Expert Answer 100% (1 rating) WINNERS OF INTERNATIONAL TRADE a)Even though it is widely believed that international trade is advantagous for all participating countries. If we include industrial supplies and automotive vehicles, parts, and engines, the fraction rises to about two-thirds. “, Carroll, Daniel R., and Sewon Hur. In Carroll and Hur (2019), we demonstrate that the negative relationship between tradable expenditure shares and disposable labor income and wealth is robust to controlling for age and education of the household head, household size, and home ownership. The interested reader can find the accompanying full bibliography on our website. 2018. T (202) 312-1600 F (202) 312-1601  West German cities close to the new border performed worse than other cities in West Germany because they lost half their traditional markets: they went from being at the centre of an integrated Germany to being on the periphery of West Germany. The growth in exports was unexpected and rather than being primarily demand-driven, it stemmed from changes in Chinese policy (both domestic and international such as China’s accession to the WTO in 2001) and the resulting increases in productivity, and also from a distinct change in the access that the US allowed China to its market – the introduction of so-called ‘normal trading relations’. Evidence for Germany indicates that while import competing manufacturing sectors suffered job losses due to increased competition from China, this was more than offset by job gains in export-oriented manufacturing units who increased their exports primarily to Eastern Europe. However, for an indication of the breadth of this work, for example with regard to the impact on the UK from leaving the EU, the interested reader is encouraged to look at Tetlow and Stojanovic (2018). 1. Contrast this level of agreement with those from other polls of the EEP on. Indeed, some countries, both developed and developing, have pursued export-led strategies (e.g. For example, technological change could be biased against low-skilled labour, and hence reduce low-skilled wages across all sectors of the economy. We suggest that the difference might be explained by FOMC statements being interpretable in two different ways and the public not having a dominant view on which interpretation was intended. For example, there is some evidence that offshoring to low-income countries, as well as increased import competition, contributed to some of the job losses, especially in low-wage, low-skilled (routine) occupations, and for older workers. The wider evidence for developed countries suggests that low-income consumers benefit more from trade-induced lower prices than do high-income consumers because a higher share of their income is spent on traded goods. At its core, international trade is similar to the cafeteria exchange—both buyers and sellers trade because both benefit from the transactions. First, the issue of export-led growth. International Trade in Goods.” This is a conservative estimate. For example, aircraft accounted for around 1% of UK exports in the early 1960s and over 4% in 2018; the share of power generating machinery in exports was around 4% in the earlier period, rising to over 7% in 2018. Third, domestic producers may import less expensive inputs and charge lower prices. Equally, it could increase the demand for some workers, e.g. These results are largely consistent with earlier work on the local labour market impact of NAFTA on the US from increased Mexican imports, and also with studies on China’s ‘local labour market’ effects in countries such as Norway, the UK, France and Germany. While changes in trade appear to have had a bigger negative impact on lower-skilled workers, other factors such as changes in technology have played an important role. Does International Trade Create Winners and Losers? Student Edition (pdf)  A twist to the story is that the changes in technology may have been in good part induced by the changes in trade. Furthermore, we find that the differences in the price effects across the income and wealth distribution are nonnegligible; rather they are commensurate with the differences in labor market costs measured in other papers. The grounds for such intervention may be that firms have imperfect information (e.g. The evidence suggested that the different changes to skilled and unskilled labour were primarily driven by changes in labour demand (as opposed to labour supply), and that both trade and technological changes were contributory factors. Therefore, even if there are no specialisation changes as described in (1) above, such that the share of an industry in imports or exports remains fairly constant over time, international trade can still lead to substantial changes within the industry. Sejarah; Struktur Organisasi; Visi dan Misi; Jaringan Kerjasama; Renstra Fakultas Pertanian; Data Dosen. In addition, the tariffs were found to have reduced the number of imported varieties, raising the cost of the tariffs further. How Well Does the Cleveland Fed’s Systemic Risk Indicator Predict Stress? 2019. We do so by documenting that the share of consumption expenditures that are tradable is higher for households with low income and wealth (Carroll and Hur, 2019). Workers in sectors particularly exposed to increased import competition tend to be adversely affected through job losses and falling wages, and some evidence suggests that the impact is felt more severely by low-income workers. For example, in the short run one may wish to relax international competitive pressures to ease adjustment and address distributional concerns. Exports are, of course, the means to affording increased imports, but the gains arise from increased imports. Labor market effects tend to differentially harm low-income households, but the price effect disproportionately benefits them.  