The Gains from Trade and Migration

I've always told my class that the gains from trade are large, about ten years ago (dating myself here) people were estimating the welfare costs of trade restrictions in the United States to be about $55,000 per job saved, assuming that the short run job losses literally vanish … forever… It puts a little perspective on the trade gains and welfare losses from restricting trade.

I've always believed the gains from migration to be smaller, but still positive. For example, some studies estimate the per capita gains for native US citizens to be about 0.25%, and a fair argument could be made that migration to the US is much more disruptive to the distribution of income than trade is. What's left out of this calculus is the huuuuuuge benefit per capita to the world on the whole, and to developing countries in particular.

Last week's Economist discusses this issue, citing an article by Kym Anderson and L. Alan Winters. What surprised me was that they estimate the global gains from migration to be much larger than the global gains from trade. The authors cite models that have predicted the gains from trade to be around $300billion per year worldwide. Similar techniques estimate the gains from just 3% of the worlds workforce migrating across borders to be about $675billion per year by 2025. These numbers are mind-boggling, especially if you consider the fact that just 3% of the world population currently resides in a country other than the one in which they were born – with existing controls and restrictions on immigration. So, taking the combined gains from trade and migration, we're basically looking at welfare gains of about a trillion, or about $150 per person per year – a sum that's far from trivial for the 60% of the world's population living on less than $2 a day.

Not only that, but the article mentions that the gains from trade of $300billion may be understating things. Computational models estimate the global cost of trade restrictions to be as high as $2.5 trillion.

Getting Tanked on French Air

Boeing's steamed this week (and for that matter, since early March) over recent developments in the Air Force's contracts for new midair refueling tankers. Basically, their beef is that that the Air Force awarded a 35 billion dollar procurement contract for new tankers to replace the KC-135 (which, as it turns out my father piloted). The subtleties of their complaint accuse Airbus/Northrop (parented by EADS) of insider trading and that there were illegal actions in the procurement of the contract. There couldn't be a thicker slice of baloney in the books.

Procurement contracts for government spending are one of the most common non-tariff barriers employed by the United States and countries in Europe (ever see a state trooper driving a Honda instead of a Crown Vic?). So if they can pitch a fit and claim wrongdoing in some way, they will. I'm a little surprised, however, that they tried to be creative by alleging illegal trading practice instead of invoking the usual "American Jobs" argument (perhaps because Airbus is going to be doing most of the assembly that normally occurs in France at plants in Alabama, USA). This shows some real ingenuity in the lobbying process! What's funny is that if anyone has insider status for such contracts, it's the Boeings and Lockheeds, not the Airbuses and Embratels of the industry.

Export Taxes and Hunger

Last week I lectured on trade policy to my undergrads. I mentioned that the United States Constitution prohibits Export Taxes, and I got a predictable response. "Why would a government want to tax exports?" one clever student asked. I used it (as was my intention) to explain the concept of Lerner Symmetry, which basically illustrates that in terms of relative prices, output and welfare, an export duty is equivalent to an import tariff in the way it affects (damages) an economy. The basic idea is that both of these instruments limit trade and so it doesn't matter which end you limit it from: coming or going. A tariff de facto restricts exports as well as imports. I then gave a couple of examples of how countries use export taxes to advantages in a similar way to tariffs: for example, when the US threatened tariffs if Canada didn't limit soft lumber exports, the Canadians brilliantly achieved the limitation with a tax on exports. The net result was the same as if the US had imposed the tariff, except the Canadian government got the tax revenue instead of Uncle Sam.

The more real answer is that once a politician gets something in his (her) head that something is a good idea for accomplishing some political end, there's virtually no stopping him. No matter how noble the cause, politics can be pretty nasty about finding a way to blunder it, but it's not always their own fault. Developing countries have been applying duties for some time now on food exports, with the goal of retaining greater quantities of food for a hungry domestic population. The issue was discussed in this week's Economist. But the question is: "Does this do the job?" In short, yes, if Lerner symmetry holds theoretically. The whole point behind these policies, and behind the principle of Lerner Symmetry is that the change will not impact the world price much. In effect, in order for producers to continue exporting with the duty, the world price must be able to cover the domestic costs (domestic market price) plus the tax (otherwise, continue supplying the domestic market to avoid the tax). So, whereas taxes on imports increase the domestic price of imports, taxes on exports decrease the domestic price of the exported good. It is exactly this that policymakers rely upon when they impose such a "recipe for trouble" on the economy. Sure the adverse effects outweigh the good they do, but the duties do make food cheaper. And, conveniently for a eggheaded economist like me, they illustrate and rely upon a theorem that seems counterintuitive at first blush.

