loewenstein_international trade and the welfare of the american dream

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International Trade and the Welfare of the American Dream

By Lara Loewenstein

Note: The essay prompt asks about both international trade and the globalization of finance, butin my

opinionthose are two very different questions. For the benefit of coherence and quality I have chosen toaddress only the international trade of goods and services. All figures and tables appear at the end.

Perhaps more than citizens of any other country, Americans view inequality as much as asymbol of potential as a sign of distress: attaching to inequality a promise that socio-economic

circumstances are not stagnant. Embodied best in the American Dream, this belief is twofold:

implying that one can continue in the footsteps of one's parents, reaping the same rewards andmaintaining the same traditions or, alternately, that with hard work and perseverance one can improve

their lot, forging a better life for oneself and one's family. This paradoxical dream of stasis and change

became a motivating concept, especially in manufacturing sectorsthe backbone to America's

unprecedented growthwhere hard, unskilled work paid a decent wage and children, at worst, lookedforward to the same. But increased international trade (see figure 1), is threatening this dream. Children

are no longer guaranteed the same prospects as their parents: those hard, unskilled jobs are

disappearing and workers are finding themselves out of a job, cast into an uncertain future where theskills they have developed have become automated or outsourced and the skills they need to succeed

feel unattainable.

In contrast to this dire portrait, economists almost uniformly agree that free trade is good: a

consensus based on the idea that trade increases welfare, both nationally and globally. But the welfare

that economists refer to is total welfare: the sum of the welfare of each individual. Economists make no

effort to hide the theoretical and empirical evidence that trade increases income inequality and mayhave temporary negative consequences for the average American. While this seems heartless, it is

important to recognize that international trade has greatly improved living standards and created ample

opportunities for individuals who know how to find them. The American dream may be shaken, but it

is far from dead.

Benefits of Trade

Everyone in the US benefits from the availability of an increased variety of cheaper

manufactured goods imported from other countries, but some of the benefits of trade are less visible. Ibenefit from less expensive electronic productssuch as the macbook on which I am writing this

essay, which contains parts sourced from a variety of countries and was assembled at a Foxconn factory

in the special economic zone in Shenzhen, China. 1 Supply chains have made many products that are

developed in the US cheaper to produce and consume. But furthermore, supply chains havenecessitated the creation of a new sector replete with jobs and prestige: supply chain management (see

figure 2),2

only one exampleamong many3

of opportunities created as a result of trade.

1 Glass, Ira (2012). This American Life: Mr. Daisey and the Apple Factory. National Public Radio. Last accessed:

January 9, 2012. http://www.thisamericanlife.org/radio-archives/episode/454/mr-daisey-and-the-apple-factory

Note: For a more substantive source with similar information, see Apple's reports on its production processes, but this

episode of This American Life was fact-checked by NPR and is worth listening to.

2 Wailgum, Thomas (2008). Supply Chain Management Definition and Solutions, CIO.com. Last accessed: January 12,

2012. http://www.cio.com/article/40940/Supply_Chain_Management_Definition_and_Solutions

3 Others include language and communication skills and logistics management, but also sectors that are strong exporterssuch as manufacturing, maybe surprisingly the sector that exports the most from the US, and services, in which the US

still has a trade surplus (source: http://www.uschamber.com/international/agenda/benefits-international-trade-and-


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People also benefit from the increased creation and spread of inventions and ideas. Open

borders force countries to interact and communicate and as a consequence knowledge spreads. One

such exampleamong billionsis paper, which was invented in China and traveled along trading

routes to the Islamic world before it became known to Western Europe.4Other ideas are more simple,but often more important for quality of life, e.g. that contaminated water spreads cholera. Aside from

facilitating the movement of ideas and goods, trade also increases the demand for them, creating a

feedback loop, which both incentivizes people to innovate while providing them with opportunities todo so. For example, there is little incentive for pharmaceutical companies to invest money and effort

into developing treatments for rare diseases. But the number of people in the world with a rare disease

is far greater than the number in the US and access to those larger markets makes research anddevelopment economically viable.5

Costs of Trade

While international trade affects everyone differently, it is almost inescapable that, in general, it

disadvantages lower skilled workers.6 Unfortunately, with only 40.3 percent of US citizens aged 25 to64 having an associate degree or higher in 20077, this implies that the median person has a high school

diploma at best qualifying them only for unskilled work. To be frank, prospects for the median seem

bleak. Since the 1970s inflation-adjusted median income growth has slowed8 and in the last decade, ithas even declined (see figure 3).9 Whether or not this is caused by increased trade or some other

phenomenon such as a slowdown in technological innovation10 is unknown, but there is strong evidence

that trade has some negative effect on income distribution11 and that those who lose their jobs due tooutsourcing are especially hurt12.

