Economic Affairs

Winners and losers in trade and immigration

A more nuanced look at immigration and trade in Britain and the US shows that most people are pro-trade, but not always in favour of the free trade agreements their countries signed. As for immigration, polls show general support , but some segments lose out.

In the wake of the Brexit vote and the United States Republican and Democratic party presidential conventions, it may be helpful to consider the apparent popular antipathy to trade and immigration in Britain and the United States.

Both countries are otherwise typically seen as bastions of liberal "Anglo-American market capitalism". Both economies have also performed better - with higher gross domestic product (GDP) growth and lower unemployment - than other advanced countries such as those in Europe and Japan.

Much has been made by media pundits of the "polarisation" and "anti-globalisation" sentiments that the Brexit vote and the mood of Middle America supposedly reflect. Certainly media images of Leave banners in Britain and No-TPP (Trans-Pacific Partnership) placards in the US have been ubiquitous on the respective campaign trails.

From an economist's perspective, this development is neither new nor surprising. It has always been recognised that trade creates both winners (consumers, producers in internationally competitive sectors) and losers (producers in uncompetitive sectors).

Winners' gains (from lower costs, higher real incomes, revenues and profits) are "diffuse and invisible" and in aggregate they exceed losers' losses (from loss of jobs, revenues and profits), which are "concentrated and visible". Losers are thus more likely to protest, than winners to defend, trade and trade liberalisation.

As the 19th-century British philosopher and political economist John Stuart Mill commented on trade protectionism: "The alternative is not between employing our own country-people and foreigners, but between employing one class or another of our own country-people."

"Polarisation" between winners and losers, and the "anti- globalisation" views of a minority, are and have long been expected outcomes from trade.


ST ILLUSTRATION : MANNY FRANCISCO

Economists' "first-best" policy solution is to tax winners' gains to subsidise losers - that is, to redistribute income through the government budget via trade adjustment assistance - unemployment payments, wage insurance, retraining and relocation programmes for workers, and upgrading assistance for firms hurt by import competition.

Unfortunately, such programmes are often underfunded, due to ideological objections (from free-market purists) or fiscal austerity (such as the one that followed the global financial crisis and ensuing Great Recession).

Despite this, and their chronic current account (trade) deficit, public opinion polls show that the British have always been strongly pro-trade and trade-liberalisation, much more so than the US and many of their European Union partners. In fact, one strand of pro-Leave thinking argued that leaving the EU would facilitate more trade between Britain and the rest of the world, specifically the US, China and developing countries such as those of the British Commonwealth.

PRO-TRADE, BUT ANTI-FTA

In the US, public support for trade is much lower than in Britain and other EU member countries, no doubt reflecting the much lower dependence of this large economy on trade. Even so, most opinion polls find that more Americans believe that overall, trade is good for the economy than that it is bad, and this proportion has even increased recently.

For example, a Gallup poll in February this year found that 58 per cent of Americans viewed trade positively, up from 46 per cent in 2012. A Wall Street Journal/NBC News poll last month found that 55 per cent saw free trade as good (41 per cent as bad), up from 51 per cent (38 per cent) last December.

In the Gallup poll, the more highly educated favoured trade much more strongly (74 per cent of those with postgraduate education), but even the least educated were favourably inclined - 52 per cent of those without a high school education, a sharp increase from just 31 per cent in 2011. As the population tends to get more educated over time, the pro-trade proportion should increase.

However the numbers reverse when respondents are asked what they think about trade agreements, with a CBS News poll last month showing that 55 per cent of registered voters (76 per cent of Trump voters) believe that the US has lost more than it has gained from trade agreements (such as the North American Free Trade Agreement).

This probably reflects the impact of the Donald Trump and Bernie Sanders campaign messages, since it is unlikely that voters are aware of the details and the impact of such agreements.

The biggest negative impact of trade in the US has been on manufacturing workers and communities exposed to import competition from China following its 2001 entry into the World Trade Organisation. As economists David Autor, David Dorn and Gordon Hanson have shown, adjustment in such local labour markets has been slow, with employment and wages remaining depressed for at least a full decade after the "China trade shock" began.

The global financial crisis, Great Recession, accelerated technological change and strong US dollar have also exerted downward pressure on job creation and wages, though jobs are plentiful (and workers scarce) for those with in-demand education and skills. These are disproportionately the highly educated whose rising incomes have contributed to widening income disparities, and who overwhelmingly favour free trade.

THE LOWDOWN ON IMMIGRATION

For all the hype, trade policy ranks only 11th among the major electoral issues of concern to US voters in the coming presidential election, according to a Pew Research survey last month. Immigration ranks seventh, and as with trade policy, it is much less unpopular among Americans than the hype on the Republican campaign trail suggests.

According to a March Pew study, 59 per cent of Americans believe that immigration strengthens the country, while 33 per cent believe it imposes a burden - an almost exact reversal of the numbers prevailing 20 years earlier.

From an economist's perspective, (permanent) immigration is a strong net positive for the US, particularly because of its contribution to competitiveness through skills and innovation, as well as the demographic dependency ratio, overall labour force and market size.

But like trade, immigration imposes net costs on particular local workers and communities. Professor Hanson has shown that large-scale immigration concentrated in particular geographies (such as the American south-west) undermines wages for low-skilled workers, bids up local housing prices and increases the tax burden on native income earners to fund public education and healthcare, even as the nation as a whole benefits.

In Britain, Oxford University's Migration Observatory found last year that immigration was the top issue of concern to British respondents, 75 per cent of whom were opposed to it, much more than in the US or other European countries. It also found that while the overall labour market impact of immigration was small, employment and wages for low-skilled workers, especially recent immigrants, were adversely affected, whereas middle- and higher-skilled workers gained.

The absolute and relative size and speed of immigration also increased housing prices particularly in London, but the fiscal impact was small (less than +1/-1 per cent of GDP) and varied according to migrant characteristics.

The overall net positive outcomes of trade and immigration are completely predictable by economists, as are their inequitable distributional consequences, and the ensuing political responses.

Thus in both the US and Britain, younger and better-educated voters are more likely to be in favour of trade (and EU membership) and immigration, indicating not only that they are more likely to benefit, but also better able to adjust to the challenges posed by globalisation and technological change.

The fact that anti-globalisation voices and votes counted for more in Brexit, and appear more prominent in the US election campaign than previously - in both countries at a time of low unemployment - largely reflects the failure of political leaders to adequately compensate "losers" for the expected losses.

At least in the US, they do not appear to reflect widespread, much less increased, opposition to trade, immigration and globalisation more generally.

The writer, an economist, is a professor of strategy at the Stephen M. Ross School of Business at the University of Michigan.

A version of this article appeared in the print edition of The Straits Times on August 10, 2016, with the headline 'Winners and losers in trade and immigration'. Print Edition | Subscribe