Impact of trade

Mark Thoma summarizes the ongoing debate over the impact of trade over on Economist's View. His post "Why Large American Gains from Globalisation are Plausible" is an excellent point to enter the discussion.

This post touches on the related issue of inequality - a topic that seems to lie at the heart of a great deal of angst in both academic and popular circles.

I recommend a read of the post over on Thoms'a blog (a portion of which can be found below.)



Thoma makes presents the conventional view of trade as he writes:

You can read Dani Rodrik if you want to know "under what conditions will trade liberalization enhance economic performance?" ... Whatever the theory says, the evidence in this paper and the evidence more generally is pretty clear, globalization has large net benefits.

Much of the discussion in this blog post revolves around the potential impact of trade on the US economy. For example:

The Bradford et al. study argues that removing all remaining barriers to trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household (or 3.4-10.1% of GDP). That is a whole chunk of change!

Why large American gains from globalisation are plausible, by Gary Clyde Hufbauer and Matthew Adler, Vox EU: The Peterson Institute calculates that the US economy was approximately $1 trillion richer in 2003 due to past globalisation – the payoff both from technological innovation and from policy liberalisation – and could gain another $500 billion annually from future policy liberalisation (Bradford, Grieco, and Hufbauer 2005). Past gains amounted to about 9% of GDP in 2003, and potential future gains constitute another 4%.


However, empirical research on the American economy does not support the contention that income distribution has been strongly affected by international trade and investment. The forces of technology, education, and immigration are much stronger (Lawrence 2008). Also see the WSY online: Technology, Not Globalization, Feeds Income Inequality

Critics of globalization often cite increasing income inequality in their opposition, but a new study suggests that technological advances, not globalization, is responsible for an increase in the gap.


Rising Income Inequality: Technology, or Trade and Financial Globalization?
Prepared by Florence Jaumotte, Subir Lall, and Chris Papageorgiou

Estimates using a new and more reliable dataset on inequality and detailed measures of globalization suggest that the observed rise in inequality across both developed and developing countries over the past two decades is largely attributable to the impact of technological change. The contribution of increased globalization to inequality has in general been relatively minor. This reflects two offsetting effects of globalization: while increased trade tends to reduce income inequality, foreign direct investment tends to exacerbate it. Both globalization and technological progress tend to increase the relative demand for skills and education. While incomes have increased across all segments of the population in virtually all countries in the sample, incomes of those who already have higher levels of education and skills have risen disproportionately more.

The implication of these findings is that broader access to education will allow a greater segment of the population to take advantage of the opportunities from globalization and technological change. While these changes have increased incomes across countries and helped reduce poverty, the benefits would be even greater, allowing for a faster reduction in poverty, if the distribution of skills became more equal. This suggests that the returns to investment in education for all countries has risen in the recent era of globalization.