This study also provides estimates of the extent to which curtailing import competition allowed domestic producers to raise their prices. (2012). Source: UN Comtrade.  Davidson and Matusz (2005), on the US and Canada, Kim and Sun (2009), Autor (2013b) as part of the China effect, Lo Turco et al. The cost to these workers depends on the duration of their displacement and the change in compensation once they find new employment, and these factors depend on how exposed their industry is to trade as well as characteristics of the individual workers. (2013, 2016) for US, Malgouyres (2017) for France and Foliano and Riley (2017) for UK.  Lower income workers, and those with lower labour force attachment and shorter job tenure tended to see larger losses of earnings and employment.  Detailed research on the ‘local labour market’ impacts of the China effect at the level of ‘commuting zones’ suggests that workers in the zones most exposed to import competition from China experienced considerably larger reductions in manufacturing employment and more job churning than others. The evidence suggests that both factors are present and hence that trade can widen within industry inequalities. When businesses shut down, people lose jobs.  See Greenaway and Kneller (2007), Wagner (2007, 2012), Redding (2010), and Silva et al. The losers from international trade tend primarily to be the firms, the workers within those firms, and the places the firms are located in, that are directly affected by increased import competition from abroad. We leave all these discussions for a later occasion. Agglomeration: As opposed to being evenly spread across a country, economic activity concentrates geographically. Third, in a world of integrated supply chains governments should be careful to ensure that policy interventions do not disrupt those supply chains. Within industry reallocations: In the preceding explanation, trade and the distributional impacts of trade, are driven by differences between countries (such as labour, land, capital or technology). Amiti, Mary, Mi Dai, Robert Feenstra, and John Romalis. Improved port facilities may increase local production because products are more easily (cheaply) sold abroad, or reduce it because imports that are substitutes for local production become more easily available. In interpreting this result, it is important to note that the size of the effects are measured as averages across certain income and wealth groups and so this does not imply that the magnitudes will offset for every household. That is, the proportion of imports and exports has grown as a share of the goods and services produced in the United States. , Further, increased import competition could also result in skill upgrading. In addition, policy in response to trade, is not necessarily the same thing as trade policy. If trade makes capital goods (such as computers and other equipment used in production) cheaper, then firms may purchase more of these capital goods. International Trade … While the literature on this is relatively small, evidence suggests that increased trade leads to more job-churning, with higher import exposure increasing job destruction, and higher exports leading to job creation. There may be consumer gains through more product varieties, lower prices, or higher quality of goods and services, and gains from higher wages induced by higher productivity. Lecture 2 - Winners and Losers from International Trade from last time immiserizing growth Rybczynski theorem winners and losers within a country Stolper-Samuelson theorem factor price equalization theorem trade and income inequality Leontief paradox trade and jobs trade and technology. THE LOSERS. First, consumers have the option to purchase imports from countries that produce at a lower cost. The producers in the buying nation face greater competition for their products, which inevitably means lower prices and profits. the decline of textiles, or iron and steel industries in the UK); from within-industry competitive pressure even in apparently competitive industries (e.g. This does not mean there are no gains from exporting. Bad policy can create further distortions and problems. Every system has winners and losers—there’s no such thing as a free lunch.  To the extent that trade leads to higher productivity (as opposed to simply the more productive firms exporting), and to the extent that there are market failures which prevent firms from exporting, there may be grounds for government intervention. Thus, for example, government might seek to facilitate the acquisition of skills through education or communications by providing modern infrastructure. This is sometimes referred to as the hollowing out of jobs. Further, while consumers on the whole have benefitted from trade through lower prices and increased variety and quality of products available, evidence suggests that low-income consumers may have benefitted relatively more. ‘before the event’) encompasses tools such as Partial Equilibrium (PE) models and Computable General Equilibrium (CGE) models. Rising productivity, which may in part be trade induced, could result in either lower or higher demand for labour by firms. Winners and Losers in International Trade: The Effects on US Presidential Voting - Volume 71 Issue 3. Topics. Indeed, within a broader context of rising inequality in many countries, recent years have seen growing public concern surrounding the negative consequences of trade and globalisation for certain sectors of society. The appropriate policy responses will depend on the underlying causes and industrial structure.  