International trade and the rise of the dispossessed

Published 8:24 am Thursday, March 29, 2018


Contributing columnist

The macroeconomic theory of international trade is very elegant. Assuming the trading partner’s use of resources per unit in different proportions and given competition, the theory proves that both trading partners benefit from international trade. The resource use condition is sufficient for “comparative advantage” to exist between the trading countries.

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Unfortunately, international trade agreements are not established by the merciless, but objective, “invisible hand.” Trade deals are made by government to government trade agreements. To be represented in the negotiations, firms must be large enough to pay for representation. Small firms and small sectors are frequently left out.  

The efficiency of labor markets is another issue. If labor markets are inefficient, workers unemployed by foreign competition may not find employment in alternative industries, particularly at a commensurate wage. The probability this will happen is greater the older is the unemployed worker.

Consequently, one cannot count on the competitive assumption when it comes to international trade. The immediate question is then how much competition is required to guarantee the macro benefits of international trade? That is an empirical question, one that requires evidence to resolve.

The evidence that each country earns macro benefits from trade is overwhelming. The easiest proof is a night time, satellite view of the Korean peninsula. South Korea is ablaze with light, as is China, Japan, and Manchuria.  North Korea is pitch black, save for a pin point of light which is Kim’s personal night lite in Pyongyang.  North Korea is known as the “hermit kingdom” because it engages in very little international trade — not enough to provide its people with electricity.

Additional evidence is contained in numerous academic studies. These academic studies are summarized brilliantly by Hans Gosling in his dynamic data presentation ( Global economic growth over the last 200 years has been spectacular. The pattern of that growth fits the pattern of international trade.    

Despite this progress, those adversely impacted by international trade seem to disappear from public consciousness rather quickly. Those adversely impacted by trade are a part of the microeconomic impacts of trade theory called the distribution effects of trade theory. The empirical evidence suggests those unemployed by trade have a hard time recovering.  They have little support from society while the elites collect the benefits from trade. These microeconomic distribution effects contribute to growing income inequality and rising resentment. Call those who lose their jobs due to foreign competition “the dispossessed.”

The dispossessed may not have the skills to recover from unemployment. They are frequently hesitant to move to alternative locations where work is available, and they may lack the capacity to learn new skills. They remain in place because they were raised in a culture where their extended family lived in the same town. The extended families are an important support group.

The desolation of unemployment leads to atrophy of skills, drug addiction and premature death. Thus, we have a decline in lifetime expectancy among white males and an opioid crisis. In contrast, incomes among the elites have exploded on both coasts. The fact that incomes rise on both coasts is not an accident.

Trump recognized there were almost 50 million dispossessed voters waiting to be recognized as U.S. citizens and they had serious economic grievances.  It is no surprise “America First,” border security, trade renegotiation and rule of law fell upon receptive ears.   By contrast the Democrats mocked them as those “clinging” to religion and their guns and their candidate called Republican voters a group of “deplorables.” It was no-contest after that. The dispossessed are now awake and demanding satisfaction.

The move to impeach Trump and remove him from office is utterly misguided and quite dangerous. The frenzy around plans to reverse the election results may permanently destroy the minimal comity that has preserved the Union for a long time.

I fear that if we do not recognize our essential brotherhood as citizens, we will lose it all. The dispossessed will not accept an extra-legal cancellation of the Trump administration and any attempt to do that will likely lead to something worse.

The dispossessed have a legitimate point: Let’s close ranks and work on a common solution that brings hope to all contenders.

Bob Martin is Emeritus Boles Professor of Economics at Centre College.