How Convincing Is The case is Free Trade?

Make Money Blog$-“Emerging Markets as Partners, Not Rivals,” a fine commentary in The New York Times on Sunday by N. Gregory Mankiw of Harvard prompted me to take a vacation from the dreariness of health policy to visit one of the economic profession’s intellectual triumphs: the theory that every country gains by unfettered international trade.

That theory is less popular among noneconomists, especially politicians and unions. They wring their hands at what is called offshoring of jobs and often have no problem obstructing free trade with such barriers as tariffs or import quotas, which they deem in the national interest. (Two blogs recently offeredexamples of this posture.)

In a well-known textbook by Professor Mankiw (Princeton class of ’80, I feel compelled to add) and in other textbooks as well, the benefits of free trade typically are explained with multicolored graphs that look like puzzles but, after some study, reveal this truth, which economists hold self-evident: Relative to a status quo of no or limited international trade, permitting full free trade across borders will leave in its wake some immediate losers, but citizens who gain from such trade gain much more than the losers lose. On a net basis, therefore, each nation gains over all from such trade.

Economists assert that over the longer run, the owners of businesses that lose their markets in international competition and their employees will shift into new economic endeavors in which they can function more competitively. Skeptics, of course, often respond with the retort of John Maynard Keynes: “In the long run, we’re all dead.”

In his recent commentary, Professor Mankiw explained the gains from trade even more simply than is done in textbooks. Your driveway is covered in deep snow. Its removal is worth $40 to you. The boy next door, currently engrossed with a game on his Xbox, would give up the game and shovel your driveway for any payment exceeding $20.

So if you pay him $30 to shovel your driveway, you will both be better off by $10. Overall social welfare is unambiguously enhanced.

Professor Mankiw then wrote:

This example is not so special as it might seem. The gains for trade would be much the same if your neighbor were manufacturing a good – knitting you a scarf, for example – rather than performing a service. And it would be much the same if, instead of living next door, he was several thousand miles away, say, in Shanghai.

As far as economists are concerned, how can anyone argue with that?

We can extend this neat example a bit. Suppose just as you are about to shake hands with the boy next door on the $30 deal, another boy from the neighborhood comes along and offers to shovel your driveway for $10. Elated at this bargain, you pay him $15. Now you are very much better off, and that other boy gains, too, because he would have done the job for $10. Social welfare seems enhanced here as well, most economists would say.

Not so, according to the first boy, who is sorely miffed at losing out in this competition. He loses his anticipated profit, known among economists as producers’ surplus — what he would have been paid to shovel the driveway minus the minimum payment he would have required to do that job.

Most Americans, however, probably would side here with economists, in the belief that all’s fair in love and economic warfare, and that this form of tough price competition is precisely what propels our economy forward.

Now let us think again about the manufactured scarves. Just as you were about to buy a scarf from your neighbor on the left for $50, your neighbor on the right, also a manufacturer of scarfs, offers you an identical scarf for $35. Economists would consider that fair and efficient as well – as, I am sure, would most Americans.

But many Americans might balk at the lower-priced scarf if it were offered not by an American but by a low-cost manufacturer in Shanghai or Bangladesh. This nationalist sentiment sets many noneconomists apart from most economists.

In their work, economists are typically are not nationalistic. National boundaries mean little to them, other than that much data happen to be collected on a national basis. Whether a fellow American gains from a trade or someone in Shanghai does not make any difference to most economists, nor does it matter to them where the losers from global competition live, in America or elsewhere.

I say most economists, because here and there one can find some who do seem to worry about how fellow Americans fare in the matter of free trade.

In a widely noted column in The Washington Post, “Free Trade’s Great, but Offshoring Rattles Me,” for example, my Princeton colleague Alan Blinder wrote:

I’m a free trader down to my toes. Always have been. Yet lately, I’m being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation. When I say this, many of my fellow free traders react with a mixture of disbelief, pity and hostility. Blinder, have you lost your mind?

Professor Blinder has estimated that 30 million to 40 million jobs in the United States are potentially offshorable — including those of scientists, mathematicians, radiologists and editors on the high end of the market, and those of telephone operators, clerks and typists on the low end. He says he is rattled by the question of how our country will cope with this phenomenon, especially in view of our tattered social safety net.

“That is why I am going public with my concerns now,” he concludes. “If we economists stubbornly insist on chanting ‘free trade is good for you’ to people who know that it is not, we will quickly become irrelevant to the public debate. Compared with that, a little apostasy should be welcome.”

source:nytimes.com

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