Jensen and Kletzer (2008) discuss this in the context of the US.  We gratefully acknowledge Foliano and Riley (2017), who supplied us with the underlying data to enable us to replicate their map which appeared on p.9 of their article. trade reflect factor-based distributional concerns,14 a number of studies link the expected winners and losers of global trade and financial flows to US international economic policy-making in Congress. Although increased international trade is widely viewed as beneficial to the economies of the participating countries, the benefits are not distributed evenly across individuals within those countries, and indeed some individuals may bear a cost. See also Görg (2011). Data has been re-based from 1987 to 1995, authors’ own calculations. , Another way to look at this is that introducing barriers to trade tends to harm consumers.  The comparison is based on the mean weekly wages in a Travel to Work Area relative to the UK average weekly wage. By international standards, the UK has some of the largest geographical inequalities among developed economies, and some of this will have been trade-induced. Most economists have argued – rightly so – that, overall, growing international trade has benefitted countries, and within them consumers, workers, and businesses. This suggests that governments may need to mitigate the speed of market opening, for example by phasing in new trade agreements over a number of years, in order to reduce the shock to the local economy and give it time to adjust.  See, for example, Helpman (2016) for a discussion of the rise in inequality in developed countries since the mid-1970s and for a review of the impact of trade on inequality. Watch: Briefing Paper Launch and Panel Discussion, Economists have long argued, and with good justification, that international trade brings overall benefits to economies. Given such developments, and as the UK prepares to leave the EU and have an independent trade policy, it is important to understand how future trade agreements, or policy changes, may affect economic outcomes such as prices, productivity and output, and through these, individuals and regions. But increasing imports brings competitive pressures which may also result in domestic industries and sectors declining, and losing out from trade. (2014) define an industry’s trade exposure as the change in imports from China over the period 1991 to 2007, normalized by a measure of domestic production in 1991. , Finally, while consumers typically benefit from trade liberalisation, evidence supports the idea that low-income consumers tend to gain more because they tend to concentrate their spending in sectors that are traded more..  The opposite was observed when East and West Germany were split. Ex post studies require data on the variables of interest before, and after, the event occurred, which can constitute data from surveys, interviews and/or official statistics. Because poorer households spend a greater proportion of expenditures on tradable goods and services, they are more sensitive to the price effects of trade. In both data sets, we restrict the sample to working age households (between the ages of 25 and 64) with positive amounts of wealth and disposable labor income.5, 6, Figure 3 plots the relation between tradable expenditure shares and disposable labor income in the (a) PSID and the (b) CEX. Over this period, trade has increased dramatically as a fraction of GDP (figure 1). Many of the results and papers summarised in this Briefing Paper are based on this approach. E) the exporter at all times and sometimes also the importer.  See Balsvik et al. International trade leads to greater specialisation and more efficient resource allocation, and this often leads to lower prices, more output, and improvements in productivity. 61, No. If there are losers from international trade, do the gains to the gainers exceed the losses to the losers? If International trade is done fairly and openly, normally no one loses. If markets are in some way imperfect they will not generate the most efficient outcomes, and there may be scope for governments to intervene to address those ‘market failures’. See for example, Fujita et.al. (2015) on Norway; Foliano and Riley (2017) for the UK; Dauth et.al (2014) on Germany, and Malgouyres (2017) who looked at France. Mark Thoma and William Polley have shared their thoughts about the importance of compensating the losers from trade, while others (e.g.  Lovely et al. Some posit that the changes in trade were insufficient to have had such large effects, and that technological change was the more important driver, while others argue that trade was more important. Tim Worstall) have questioned that need. Alternatively, consider Figure 1 which gives the share of cars in UK exports since the early 1960’s. Charlotte Denny. So far we have presented evidence of two channels that may affect low- and high-income households differently and that work in opposite directions. For example, the South West of England is one of the poorer regions, but the impact of China per job is relatively low. Indeed, within a broader context of rising inequality in many countries, recent years have seen growing public concern surrounding the negative consequences of trade and globalisation for certain sectors of society.Those concerns, in turn, are seen as being partly responsible for the rise in populism in some developed countr… Evidence for the UK also suggests that low-paid workers were more adversely affected by Chinese import competition. This reflects the significant growth in Chinese sales to the US and other developed countries. In addition, when the authors proxied for skill (education) with