A macroeconomic crisis affects everyone, and trade makes the US vulnerable to crises in other

countries. Oil and turmoils in the Middle East immediately come to mind, but a glaring example ofhow a crisis in one country can cause a chain-like reaction to shut down trade worldwide is The Great

Trade Collapse (GTC), which occurred between the third quarter of 2008 and the second quarter of

2009. It was sharpest collapse in world trade in recorded history and the deepest since World War II(see figure 4). Trade did not fall by as much as it did during the Great Depression, but the fall was

much steeper: the same fall in trade that took 24 months during the Great Depression, took only 9

months during the GTC. The collapse was also almost uniform across countries and goods. It was

investment)

4 Burns, Robert I (1996). Paper Comes to the West, 8001400, Tradition and Innovation, pp. 413422

5 Alex Tabarrok makes this argument in his recent TED book: Launching the Innovation Renaissance: A New Path to

Bring Smart Ideas to the Market Fast

6 For a great aural description of the difference between skilled and unskilled labor, listen to the recent Planet Money

Podcast The Past and Future of American Manufacturing, which can be found at http://www.npr.org/blogs/money

7 Lee, John Michael Jr. & Anita Rawls (2010). The College Completion Agenda 2010 Progress Report, College BoardAdvocacy & Policy Center.

8 Kenworth, Lane (2008), Slow Income Growth for Middle America, Consider the Evidence, 3 September. Last

Accessed: January 11, 2012. http://lanekenworthy.net/2008/09/03/slow-income-growth-for-middle-america/

9 Leonhardt, David (2009), A Decade with no Income Gains, Economix Blog,New York Times, 10 September.

http://economix.blogs.nytimes.com/2009/09/10/a-decade-with-no-income-gain/?pagewanted=all

10 Cowen, Tyler (2011), Innovation is Doing Little for Incomes, New York Times, 29 January. Las accessed: January 11,

2012. http://www.nytimes.com/2011/01/30/business/30view.html?_r=1&src=busln&pagewanted=all

11 Krugman, Paul (2008). Trade and Wage, Reconsidered, Brookings Papers on Economic Activity, Spring12 Hummels, David, Rasmus Jrgensen, Jacob R. Munch & Chong Xiang (2011), Offshoring, inequality, and the value of

college degrees, VOX, 10 December. www.voxeu.org


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triggered by and helped spread The Great Recession.13One explanation is that supply chains allowedfor more coordinated reductions in output as companies delayed orders in response to an uncertain

future. However, while the GTC implies that the US is more vulnerable to economic downturns, it also

implies that it is in a better position to take advantage of upswings since growing economic partners

increase demand for US exports.14

The Net Effect

It is very easy to qualify the positive and negative effects of trade, but very difficult to quantify

them. An obvious place to start, is the effect of trade on wages. There was a significant amount of

empirical work done on this in the 1990s (see table 1). All of these studies predicted a modest impact oftrade on the skilled-unskilled wage ratio in developed countries, but the last data point used was never

later than 1995. There have been a couple studies since that update the estimates using new data, but

most notably, Paul Krugman recently revisited the question.15 He notes that world trade has changeddrastically since the 1990s. There has been a dramatic increase in the imports of manufactured goods

by developed countries, which has involved a peculiar concentration in apparently sophisticated

productsmost likely the result of supply chains and vertical specialization16which greatly

complicates the nature of trade. Krugman concludes that while it is likely that the rapid growth in tradesince the early 1990s has had significant distributional effects, to put numbers on these effects would

require a much better understanding of the increasingly fine-grained nature of international

specialization and trade.

If we cannot even estimate of the effect of trade on wages, how can we expect to have an

accurate estimate of the net effect of trade on the median? We cannot. But we can make an informedguess as to the sign of the net effect. Given everything discussed so far, I propose that the effect is

positive. If this seems surprising, remember that the positive effects come in the least quantifiable

forms while the effect on wages is probably negative, so it is easier to imagine a negative impact

overall. But we cannot ignore the historical importance of trade to economic growth and quality of life.Even if the effect on wages is significantly negative, it cannot outweigh the other improvements.

Despite trade having undeniably enriched and lengthened the lives of everyone, any cost-benefitanalysis is going to exaggerate the benefits to the average person because it will never include the

emotional cost of living in an uncertain, shifting world. The helplessness and betrayal felt by someone

who has lost their job due to outsourcing is impossible to quantify. This is the drawback to any cost-benefit analysis: it is a cold, inhuman exercise that is meant to produce a single number that invariably

leaves one wanting.

