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Free trade deals claim unwilling victims

When people talk about the benefits and harm from trade, they usually refer to the labour market. That makes sense, since losing a job has a huge impact on a person's life. Even if you can find another job, it takes time and money and causes lots of stress. It disrupts your life, and sometimes you can't find as good a job as the one you had before.

That's why recent research from economists David Autor, David Dorn and Gordon Hanson, showing that trade with China hurt lots of US workers, made such a splash - we can all imagine the stress, the fear, the humiliation and the hopelessness of workers whose careers are destroyed in a day, leaving them dependent on welfare or working at a job paying half as much. If Autor et al are right, the "China shock" of the 2000s hurt more workers than it helped.

Defenders of free trade will often respond that labour markets are not the only markets affected by trade. Many of the things we buy, from TV sets and phones to toys and clothing and food, are traded in international markets. Opening up to trade does not always reduce the price of everything we buy, but it tends to make most stuff less expensive, in two ways.

First, consumers get to buy things from companies that make those things overseas more cheaply - some of that cost saving gets passed on in the form of lower prices.

Second, trade allows countries to shift their own production towards the things that they are the most efficient at making, which also tends to push down prices.

Lower prices take some of the sting - hopefully all of the sting - out of lower wages. They even provide a bit of relief for the unlucky few who lose their jobs. That is why cheaper consumer prices are one of the main benefits cited by defenders of free trade policies.

But there is a catch - trade does not affect all prices equally. Some things get much cheaper, other things barely change, and a few things can even get more expensive. If trade fails to lower prices for the things bought by the people who lose their jobs to foreign competition, it is a double whammy for those folks.

Economist Sergei Nigai, a postdoctoral fellow at ETH Zurich, has developed a model that breaks down trade into food and non-food goods. It shows that because agricultural productivity varies less around the globe than productivity in other industries, trade tends to lower the price of manufactured goods and traded services more than the price of food. That's bad news for people who spend more of their income on food - that is, the working class and poor.

In fact, in the US, the explosion of trade since 2000 has had little effect on food costs. Here is a picture of the ratio of food prices to prices as a whole: What has fallen in price? Manufactured goods - clothing, electronics, cars and toys.

That provides some benefit to the poor and working class. Gone are the days when poor children would have to borrow clothes, or freeze in the winter for lack of a warm coat. My grandfather, working to help feed his family as a teenager during the Depression, would stuff his shoes with cardboard when the soles wore out. That does not happen anymore, thanks in part to cheap shoes from overseas.

But in general, these price declines benefit the middle class more than the working class and poor because those who earn more tend to spend a larger share of their income on  cars, TV sets and  furniture, while spending relatively less on food.

Meanwhile, there's another way that the price changes from trade can hurt the working class. Trade pushes up the incomes of the wealthier classes, and the resulting demand will tend to raise the prices of things that cannot be traded overseas, such as housing. Working class and poor Americans pay a larger percentage of their income in rent.

And rent has gone up and up: So trade with China hit the United States working class hard in terms of jobs and wages. But its consumption benefits flowed far more to the middle and upper-middle classes. This shows how difficult it is to wave away the distributional effects of international trade. Not all boats rise equally, and many sink, when a big shock comes from overseas.

BLOOMBERG VIEW

A version of this article appeared in the print edition of The Straits Times on September 21, 2016, with the headline 'Free trade deals claim unwilling victims'. Print Edition | Subscribe