Whats the price of free trade? Peter Levell Institute for Fiscal - PowerPoint PPT Presentation

What’s the price of free trade? Peter Levell Institute for Fiscal Studies

2016

2016 “You go to New England, you go to Ohio, Pennsylvania...and you will see devastation where manufacture is down...” -Donald Trump 2016

2016 1846

2016 1846 “...it is a question of displacing the labour of England that produces corn... Will that displaced labour find new employment? ” -Benjamin Disraeli

2016 1846 c380 BCE

2016 “...as to...the 1846 materials ...which are “If you were founding a not necessary―no city of pigs , Socrates, one should import what other fodder them ” would you provide” -Plato - Plato c380 BCE

Economics • Have we learnt anything over the last 2000 years? • Yes!

Today 1. Trade increases choice 2. Trade allows each country to produce more But... 3. Trade creates winners and losers within a society

Today 1. Trade increases choice 2. Trade allows each country to produce more But... 3. Trade creates winners and losers within a society

Variety: the spice of life • Plato wanted restrictions on imports of luxuries • Today governments necessarily restrict imports which do not meet certain standards • But too many restrictions can reduce consumer choice...

“Brie trade” “We import 2/3 of our cheese. That is a disgrace!” Liz Truss MP

480,000 tonnes IMPORTS (£1.25 billion) 163,600 tonnes EXPORTS (£460 million) Source: UN COMTRADE database

A Smorgasbord... • Trade increases the number of product varieties • The same industries which import also export

1. Trade increases choice 2. Trade allows each country to produce more 3. Trade creates winners and losers within a society

• Tax applied to imports of corn (grain) in the early 19 th century • Designed to keep out imports from big producers (Germany, Poland, United States) • Repealed 1846 • Prices 40% higher in England than in Konigsberg at the beginning of the 19 th century – fell to zero in years after repeal

1846 and all that Cobden: Corn prices would fall, raising the value of wages for factory workers. Exports of manufactures must rise to pay for imports. These forces would shift workers to manufacturing.

Comparative advantage • Opponents of the Corn Laws were drawing on the latest economic thinking • David Ricardo’s principle of comparative advantage showed how all countries could produce more if they traded

Example • Imagine that the UK had 10 million workers • Workers could produce one of two goods: cloth and corn

Employment Production Consumption Employme Employment Consumption nt UK 5 25 25 6 30 Corn 5 50 50 4 40 Cloth

Cloth2Corn

Employment Production Consumption UK 2 10 30 Corn 8 80 50 Cloth Cloth2Corn

Employment Consumption Consumpti Employment Production Consumption on UK 5 25 Corn 5 50 Cloth Prussia 5 Corn 5 Cloth Total Corn 10 10 Cloth

Employment Consumption Consumpti Employment Production Consumption on UK 5 25 Corn 5 50 Cloth Prussia 5 20 Corn 5 25 Cloth Total Corn 10 10 Cloth

Employment Consumption Consumpti Employment Production Consumption on UK 5 25 Corn 5 50 Cloth Prussia 5 20 Corn 5 25 Cloth Total Corn 10 45 10 75 Cloth

Employment Consumption Consumpti Employment Production Consumption on UK 5 25 2 Corn 5 50 8 Cloth Prussia 5 20 10 Corn 5 25 0 Cloth Total Corn 10 45 10 75 Cloth

Employment Consumption Consumpti Employment Production Consumption on UK 5 25 2 10 Corn 5 50 8 80 Cloth Prussia 5 20 10 Corn 5 25 0 Cloth Total Corn 10 45 10 75 Cloth

Employment Consumption Consumpti Employment Production Consumption on UK 5 25 2 10 Corn 5 50 8 80 Cloth Prussia 5 20 10 40 Corn 5 25 0 0 Cloth Total Corn 10 45 10 75 Cloth

Employment Consumption Consumpti Employment Production Consumption on UK 5 25 2 10 30 Corn 20 5 50 8 80 50 Cloth Prussia 30 5 20 10 40 20 Corn 5 25 0 0 30 Cloth Total Corn 10 45 10 75 Cloth

Employment Consumption Consumpti Employment Production Consumption on UK 5 25 2 10 30 Corn 5 50 8 80 50 Cloth Prussia 5 20 10 40 20 Corn 5 25 0 0 30 Cloth Total Corn 10 45 10 50 50 10 75 10 80 80 Cloth

The result • Even though the UK is more productive at both activities than Prussia both countries now have more than they did before • Both countries are better off through trade • Workers shift into industries they are comparatively better at

March of the Makers 60 Agriculture 50 % of employment 40 30 20 10 0 1710 1817 1851 1871 Source: Shaw-Taylor and Wrigley (2008)

March of the Makers 60 Agriculture Manufacturing 50 % of employment 40 30 20 10 0 1710 1817 1851 1871 Source: Shaw-Taylor and Wrigley (2008)

The modern world • Trade in the modern world is much more complicated • E.g. an iPhone • But the principle is the same

It’s that easy huh? • I’ve just shown you how both countries can benefit from trade by specialising • But if so, why do countries appear so reluctant to trade...

Trans-pacific partnership : 5,600 pages Japan – Colombia deal: 13 rounds of negotiations which began 6 years ago (still no deal)

Trade and inequality • When trade occurs, countries specialise – some industries shrink and others grow • If people are heavily invested in a particular industry, trade can have losers as well as winners

#2 Specialisation

1. Trade increases choice 2. Trade allows each country to produce more 3. Trade creates winners and losers within a society

2001: The “China Shock” • In 2001, China joined the World Trade Organisation • This meant a large increase in exports to US, UK and rest of Europe • Years later researchers examined effects on the US

2001: The “China Shock” • This brought many benefits to the US • Increased exports in some industries • Lower consumer prices • But...

The “China Shock” • Imports were concentrated in a few industries • These industries were concentrated in a few regions

Source: chinashock.info graphic developed by Andrew Van Dam and Jessia Ma of the Wall Street Journal based on data collected by the China Shock research team. This graphic accompanied a WSJ article written by Jon Hilsenrath and Bob Davis.

Source: chinashock.info graphic developed by Andrew Van Dam and Jessia Ma of the Wall Street Journal based on data collected by the China Shock research team. This graphic accompanied a WSJ article written by Jon Hilsenrath and Bob Davis.

Source: chinashock.info graphic developed by Andrew Van Dam and Jessia Ma of the Wall Street Journal based on data collected by the China Shock research team. This graphic accompanied a WSJ article written by Jon Hilsenrath and Bob Davis.

Effect on workers • The “China shock” also had different effects on different workers • Those more affected by higher imports were disproportionately – Older – Less educated – Poorer • These people may have found it harder to shift to growing industries than other people

Today 1. Trade increases choice 2. Trade allows each country to produce more But... 3. Trade creates winners and losers within a society

The price of free trade • Specialisation in a country’s comparative advantage requires workers to move industries • Some workers cannot switch activities 1. Their skills may not be transferable 2. They may live in the wrong places

What to do? • Trade almost inevitably creates some winners and some losers • It works best when resources can easily shift to ‘growing’ industries • How can we best manage this?

The Best of Both Worlds? • Social contract: those who gain from trade can help compensate those who lose out • Gradualism : Reduce tariffs slowly to give people more time to adjust • Help people adjust: Worker re-training

Thank you!