Apparent vs. Real Winners and Losers in Trade

In his latest blog post, Alan Tonelson remarks on a study that puts trade issues in a new light. The study “contends that, since 1970, crooked politicians have stolen just over $12 trillion from the third world countries they’ve ruled.” Moreover, almost 2/3 of this theft has involved just a few countries, notably major American trading partners China and Mexico.

Though the scale of this corruption is stunning, Alan makes a somewhat different point, as follows. An argument made by the Establishment class in the U.S. is that although trade harms the American middle class (something they are now just starting to admit, thanks to Sanders and Trump), it is lifting millions of people in the Third World out of poverty. But Alan ties in the corruption issue by pointing out that if all this stolen wealth had been invested in infrastructure, education and so on, the salutatory effect on the Third World poor would have been far greater than whatever benefit they derive from trade. The “lifting them out of poverty” issue is thus a red herring.

Sounds plausible, but it got me to wondering just who benefits from trade with poor countries, which will be my topic in this post.

I’ll start by noting that Alan and I move in quite different circles. In a post a few days ago, he mentioned that a standard argument in favor of liberal trade policies for the U.S. is that it reduces the chances of war. Yes, I have occasionally heard this argument, as well as the one about reducing world poverty, but really, I think one hears this much more often in Alan’s circles than in the mainstream press — or from Hillary Clinton. The canonical arguments for free trade in most Americans’ minds has been claimed benefits to them, in terms of lower consumer prices and creation of American jobs.

In the last 15 years or so, I’ve begun to understand that claims along the latter lines are often fallacious.  A Wall Street Journal analysis, for instance, showed that only a small part of the price of an iPhone is connected to Chinese labor. My colleague Phil Martin found that use of unauthorized immigrant labor saves consumers of lettuce only about a nickel per head. Due to small profit margins, the use of foreign labor does increase the vendor’s profits proportionally, but the much-vaunted savings to consumers is not there in most cases.

These things have been startling revelations to me, as they clash not only with what we are told in the press, but also with the extensive education in economics that I pursued as an undergraduate and in continuing informal study afterwards. I feel a little sheepish about being so naive, but as Alan points out, plenty of economists are saying the same thing today. Caveat emptor, even in — especially in — university studies.

Thus my first reaction to Alan’s post was to wonder whether the claim that trade helps alleviate Third World poverty is just as subject to misinformation as assertions of benefits to Americans. I haven’t read studies on this, but I know the situation in China fairly well, and I must say it’s not so clear that rural Chinese, the putative group most helped by trade with the U.S., has benefited to the degree implicit in the slogans about “lifting millions out of poverty.” Though it’s certainly true that individual factory workers from rural China have found the income from their work to be worth the quite onerous hardships (leaving their children back home, enduring harsh, dangerous and tedious working conditions etc.), I believe few of them would agree that they have been lifted out of poverty. Instead, it is the well-off in China (or more commonly, in Taiwan, the source of much of the investment) who have reaped the main benefits.

In other words, the main winners on both ends of trade seem to be the upper class, quite contrary to the image most people have of middle-class beneficiaries in the U.S. and lower-class ones in the Third World.

One of the particularly disturbing points Alan makes in his post is that prominent, presumably Democratic, economists such as Harvard’s Kenneth Rogoff are in essence saying that Bernie fans should be ashamed of themselves for supporting Sanders’ call for tighter trade policies. Does Rogoff really believe that? He’s about my age, and thus grew up on a diet of Samuelson-style support for trade, and maybe he has just never taken the trouble to take a serious look at just who the winners and losers are here. Is he yet another member of the Chattering Class, whom I noted recently have no idea what it’s like to be laid off, face eviction or mortgage default and so on? It’s so easy to view things simplistically while sipping a $6 latte’ in Harvard Square.