David R. Henderson  

DeLong on Gains from International Trade

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UC Berkeley economist Brad DeLong has written one of the best short pieces on the gains from international trade. His post is titled "Are There Benefits from Free Trade?: DeLong FAQ."

He writes:

Well, typically and roughly, the average import we buy from other countries we get for 30% off--we use foreign currency that costs us $1.40 to purchase goods and services made abroad that would cost us $2.00 worth of time, energy, resources and cash to make at home.

But there's more.

Typically and roughly, we sell the typical export to foreigners for about 40% more than we would get if we had to find a market for it at home: it costs us $1.00 worth of time, energy, resources and cash to make stuff that we can sell to foreigners for $1.40 worth of foreign currency. Thus for the country as a whole our foreign trade sector--exports and imports--is a way to get $2.00 worth of value for $1.00 worth of work. That's a very good deal. Our foreign trade sector takes advantage of this good deal on a mammoth scale: in the fourth quarter of 2016 we were trading goods and services at a rate of $2.8 trillion a year--17.5% of national income. That means that in a typical year we sell exports that we could get $2 trillion for if we had to sell them here at home and get imports that would cost us $4 trillion. That makes us $2 trillion per year--$25,000 per family each year--richer and more prosperous.

That is a big deal.


Indeed. I do wonder where he gets the 30% and 40% estimates. They strike me (I admit this is gut feel) as about double the right numbers. But even if the right numbers are half of his estimates, there are huge gains from trade.

The whole thing, which is not long, is worth reading.


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CATEGORIES: International Trade




COMMENTS (17 to date)
Thomas writes:

I agree that there are gains from trade. It's a no-brainer. If there weren't gains (or the prospect of gains), people wouldn't trade. But "we" don't reap the gains -- or not directly, at least. The gains are reaped by the firms and individuals who trade. Some of "us" may even lose because of trade (i.e., American workers who lose their jobs). I'm not saying that's an argument against international trade. All I'm saying is that I protest the use of "we," as if trade were a collective endeavor.

David R. Henderson writes:

@Thomas,
True. So the correct statement is not that we gain from trade. The correct statement is that American residents who trade across all borders gain massively from trade and that virtually everyone in America is someone who trades across borders; therefore, although they may lose on the goods that they no longer produce for other American residents, they gain on the tens of thousands of goods that they buy. In almost all cases, their gains from trade as a whole outweigh their specific losses.

Effem writes:

And how do you value the externality that the losers in the free trade game might tear down your entire system?

George writes:

That last leap is where Trump and many others find fault. As good as trade is it is not 25k per family each year since for obvious reasons the benefits of trade go to specific individuals and firms that trade as Thomas states and if you happen to be the one to lose your job due to trade you or your family are clearly not making or benefiting 25k per year.

I would rather look at some sort of natural experiment to see how the performance of people who lose their livelihoods with respect to free trade vs limited trade. I'm guessing Brexit may give us that experiment depending on what the Scots do. But maybe there has been other natural experiments through out history I'm not aware of.

Hazel Meade writes:

I keep thinking about the guy who famously outsourced his own job.

http://www.npr.org/sections/thetwo-way/2013/01/16/169528579/outsourced-employee-sends-own-job-to-china-surfs-web

If only there was some way for the actual people whose jobs are outsourced to profit from the transaction directly. If people were outsourcing their own jobs they would be the first to reap the rewards, rather than the losers.

bill writes:

If you consume almost any goods at all, you gain from trade. You may be a net loser overall, but there is probably less than 1% of the people in this country that doesn't buy something from overseas. Oil for instance.

Dan Hill writes:

@Thomas - I suspect when you say:

Some of "us" may even lose because of trade (i.e., American workers who lose their jobs)
what you mean is that those American workers would be better off if their jobs were protected but all the things they buy were still traded freely.

Of course if everyone plays that game, you end up with autarky (think North Korea). I don't know about you, but I'd rather be a worker in the US who loses his job to foreign competition than an employed worker in North Korea.

Thaomas writes:

@Hazel Meade

If only there was some way for the actual people whose jobs are outsourced to profit from the transaction directly.

There is, though not "directly." It is to create an economy -- and more redistributive taxation may have to be a bigger part of it -- in which the gains from freer trade, more immigration, and rapid technological change are very widely shared, an economy where we do not observe a stagnation in media wages while the share of income going to the top 1% increases.

What about funding SS and Medicare from progressive consumption taxes rather than taxes on wages? What about subsidizing retirement savings with tax credits instead of tax deductions? What about removing regulations and subsidies that protect high-income earners like doctors and automobile dealers and farmers? What about subsidizing tax-favored consumption of home ownership and charitable giving with partial tax credits rather than deductions? What about a much higher EITC instead of increasing the minimum wage? What about trade deals that focused more on opening foreign markets to US exports and less on protecting US intellectual property? What about discouraging CO2 accumulation in the atmosphere with a carbon tax rather than restrictions on and subsidies to specific processes and technologies?

john hare writes:

I think some of the critics of trade here are missing some of the benefits of free trade to people other than the major traders.