relative predisplacement wages among peers, they found evidence that high-skilled workers were much more mobile across industries and sectors and consequently suffered lower income losses. See also Hsieh et al. Again, this raises the question of the extent to which trade may have been a driver of these changes in employment. On net, how important is each channel? (2001) and Gardiner et al. Since some consumers want Fords, and others Volkswagens, trade will occur. Studies differ on the relative importance of each. This is because most products produced are exported hence there will not be available products for the consumers to use. However, increased competitive pressures also result in industries and sectors declining, less efficient firms closing down and workers being made redundant. We follow Johnson (2017) who finds that the 11 percent threshold minimizes the number of industries that change tradability classifications due to a 1-percentage-point increase or decrease from the threshold.  There is also some evidence, that while increased import penetration in final goods may negatively impact on manufacturing employment, increased imports of intermediates may have the reverse effect as it is associated with increased engagement in value-chains, and consequent exports of those goods higher up the value chain..  Recent work on the US suggests that trade adjustment assistance did have a positive impact on workers, both in terms of how quickly workers became re-employed, and also in terms of higher incomes, with a bigger impact in the more disrupted regions. , The preceding examined changes in employment and wages across industries/sectors. Autor et al. Forward Guidance during the Pandemic: Has It Changed the Public’s Expectations?  Similarly UK manufacturing employment fell by 2.8 million over the period 1982-2018. the East German regions still lagging behind the West German regions) and it may take a long time for localities and regions to adjust to such shocks. International trade involves several laws. Obviously the international trade is not better for all. 3. This is because the latter face more significant import competition from developing countries, and their inputs may be easier to replace and/or offshore. Most governments have various labour market safety net policies, such as social insurance or re-training. Places: As already discussed many factors influence regional inequality and trade is one such factor. However, such a change typically means getting more output for less input, which may, in turn, imply a need for fewer workers for the same level of output. (2013) on Italy. Autor et al. This Commentary provides a review of the SRI’s performance from 2001 to 2020 and finds that it has performed well, providing a reliable, valid, and timely signal of elevated levels of financial system stress. (2019) examines the impact on prices in the US following the US administration’s introduction of ‘trade war’ tariffs. Economists overwhelmingly view the benefits of trade as outweighing the costs. Not every single entity, however, gains from international trade. This in turn can lead to negative spillover effects for example on crime, health and schooling. This is because on the one hand it leads to lower prices and hence increased demand, but it also leads to a reduced demand for labour inputs.  This is the principle of comparative advantage, which arises when there are differences in relative costs across countries. Indeed, several countries already have these types of programmes in place, such as the Trade Adjustment Assistance programme in the US and the European Globalisation Adjustment Fund. 2019. 2018. 1. Lump-sum transfers, although effective in theory, are virtually impossible to implement in practice.  The structural shifts could be driven by several factors, notably changes in technology, changes in demand (as income levels rise consumers typically spend a higher proportion of income on services), or changes in trade. , More recently, US manufacturing employment fell by just under 6 million between 1999-2011,and, over this time, differences between skilled and unskilled wages grew. Second, each of the above causal chains can occur over different time horizons and these time horizons will differ across sectors, industries, regions and people. A number of financial stress measures were developed after the financial crisis of 2007–2009 in the hope that they could provide regulators with advance warning of conditions that might warrant a corrective response. Countries with lots of skilled labour can produce skilled-labour-intensive goods and services relatively cheaply (aircraft, banking), those with lots of fertile land can produce agricultural products at lower cost, and those with better technology for producing industrial pumps, say, will have cheaper pumps.. As a share of expenditures, poor households spend more on food, a relation known as “Engel’s Law.”. While our results are not sensitive to these restrictions, we focus on working age households since they are more likely to be affected by the labor market effects of trade. Explain. When economists advocate for more open trade, they usually point to lower consumer prices as a major benefit. on sales or investment opportunities in foreign markets, on investment opportunities for foreign firms in the domestic market, or on policy and the business practices in those markets); that there may be spillovers between firms; the existence of institutional or procedural entry barriers, and possibly ad hoc discriminatory policies; or finally just to provide more certainty for firms (for example as a guarantee of stable political relations with a trade partner). The lowest and highest wealth deciles have average tradable expenditure shares of 39 percent and 30 percent, respectively, across the two data sets.  