Sunday, May 25, 2008

Free-Trade Paradox: Poor Benefit More Than Rich

It’s safe to say that the main burden of trade-related job losses and wage declines has fallen on middle- and lower-income Americans. So standing up to China seems like a logical way to help ordinary Americans do better. But there’s a problem with this approach: the very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries.

The reason for this is simple: free trade with poorer countries has a huge positive impact on the buying power of middle- and lower-income consumers—a much bigger impact than it does on the buying power of wealthier consumers. The less you make, the bigger the percentage of your spending that goes to manufactured goods—clothes, shoes, and the like—whose prices are often directly affected by free trade. The wealthier you are, the more you tend to spend on services—education, leisure, and so on—that are less subject to competition from abroad.

In a recent paper on the effect of trade with China, the University of Chicago economists Christian Broda and John Romalis estimate that poor Americans devote around forty per cent more of their spending to “non-durable goods” than rich Americans do. That means that lower-income Americans get a much bigger benefit from the lower prices that trade with China has brought.

From The New Yorker via Greg Mankiw


At 5/25/2008 1:25 AM, Anonymous Anonymous said...

"That means that lower-income Americans get a much bigger benefit from the lower prices that trade with China has brought."

Except for the fact that we wouldn't buy the crap that lower income Americans buy in the first place.

There is a benefit though it is a small one and that is that the lower income Americans we hire cost us less because they can buy cheap stuff at Walmart and they seem happy about that.

At 5/25/2008 5:41 AM, OpenID sethstorm said...

Said benefit is erased when you account for time and travel associated with the re-buys of said junk. That is what conclusion I came to after reading that study.

Buying power is not increased if the only thing that can be bought is low-quality items. It only encourages a lowering of quality towards all levels. The result is a ton of shoddily built products with a few slightly better ones at an exorbitant cost.

Since they will do nothing on their end, it is time to intervene on ours. There is no such thing as choice if the only option is junk.

At 5/25/2008 7:38 AM, Blogger David said...

Imported manufactured goods are not synonymous with either "Wal-Mart" or "low quality." Virtually all computers & electronics products, including expensive ones, include substantial imported content, even if the final assembly is done in the United States. This is also true of automobiles.

At 5/25/2008 10:28 AM, Anonymous Anonymous said...

Is the Samuelson-Stolper theorem in Mankiw's basic economics textbook?

If not, there is a problem with the conclusion that lower income households receive larger benefits from globalization.

Isn't the net benefit a function of the consumption basket?

It seems to me that low income households consume a disproportionate amount of income on food, rent and energy compared to higher income households. Less of those major items of consumption are impacted by the globalization production of basic non-durable goods rather than luxury non-durables.

It's not a paradox.

At 5/25/2008 6:34 PM, Blogger bobble said...

given the choice, i would choose a decent job over cheap crap from walmart.

At 5/25/2008 8:16 PM, Anonymous The Masked Millionaire said...

Some people are making assumptions based on their beliefs that all of Wal-Mart's merchandise is "crap" and that free trade with China is responsible for junk being sold in this country.

Let's get the smack in the face out of the way first: the assumptions that you are making are erroneous.

Not everything sold at Wal-Mart is crap. To say that it is can only mean one of two things.

1. You have never been in Wal-Mart. Becasue if you have then you would have seen everything from name brand wide screen televisions to name brand computers. Hardly the type of merchandise most people would classify as crap.

2. China is not even close to being the first or only country to send us less than stellar products. I remember when you would look at a cheap product in a store---before Wal-Mart began its expansion---and the popular expression was "Must be made in Japan" and everybody would laugh.

Lower income Americans are much better off becasue of Wal-Mart. They can buy items that they could never afford before. They can buy food stuff at reduced prices. And they, probably unknowingly, benefit because other retailers must compete with Wal-Mart, therefore offering their merchandise at much reduced prices.

Not everybody can or wants to shop at Tiffanys or Neiman Marcus.

The Masked Millionaire

At 5/26/2008 3:01 AM, OpenID sethstorm said...

I address that in the eroding of quality of higher level brands. When they turn that direction, choice is reduced.

As for final assembly, that is not much more than Complete Knockdown. The lack of quality and attention to detail stand out like a sore thumb. The problem comes when everything is a sore thumb.

Yes, I have been in one of those places, before and after Sam's family de-nationalized it. When in the hands of Sam Walton, things were of the "US by majority and quality" variety and by a wide margin. After they de-nationalized, quality went downhill rapidly. Of what name brands were there, they were largely surrounded by no-names and/or hollowed-out brands.

