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

What’s the price

• f 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

1846 2016

1846 2016

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

• Benjamin Disraeli

c380 BCE 1846 2016

c380 BCE 1846 2016

“...as to...the materials ...which are not necessary―no

• ne should import

them”

• Plato

“If you were founding a city of pigs, Socrates, what other fodder would you provide”

• Plato

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

• 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...

Variety: the spice of life

“Brie trade”

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

480,000 tonnes (£1.25 billion) 163,600 tonnes (£460 million)

Source: UN COMTRADE database

IMPORTS EXPORTS

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

19th 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• Repealed 1846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 19th 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 nt Employment Consumption

UK

Corn

5 25 25 6 30

Cloth

5 50 50 4 40

Cloth2Corn

Employment Production Consumption

UK

Corn

2 10 30

Cloth

8 80 50

Cloth2Corn

Employment Consumption Consumpti

• n

Employment Production Consumption

UK

Corn

5 25

Cloth

5 50

Prussia

Corn

5

Cloth

5

Total Corn

10

Cloth

10

Employment Consumption Consumpti

• n

Employment Production Consumption

UK

Corn

5 25

Cloth

5 50

Prussia

Corn

5 20

Cloth

5 25

Total Corn

10

Cloth

10

Employment Consumption Consumpti

• n

Employment Production Consumption

UK

Corn

5 25

Cloth

5 50

Prussia

Corn

5 20

Cloth

5 25

Total Corn

10 45

Cloth

10 75

Employment Consumption Consumpti

• n

Employment Production Consumption

UK

Corn

5 25 2

Cloth

5 50 8

Prussia

Corn

5 20 10

Cloth

5 25

Total Corn

10 45

Cloth

10 75

Employment Consumption Consumpti

• n

Employment Production Consumption

UK

Corn

5 25 2 10

Cloth

5 50 8 80

Prussia

Corn

5 20 10

Cloth

5 25

Total Corn

10 45

Cloth

10 75

Employment Consumption Consumpti

• n

Employment Production Consumption

UK

Corn

5 25 2 10

Cloth

5 50 8 80

Prussia

Corn

5 20 10 40

Cloth

5 25

Total Corn

10 45

Cloth

10 75

Employment Consumption Consumpti

• n

Employment Production Consumption

UK

Corn

5 25 2 10 30

Cloth

5 50 8 80 50

Prussia

Corn

5 20 10 40 20

Cloth

5 25 30

Total Corn

10 45

Cloth

10 75

20 30

Employment Consumption Consumpti

• n

Employment Production Consumption

UK

Corn

5 25 2 10 30

Cloth

5 50 8 80 50

Prussia

Corn

5 20 10 40 20

Cloth

5 25 30

Total Corn

10 45 10 50 50

Cloth

10 75 10 80 80

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

10 20 30 40 50 60 1710 1817 1851 1871 % of employment Agriculture

Source: Shaw-Taylor and Wrigley (2008)

March of the Makers

10 20 30 40 50 60 1710 1817 1851 1871 % of employment Agriculture Manufacturing

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
• n 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!