My work jeans are about $10.00 and I ruin a lot of them doing construction. I can still afford the dozen of them in the closet without any financial pain. I remember paying more per pair in the 70s when my income was far less. Adjusting for inflation, that dozen pairs of jeans would set me back a weeks wages instead of less than a days pay. That weeks wages puts good dent in the $25k from one item for one individual.

I am able to buy good quality used vehicles with a lot of miles left on them because other people can afford to buy new vehicles which makes the used ones available. This is partially driven by the automobile import industry. I couldn't do that in the 60s and would have a lot more trouble doing that now if there were no imports. That's another bite out of the $25k mentioned.

The point being that though I don't see the $25k directly, the benefits are there in my lifestyle though I don't directly buy new import cars or wear fancy import clothes, and definitely am not an import mogul. Tearing jeans and driving are not the stressful events that they would be if I were paying the inflation adjusted price before the imports were available.

Don Boudreaux writes:

Effem asks:

And how do you value the externality that the losers in the free trade game might tear down your entire system?

This question should not be limited to trade. The people who are typically identified as "losers in the free trade game" are a subset of people who can, with equal justification, be identified as "losers in the competition game." Anytime consumers change their spending patterns, some jobs and businesses are destroyed and some jobs and businesses are created.

If the economy is so rigid that an increase in imports causes such economic misery that the losers "might tear down your entire system," the same risk of destruction arises for all economic change. The new labor-saving machine; the new restaurant chain; consumers' new faddish diet; the new means of transportation; the medical breakthrough that extends life-expectancies; demographic trends that prompt changes in people's spending patterns. The list is long indeed.

So we either freeze or slow all economic change or we don't. Either way, there's no reason to single out international trade as if it is a unique 'spark' to what Effem calls an "externality."

For centuries, such an externality was real: people resisted economic change. Economies therefore grew, when they grew at all, only at a tortoise-like slow pace. For the past few centuries, the embrace of change and creative destruction has permitted unprecedentedly rapid and widespread economic growth.

Rather than give in to - instead of laying down before - the forces of stagnation, fear, and ignorance by erecting trade barriers, we should challenge these forces. Bottle them up as much as possible. Make those people whose spread ideas that fuel such antediluvian forces intellectual and ethical outcasts (and not the "Progressives" so many of them are today wrongly believed to be).

And finally there's this question: what is the true source of the externality that Effem would have us worry about? Is it economic change (or trade) itself? Or is it people who incessantly spread fear and loathing of trade? I favor government suppression of neither of these potential sources of this "externality." But let's not be blind to the reality that, if our civilization is burned to the ground by those who resist economic change and competition, it would make at least as much sense to put the blame for uncorking this externality on those people who speak out against trade as it would to put the blame on freedom to trade itself.

Johnhare writes:

@ Don
As a thought experiment consider the consequences if crime disappeared. About ten million unemployed former criminals, cops,lawyers,guards, locksmiths, etc unemployed and looking for work. Good thing or bad?

David R. Henderson writes:

@Johnhare,
Easy thought experiment.
Absolutely good. Especially for the women who would have been raped, the people who would have been murdered, and the millions of people who can walk safely down the street.

Johnhare writes:

@David
It is easy, except for the millions of people that freak anytime something causes unemployment. I would make a (very) small wager that there are a large number of people that would consider it a disaster.

David R. Henderson writes:

@Johnhare,
I won’t take that wager because we agree. A friend in Monterey a few years ago ran into some prison guards on vacation who told him that no way would they want to legalize drugs because they would lose their jobs.

MikeP writes:

...except for the millions of people that freak anytime something causes unemployment. I would make a (very) small wager that there are a large number of people that would consider it a disaster.

The Man in the White Suit is a must-see movie on the theme.

Thaomas writes:

@ Boudreaux

I agree with the reply to Effem. You correctly point out that there are "losers" from all sorts of positive economic change such as technology and immigration. And I also agree that the way to prevent a coalition of losers from overthrowing the system is not to try to prevent the changes that has made them losers. Rather we ought to maintain and at this point restore the kind of economy in which losers from trade, immigration, and technological change have reasonable prospects from sharing in the gains from trade, immigration and technological change.

What those measures are is a big question. Some are things that Libertarians and Liberals agree on such as deregulation of occupations, opposition to NIMBY zoning and land use restrictions, much greater immigration, and continuing the never-ending effort to educate people about the benefits of trade, technology and immigration as DeLong does.

I think there are others, too, such as reform that taxes consumption progressively rather than income, removal of SS-Medicare taxes on wages, a higher EITC, and higher/lower public investment in projects with positive/negative NPVs.

Hazel Meade writes:

@Thaomas,

That's not what I mean. Redistribution to *everyone* willy nilly is not equivalent to redistribution to *specifically* people whose jobs are outsourced. If you just redistribute to everyone that doesn't create an incentive for the specific people affected by trade to favor trade. Those people will still be net better off without trade, since they can then get the benefit of BOTH the protectionist trade policies AND wealth redistribution - since the redistribution isn't tied to any specific job losses or harms to them.
Also it incentivizes all sorts of people to vote for more redistribution even if they haven't been harmed by trade at all. Everyone likes free money.


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