Policy Implications

There are policies in place in the US to help those hurt by trade. Recently prominent in the

media was the Trade Adjustment Assistance (TAA). Workers file a petition to get certified as a trade-affected worker to receive benefits such as reemployment counseling, job search or relocation

13 Baldwin, Richard (2009) The Great Trade Collapse: Causes, Consequences, and Prospects. A VoxEU.org publication.

14 Another, somewhat related, concern, is that of global imbalances: the high savings rate in Asia and the low savings rate

in the US that correspond to the US's trade and budget deficits. Some economists claim that this will lead to disaster at

some point. Whether or not that is true is debatable and is too complex to be explored fully in this essay.15 Krugman, Paul (2008). Trade and Wage, Reconsidered, Brookings Papers on Economic Activity, Spring

16 The specialization in one component of a production process, e.g. assembly.


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allowances, training, income support, and a health coverage tax credit. 17 Despite seemingly good, it isnot clear why the TAA is separate from regular unemployment assistance. If the US had a strong

enough safety net for the unemployed, then TAA would be redundant and it almost appears that TAA

exists simply to provide politicians with a talking point in response to complaints about trade

liberalization, or because providing assistance to those adversely affected by trade is more palatable tovoters than helping the unemployed en masse.

More problematic, is that the TAAor any unemployment insurance programis just apalliative. If the US wants to improve its economic standing and the outlook of the average worker, it

should promote the development of the skills the US economy could use most. These might include

language and communication skills since globalization invariably requires them. Or, more dramatically,it could mean a shift from subsidizing liberal arts higher education to investing in a German-style

apprenticeship program. It is not clear that the standard liberal arts education provides students with the

skills necessary to succeed. For example, in 2009, American universities graduated 94,271 studentswith psychology degrees when there were just 98,330 jobs in clinical counseling and school

psychology in the entire country.18 That latter figure is not new jobsit is total jobs! And graduates

with skills for which there are no jobs are less likely to create the kind of innovations that drive

economic growth. Evidence for this is the fact that inflation-adjusted earnings have fallen for everyeducational group except for doctors, lawyers, MBAs, and PhDs19. Apprenticeships would allow people

to develop the on the job technical know-how to better help themselves and the US thrive. 20

Conclusion

While the concept backing the American dream may not be uniquely American, it is profoundlyAmerican. It is celebrated in gameshows promising instant celebrity and wealth and is championed in

Alger-esque biographies of inventors, businessmen, and politicians.And it is difficult for Americans to

accept any change in its promises. But an unfortunate consequence of the American dream stems from

its celebration of the individual: the impression it gives that successful people are singularlyresponsible for their own success. If that were ever true, it is certainly not true anymore. The world is a

much more complicated placetechnically, socially, economicallythan it was even a hundred years

ago. Progress today requires collaboration; it requires the exchange of ideas; it requires trade. Buteconomies are still transitioning to this new world, leaving citizens with a sense of economic

uncertainty. The United States cannot hang onto the pastit is still, undeniably, the leader of the

Western worldbut the US can set an example by not forgetting that it owes its success, at least inpart, to a dream: a dream that motivated its citizens more than any propaganda machine or whip ever

could. And while all the promises of the original dream cannot be kept, the dream can be kept alive by

making sure not to leave too many people behind and by ensuring that at least a partthe part about

forging a new life with hard work and perseverancestays intact.

17 Trade Adjustment Assistance (TAA) and Alternative Trade Adjustment Assistance (ATAA) Services and Benefits. United

States Department of Labor. Last accessed: January 9, 2012. http://63.88.32.17/tradeact/benefits.cfm

18 US Bureau of Labor Statistics' Occupational Employment Statistics

19 Wessel, David (2011), Only Advanced-Degree Holders See Wage Gains, Real Time Economics Blog, Wall Street

Journal, 19 September

20 For examples of the kind of on-the-job know-how a current skilled job in manufacturing requires listen to the recentPlanet Money Podcast The Past and Future of American Manufacturing, which can be found at

http://www.npr.org/blogs/money


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Figure 1. Trade-to-GDP Ratio, 19702005

Source: OECD Macro Trade Indicators

Figure 2. Mentions of Supply Chain Management in books since 1900

source: http://books.google.com/ngrams/


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Figure 3. GDP per capita and median family income, 19472007

source: Figure copied from Lane Kenworthy's blog Consider the Evidence; Data originally from US Census Bureau

(http://lanekenworthy.net/2008/09/03/slow-income-growth-for-middle-america/)

Figure 4. The great trade collapses in historical perspective, 1965 - 2009

Source: Figure copied from the VoxEU.org publication The Great Trade Collapse: Causes, Consequences, and

Prospects; Data originally from the OECD Quarterly Real Trade Data


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Note: Table originally from Krugman, Paul (2008).

Trade and Wage, Reconsidered,

Brookings Papers on Economic Activity, Spring

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