jobs below what the number of jobs would otherwise be – or that such trade causes, now for the first time in U.S. history, an increase in joblessness that lasts so long as to be a genuine problem – then the culprit is not increased trade.  The culprit is some change in the economy – the “X” that I refer to in my EconLog comment – that today interacts with increased foreign trade to cause these problems.  But note, again, that if the problem is some “X” in the nature of the domestic economy (including the government policies that influence that economy), then it is inaccurate to say that “‘X’ has caused economists’ traditional case for a policy of free trade to no longer hold.”  A more accurate statement is that “‘X’ has caused economists traditional case for competition and consumer sovereignty to no longer hold.”

My plea, amidst all these many words, is for a clearer understanding that trade is simply competition.  My plea is for people to understand that any complaints about trade, or any findings that trade sparked this or that problem (be the problem real or illusory), are really complaints about competition and findings that competition sparked this or that problem.  If politicians and pundits (and, especially here economists) really have found some good economic reason to restrict people’s freedom to trade with foreigners, then these politicians and pundits (and economists) have in fact found some good economic reason to restrict people’s freedom to compete economically in whatever ways economic competition might be manifested.  Such a finding has implications that go well beyond the case for international free trade.

Put differently, if someone insists on making a case against free trade, I want that case to be made more honestly and consistently with the underlying argument: make it openly, not as a case merely against international trade, but as a case against all competition and economic change.