Broda and Weinstein (2006). For firms with exporting opportunities, (such as those producing aircrafts, optical and medical instruments, and soybeans) increased trade can lead to revenue and job growth, while firms that face competition from less expensive imports (such as those producing furniture, toys and sporting equipment, and plastics) may be forced to downsize or exit the market. Differences between firms rather than within firms in turn leads to considerable wage inequality within sectors and within occupations, and is partly driven by exporting firms paying higher wages than non-exporting firms. We find that the effects of trade on the labor market and the effects of trade on prices go in opposite directions and are of similar magnitude. 2019. Winners and Losers from Global Trade. How Did China’s WTO Entry Affect US Prices? For instance, a household that experiences a long spell of unemployment may not be fully compensated by the price effects. Economists have long argued, and with good justification, that international trade brings overall benefits to economies.  This was also a period with significant changes in trade, with the growth in Chinese exports, increased offshoring, and increased fragmentation of supply chains. Opening up to international trade (i.e. Map Right: Data are from Foliano and Riley (2017). These companies must find ways to make their products competitive or produce other products, or they risk going out of business. Opening up to trade also enables firms to sell to new buyers and markets.  See Hyman (2018) who finds a positive impact. “, Autor, David H., David Dorn, Gordon H Hanson, and Jae Song. 2019. Indeed, while it has been recognised that countries’ ability to realise the full potential gains from trade depends, at least partly, on the accompanying supporting policies, it is also true that there is no one-size-fits-all policy strategy to achieve this..  Having access to larger consumer markets encourages economies of scale and increases the returns to investment and innovation.  This is in contrast to the results discussed above for the US, and similar analysis for the UK. For example, the paper by Amiti et al. How trade affects labor markets depends on how much those markets are exposed to import competition or export opportunities. While the net impact on employment may be small, this may conceal important labour market dynamics as the process of reallocation impacts on firm or sectoral level job losses. It is worth noting that while these factors were mutually reinforcing and led to dramatically higher average living standards, they also led to fundamental shifts in the distribution of incomes, leading to considerable disruption and at times social unrest. 2018. Winners and Losers: What is the Evidence? Our focus is primarily on developed countries, and on within-country impacts rather than cross-country effects. For instance, Feenstra and Sasahara (2018) find that between 1995 and 2011 the growth in total US exports led to a net rise in job demand even after accounting for job losses from the growth in imports.  See Eriksson et al. We first provide a conceptual background which outlines the causal mechanisms which may lead to winners and losers. Specialisation: The classic explanation is based on the principle that countries should specialise in what they are relatively better at, driven by countries being in some way different from each other. In practice evidence suggests these programmes can be difficult for workers to access and are often under-utilised. However, trade also occurs even if countries are similar. This could simply be a selection effect (i.e. Differences in the overall effects of trade across households may contribute to the disagreement among the public as to the benefits of trade openness. Show transcribed image text. In this section we consider what drives international trade and why trade may have such distributional consequences.  This is sometimes referred to as the ‘new economic geography’. For example, recent work on the impact of US trade war tariffs has explicitly considered the regional dimension by examining which counties or states are most affected. Daniel Carroll’s primary research interests are macroeconomics, public finance, and political economy. How trade affects labor markets depends on how much those markets are exposed to import competition or export opportunities. Does international trade cause unemployment to rise in the U.S.?! The preceding in turn raises the question, and difficulty, of identifying what constitutes a trade-induced shock and how to identify its impact. Additionally, in the future there may be more significant disruptions for workers driven by (in part trade-related) changes in technology and automation. HS2 may help Mancunians sell more services to London, or vice versa. Take ‘people as consumers’. So while trade impacts on the real incomes of regions, there are many other factors at play. Estimating US Consumer Gains from Chinese Imports, Trade and Labor Market Dynamics: General Equilibrium Analysis of the China Trade Shock, On the Heterogeneous Welfare Gains and Losses from Trade, The ‘China Shock,’ Exports and US Employment: A Global Input–Output Analysis, The Production Relocation and Price Effects of US Trade Policy: The Case of Washing Machines, What Are the Price Effects of Trade? Even where models do not have the labour / household / regional dimension embedded, the results on the changes in output by sector can then be used to infer what might be the impact on these categories. 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