Clarification on trade and American workers: right criticism, poorly targeted

It’s been pointed out to me that yesterday’s blog post about a story by NPR’s Chris Arnold targeted too much ire at Arnold himself rather than the phenomenon he was reporting about. I think that’s probably right, and so I apologize to him for that. I was using Arnold’s story as a jumping off point for a discussion of a larger issue, and should have made that more clear. I do think my larger points about the substance of the topic under debate hold. The damage done by trade to American workers is consistently underestimated and is often treated as a surprise when it shouldn’t be—it’s completely the prediction of standard trade theory. To the degree that Arnold’s story helps take this “surprise” excuse off the table for future debates over trade, it’s doing a service.

Some quick notes on why I think all of this is important, however. This is Arnold’s first paragraph:

Economists for decades have agreed that more open international trade is good for the U.S. economy. But recent research finds that while that’s still true, when it comes to China, the downside for American workers has been much more painful than the experts predicted.

I think Arnold reports this exactly right. Experts continue to portray the downside of expanded trade for American workers as having turned out to be unexpectedly large, but they are wrong to be surprised. Downward pressure on a large majority of American workers’ wages is completely predicted by mainstream economic theory. But I should have made clearer where my criticism here was aimed.

I also think Arnold correctly reports on many experts’ assessment of the sheer heft of the downward pressure that trade inflicts on most American workers’ wages. But I again think that these assessments are often off the mark, and too often lead people to believe that the bulk of trade’s downsides for American workers can be inferred just by looking at the number of workers directly displaced from jobs by imports. This is why almost all articles assessing the pros and cons of expanded trade for American workers reference the effect of this expanded trade on manufacturing employment.

But while these trade displacement costs are indeed concentrated and acute, the larger costs (in the aggregate) are the steady downward pressure on wage growth that trade imposes on workers throughout the economy who resemble the import-displaced workers in terms of skills and credentials. These more diffuse costs add up to be a much bigger deal than the acute costs inflicted on a much smaller group of workers, and this changes (radically) the scale of compensation that would be needed to hold trade’s losers harmless. It is not a case of shaving a little bit off of the winners’ take to compensate for the losses inflicted by growing trade. Instead, the large majority of the winners’ gains from trade expansion would need to be clawed back and redistributed to hold losers harmless.

Arnold and MIT economist David Autor (quoted in the piece) are correct that the poor wage performance of most American workers in recent decades cannot be totally—or even mostly—explained by rising trade flows. And yet the effect of trade goes in the wrong direction for these workers, and the compensation that could theoretically make expanded trade win-win even for American workers has been very slow in coming, to say the least.