However, they are not the only place this occurs. Higher up the chain, this has happened. For computer equipment this has impacted Cisco(given the mass counterfeits of low quality), IBM, NCR, HP, Apple, and Dell. For cars, this has impacted Jaguar(post-Ford), BMW, Mercedes Benz, Rover, General Motors, Chrysler, Ford, and all the Japanese imports. The constant is lowered overall quality with few and exorbitantly priced exceptions.

As for the comment on not everybody being able to afford Tiffany's/Neimann Marcus - you only prove my point.

At 5/26/2008 8:41 AM, Blogger David said...

sethstorm...would you refer to the BMW assembly plant in South Carolina as "complete knockdown"?...because cars made there use many components from overseas, including (IIRC) engines from Austria.

How about the GE Healthcare plant in Wisconsin, which makes CAT scanners and MRI machines? These products use mechanical components from Mexico, displays from China, etc...this manufacturing activity is scarcely "knockdown."

If all components in these medical devices were required to come from the US, the cost would go up sharply, increasing healthcare costs in the US and also reducing export sales of the products.

At 5/26/2008 9:01 AM, Anonymous cahunga said...

You might be able to convince yourself of this if you are able to ignore the fact that income inequity is increasing worldwide since the move toward globalization.

And this conclusion really doesn't square to well with the odd coincidence that all of the countries with higher standards of living than the US are either heavily unionized or openly protectionist.

At 5/28/2008 3:38 PM, Blogger Marko said...

Income inequality is not a problem when the poor are getting richer. Don't peddle crazy envy/guilt trips here, we will have none of it. A rising tide really does lift all boats, its just that some have bigger boats than others, and if you want to make them all the same size, comrade, you will need lots of guns.

At 6/01/2008 8:47 PM, Anonymous Andy said...

Maybe free trade helps the middle and lower classes and maybe it doesn't. Perhaps we will never know and there are economists on both sides of the issue. I think you will find, regardless, that it does not help the people in foreign countries who get paid a fraction of US wages, and not even enough to pay their own bills. Not to mention that they get no insurance and no OSHA protection. If you are worried about human beings, best be worried about all of them.

At 6/09/2008 11:35 PM, Anonymous Anonymous said...

Andy - Why would the poor in these countries take these jobs if they weren't better than what they already had?

There are thousands of Chinese people, as an example, turning to factory work you in the first would would find unacceptable, but they're leaving being sustenance farming and a poverty far more crushing.

This is the height of Western arrogance--that you are far better at judging for these people where the best job for the lies.

The West has OSHA laws because the West has developed its economies to the point where we can afford OSHA laws. It's not that Chinese parents don't care about their children. The option is not: factory work or school. The option is: factory work or sustenance farming. And maybe if a couple of the oldest get factory work, one of the youngest can be the first to go to school.

This is a slow, generational wealth building process that was allowed to play out in the West, and one that you bleeding harts seem determined to deny people in actual poverty in the third world.

At 7/01/2008 11:52 PM, Anonymous Ed W said...

"This is a slow, generational wealth building process that was allowed to play out in the West, and one that you bleeding harts seem determined to deny people in actual poverty in the third world."

It may have been a slow, generational process a hundred years ago. But U.S. corporations are flat-out taking advantage of people in third world countries. Corporations do very little that isn't in the interest of their bottom lines.

When corporations who face regulations and rules regarding employee health and safety, compensation, the environment, and general human rights offshore jobs and don't uphold those standards, that's greed. They have no concern for the people in their employ. So please don't paint a picture of the heroic corporations lifting the people of the third world out of poverty. They pay wages just high enough to avoid revolts.

As someone else here said: if we're going to be concerned about humans, we need to be concerned about all of them. But don't try to disguise greed and profit-taking as anything but what it is.

At 9/26/2008 10:22 PM, Anonymous Luke Lea said...

You have a good blog, really good in many ways. But this particular entry defies logic: factor price equalization theory predicts real wages for unskilled workers in the U.S. will fall in response to liberalized trade with a low-eage goliath like China. It is a simple matter of supply and demand. (Of course the U.S. economy as a whole benefits, but that is not the same thing.) This post reminds me of the leftist arguments back in the 1970's that deregulating natural gas production and prices would not increase supply. They had fancy studies to bolster their case, but of course is simply wasn't true. Supply and demand.


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