Gains from trade and all that

When and how does trade produce gains?

One of the oldest debates in intellectual history

It is generally objected against the East-India Trade, that it carries great quantities of Bullion into India, and returns chiefly Manufactures to be consum'd in England; there are also particular Complaints against this Trade by the Labourer, that he is driven from his Employment; by the Landholder, That his Rents must be abated.

But a Law to restrain us to use only English Manufactures, is to oblige us to make them first, is to oblige us to provide for our Consumption by the labour of many, what might as well be done by that of few; is to oblige us to consume the labour of many when that of few might be sufficient. Certainly we lose by being restrain’d to the Consumption of our own, we cannot be so much impoverish'd by the free and indifferent use of any Manufactures.

Henry Martin (1701)

Martyn’s analogy between trade and technology

A Saw-mill with a pair or two of Hands, will split as many Boards as thirty Men without this Mill; if the use of this Mill shall be rejected, that thirty may be imployed to do the work, eight and twenty are imploy'd more than are necessary, so many are imploy'd to do the work that may be done as well without 'em. Five Men in a Barge upon a Navigable River, will carry as much as an hundred times so many Horses upon the Land, and twenty times as many Men ; if the Navigation of this River shall be neglected, that the same Carriage may be perform'd by Land, nineteen in twenty of these Men, and all these Horses, are more than are necessary to do the work, so many are imploy'd to do the work that may be done as well without them. So, if by any Art, or Trade, or Engine, the Iabour of one can produce as much for our consumption or other use, as can otherwise be procur'd by the labour of three; if this Art, or Trade, or Engine, shall be rejected, if three shall rather be imploy'd to do the work, two of these are more than are necessary, so many are imploy'd to do the work that may be done as well without 'em; so in all cases, all that are imploy'd more than are necessary to do any work, are imploy'd to do the work that may be done as well without 'em: Wherefore, the People imploy'd to make Manufactures here, more than are necessary to procure the like from India, are People imployed to do the work that may be done as well without 'em, so many are imploy'd to no profit of the Kingdom/

--Henry Martin (1701, 32)

(1) Gains from moving to free trade from autarky

Where do the gains from trade come from?

• Differences between countries in the relative scarcity of goods

• Reflected in differences in (relative) prices in the absence of trade (autarky relative prices)

• Due to – Supply side differences

• Relative productivities (Ricardo)• Relative factor endowments (Heckscher-Ohlin)

– Demand side differences• Differences in tastes

(2) Gains from removing domestic trade barriers

(3) Gains from transport-cost reduction (or liberalization) abroad

Note: Direction and magnitude of effect depends exclusively on the impact on the terms of trade (price of exports relative to price of imports)

How large are the gains from trade?The case of tariff liberalization

How large are the gains from trade?Illustrative calculations

How large are the gains from trade?estimates from large simulation models

Note: The source is Bradford and Lawrence (2004) and the barriers in question refer to anything that prevents price equalization across markets.

Notes

• Three sets of simulations– Own liberalization– Others’ liberalization– PTAs

• Size of effects depends on– Share of trade in GDP– Extent of market segmentation or price differential

• Terms of trade effects– They mute the gains from liberalization in some large

countries (e.g., the U.S.)– They are responsible for some of the “perverse”

(negative) effects in the Table.

Another set of estimates, from World Bank, this time referring to just tariff removal

More from the World Bank study

Discussion

• Why do the Bradford and Lawrence numbers differ so much from the World Bank estimates?

• What do these numbers imply for the magnitude of benefits for continued trade liberalization (e.g., Doha)?

• What features of the real world may lead us to inflate these numbers (or reduce them)?– Scale economies: but can cut both ways– Externalities, imperfect competition and other market failures that may

be alleviated or aggravated by trade openness– Gains from product variety– Static versus dynamic efficiency gains (trade => productivity growth

over time?)– Samuelson’s riposte: the terms-of-trade effects of other nations’

productivity gains– Peterson Institute: US richer by $1 trillion a year due to “past

globalization”

Gains from financial globalization

• Transfer of savings from countries where (marginal) productivity of capital is low (rich nations?) to where it is high (poor nations?)

• Smoothing consumption in the face of volatility• Global diversification of portfolios, reducing risk

all around• Collateral benefits?

– More competition, better finance, improved governance…

Does capital flow from rich to poor nations?

Source: Prasad, Rajan and Subramanian (2006)

Has risk-sharing increased?

Source: Kose et al. (2007)

The spread of financial crises

Source: Jeanne and Ranciere (2005)

Globalization and income distribution

Recent trends in income distribution

Trends in global poverty: absolute numbers(people living below $1.25 per day poverty line, in 2005 PPP $)

Note: This poverty line corresponds to the average of the national poverty lines for the poorest 15 countries in the world

Trends in global poverty: incidence(percent below $1.25 per day poverty line, in 2005 PPP $)

Note: This poverty line corresponds to the average of the national poverty lines for the poorest 15 countries in the world

Trade policy and distribution: not everyone wins

From Mankiw

How much redistribution per dollar of net efficiency gain?

If not everyone wins, does a majority?

• Not necessarily– Nothing in theory says that a majority must win– Example of high- versus low-skill workers in advanced nations

Will everyone’s wages be set in Shanghai?

Source: Leamer

When will trade equalize real wages across countries?

• Head-to-head competition in standardized industrial products– role of labor productivity

• Differentiated products– Degree of substitutability in demand– Relationship-specificity of production

• Non-competing production– Soccer balls for high-tech products

• Do non-traded sectors shield workers from the forces of global competition?

Trade and jobs

• Job displacement versus unemployment

Can we say trade is good for a country if some people lose?

• The analogy with technological change– objections?

• Is there such a thing as “unfair” trade?– Foreign country subsidies– Worker repression in foreign country

• Procedural fairness• Should we compensate losers? • What criteria should we use?