Sunday, August 19, 2018

on trade and trade policies

A nice analysis from a friend on FB and then my extension/reply...

KK: Here is something I have been thinking about. I do not have your depth of research so I would like your opinion. In the simplest term, Comparative Advantage creates winners and losers in both countries when trade occurs BUT overall both countries will benefit more because production and service will move to where the opportunity costs are least for each product. The problem is that our countries are not homogeneous. We have both skilled and unskilled workers with varying amounts of opportunity costs in the US. This means that if low-skilled work goes to China, American consumers enjoy greater benefit because of the lower prices. (China's minimum wage is about $1.50 and dropping quickly as the RMB devalues.) Then in America the losers are those that don't fit into the higher-skilled category and are not going to ever fit into that category. The high minimum wage in America only exacerbates this issue so these people will never be employable while there is cheaper foreign labor to meet all our demand. So with our very generous and expensive social programs for these unemployable people, the US loses any savings through redistribution of the wealth. Comparative advantage only works well in a vacuum where government is not incentivizing non-productivity.
Me: That's good next-level analysis (beyond where most people go). But there are other factors if we take down another notch.

-The cost of labor (wages, etc.) is a key factor, but it's really productivity per $ that matters.
-Transaction costs (natural and artificial) get in the way of trade. So, even if China has a substantial CA in X, it does not mean we would engage in trade with them. (Of course, those TC's have dropped a ton in recent decades.)
-It's not really skilled/unskilled as much as the transaction costs issue. Tyler Cowen has a great book on this (Average Is Over) where he wrestles with the higher-skilled jobs that are going overseas. It doesn't change your point about winners/losers, but avoids the simplistic sense of reducing it to skilled/unskilled.
-That said, it is definitely important to consider the role of other govt programs, esp. various sorts of welfare programs such UI, SSDI, etc.
-The economist doesn't say "don't do trade restrictions". There are good non-econ reasons to restrict trade (national defense, moral issues) and are reasonable subjective values (the fairness/equity of protecting certain people/jobs). The economist insists that the costs/benefits be on the table-- and that we recognize that protecting some folks (or addressing defense or moral issues) necessitates larger efficiency costs that are usually overlooked for political reasons. (The economist would also ask that we recognize our abundance of trade restrictions and the universal desire for special interests to use govt to enrich themselves-- through nice-sounding rationales like we see in trade policy-- at the expense of others and the economy.)


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