Basically, the policies boil down to a second-best solution: they do the job, but of all the options that could do it, trade taxes are among the worst. Better would be to subsidize consumption directly, perhaps by taxing non-food goods and transferring the revenues to poorer households in the form of in-kind transfers. The reason the duties are laid on, the Economist correctly points out, is political expedience, but I think that this keen observation oversimplifies the issue. Many countries have extreme difficulties collecting taxes other than those from trade, and many solutions that would be best solved by direct subsidies are often more than inexpedient; they're infeasible. In nerdy terms, there's an important political constraint that the writers at the Economist isn't taking into account. Then again who am I but a bookish economist who only knows abstract inapplicable theories?

Free Trade and the Liberal Bourgeoisies

I blogged last week about two groups cited as opposing free trade. The first were the working class of developed countries – this group is correctly concerned about their own jobs, incomes, families, and livelihoods. Although trade is good overall, it hurts some groups because the gains are uneven, and this group is the most likely to suffer in the short run.

The second group consisted of "liberal hippies" who are sort of caricatured as English professors (no offense intended to the English professors in my own college) and their idealistic young students. Their ideas are romantic, and their ends are admirable and include: reducing global poverty, saving the environment, ending armed conflict in the globe, child labor, gender and racial discrimination (er, reducing them, that is), and so on. Their means for accomplishing them on the other hand are somewhere between self-conflicting and patently stupid because they almost always include imposing trade restrictions on countries who appear to be behaving in an unsatisfactory way or tying these issues to trade negotiations. Oh, what a tangled web they weave…

Let me start though with the empirical evidence on such issues:

Poverty: With a few exceptions, trade has been found to alleviate poverty in most countries that are "open." Viet Nam is a good example, where textile industries boomed as a result of trade, which was paired with the adoption of better technologies in the rice sector and a win-win or poor families. Here's another story from NPR on China, and a complementary piece, also from NPR. It's an interesting tale of factories in China shutting down, which seems sad at first, but digging deeper, much of the jobs lost are due to the fact that labor markets are becoming more competitive, workers are seeking jobs with other firms, and wages and labor standards are increasing.

Environment: The effect of trade on the environment is tough to pin down. The only thing that can really be said is that assuming trade leads to greater productivity, higher incomes and a "growth spurt" in developing countries, then it will also lead to increased demand for energy resources, and put greater strain on the environment. There are two problems with this proposition. First, even if it is valid, liberal hippies have to concede the point on poverty to make it true. If trade leads to growth and increases household consumption of carbon-emitting fuels, then it is probably because they are less poor. To restrict trade would be to deny poor families the opportunities that greater wealth brings and we would be inflicting poverty on 60% of the world's population in an attempt to put a band-aid on environmental harm. Second, the proposition above assumes that with growth these economies will stupidly continue to use the same harmful technologies and not adopt cleaner ones. Even China has recognized that they need to resolve this issue, with an increasing number of "zero energy/zero emissions" skyscrapers being built and carbon capture technology being better investigated.

Child Labor, Social Issues, etc.: Globalization brings these issues more to our attention than anything else. These things have always been problems, but they have been greater problems in closed countries, and in poorer countries. Even the United States and Britain, when they were first industrializing, struggled with problems of child labor and various forms of wage and employment discrimination. These problems tend to be more effectively alleviated by extending economic freedom, which is what openness to trade does, not denying it, which is what restrictions do.

A good book on the "human face" of globalization is In Defense of Globalization by Jagdish Bhagwati. It should be required reading for anyone considering opening their pieholes on the topic of trade and globalization.

It's actually going to be a fun week – I see two good articles on trade and globalization in this week's Economist, so you'll get to hear my thoughts on them.

Bang