Good versus Bad Free Trade

A Wall Street Journal story this morning gently but firmly makes the point that many erstwhile free trade supporters are hypocritical. They were fans of free trade so long as it meant blue-collar jobs going overseas, and cheap products coming back. That made sense to them.

But now that it means service jobs — like software and financial analysis — heading overseas, some supporters aren’t so sure any more:

So long as manufacturing jobs were at stake, opinion leaders didn’t take much note, said Dani Rodrik, a Harvard University economist. The alarm is being sounded now, he said, because “the opinion leaders are seeing their neighbors being displaced.”

There is an old saw in economics that a recession is when a friend loses his or her job, and a depression is when you lose yours. There is apparently something similar in free trade: Good free trade is when someone else’s job is sent offshore; bad free trade is when yours is.

But as the WSJ piece go on to point out, that is a short-sighted view to take:

If Indian programmers, for instance, produce software at lower prices than Americans can, that would reduce costs for the many users of information technology. As that lower-price software permeates U.S. and European companies, those companies would become more productive and more able to hire new workers. At the same time, as India and China develop economically, they would become more-lucrative markets for U.S. exports.

I said something similar in a recent CNBC appearance, and boy oh boy did I get nasty email. But the truth hurts: Trade is far from painless, but the benefits economy-wide almost always outweigh the costs, as Catherine Mann points out at the tail end of the WSJ piece:

[Mann] has estimated that U.S. companies were able to reduce the cost of computers and communications equipment by about 10% to 30% by making the equipment in factories around the world. That lifted U.S. economic growth by about 0.3 percentage point a year between 1995 and 2002, as more companies made use of information technology. She expects similar economic gains if computer software is produced in an internationally efficient fashion.

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