How Trade Helps Explain Inequality Trade makes for peaceful relationships between nations, but gains for consumers and workers aren't spread evenly.
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How Trade Helps Explain Inequality

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How Trade Helps Explain Inequality

How Trade Helps Explain Inequality

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STACEY VANEK SMITH, HOST:

Hey, everyone. It's Stacey and Cardiff, and this is THE INDICATOR FROM PLANET MONEY. There is a story you might be familiar with. And it goes a little something like this. When the U.S. trades more of its goods and services with other countries, it is good for the overall economy. And it's good for workers who make the stuff that the U.S. sells abroad. But it is also bad for the workers who make the stuff that the U.S. is now buying from other countries.

CARDIFF GARCIA, HOST:

But, the story goes, even though trade might increase inequality between those workers, overall, that trade-off is worth it. The economy's more efficient, and American consumers get access to cheaper and more varied goods that they can now buy from other countries.

VANEK SMITH: And this story is not wrong. But it also fails to answer a lot of questions. For example, how much is trade responsible for rising income inequality in the U.S. versus other factors like changing technology? And which kinds of workers specifically can expect to lose out the most from free trade? And what should be done for them?

GARCIA: Questions like these are at the heart of a new book called "Open: The Progressive Case For Free Trade, Immigration, And Global Capital" by economist Kimberly Clausing. The book argues very much, as its title implies, for continuing to trade openly with other countries but also to design economic policies that spread the benefits of trade to all workers, not just to those workers lucky enough to be in the industries that trade directly helps.

So today on the show, we talk to professor Clausing about the different ways that trade affects inequality between workers. And then on tomorrow's show, we discuss with her which economic policies are most appropriate for a country that opens itself up to trade. That's coming right up.

(SOUNDBITE OF MUSIC)

GARCIA: Professor Kimberly Clausing, welcome to THE INDICATOR.

KIMBERLY CLAUSING: Thank you. Thank you for having me.

GARCIA: Here's where I want to start. There are some sectors in the U.S. economy that tend to expand whenever the country engages in more trade, and there are some sectors that tend to contract. I want to first start by understanding that process. So what do we know about the sectors that expand, and what do we know about those that shrink?

CLAUSING: Yes. So in the United States, we think of ourselves as having a comparative advantage in products that use a lot of highly educated labor and that use a lot of technology and capital. So good examples of that would be software, aircraft - commercial aircraft, soybeans which is actually a very capital-intensive product, whereas we tend to import things that are much more intensive in unskilled labor. And examples of those types of products would be shoes and textiles and tires - would be good examples. And then there's some goods, like cars and pharmaceuticals, that go in similar amounts in both directions.

GARCIA: OK. So what you're saying is that when the U.S. has a big advantage over other countries in making a certain product, like high-tech products - software, aircraft - inside the U.S., that sector will expand. We'll make more of that product because we can export it; we can sell it abroad.

And then the flip side is that when the U.S. does not have a huge advantage in making a product, like with textiles or shoes - might even be at a disadvantage in making that product - instead, American consumers or even American companies will import that product. And so inside the U.S., the sector that would have made that product, like the shoemaking sector or the textile-making sector, will shrink instead. Is that about right?

CLAUSING: That's exactly right. So because we're selling to people abroad as well as at home, those sectors grow. And because we're importing goods, the domestic production we used to have gets displaced by that, and those sectors shrink. And so it reallocates labor and capital and all the inputs in production across sectors when we trade.

GARCIA: What can we say about the kinds of workers that we tend to find in the expanding sectors versus the workers that we tend to find - in the U.S. - in the sectors that will shrink?

CLAUSING: Yeah. So if you think about the examples of the export sectors, those include things like aircraft and software. And the reason that we export those things is because they use intensively highly educated workers. And relative to other countries, we have more highly educated workers than we do poorly educated workers.

And so when we sell more aircraft and more software abroad, we are expanding the demand implicitly for those types of workers and raising their wages, whereas when we import things like shoes and textiles and tires, we're reducing the demand for the types of workers that make those goods. And in the United States, we tend to import goods that use unskilled labor intensively. So that reduces the demand for those types of workers, and then we see less rewards for those at the bottom of the distribution.

GARCIA: And we sort of define these terms - skilled and unskilled workers - by like, college-, non-college educated. Is that a fair (unintelligible)...

CLAUSING: Yeah. That's one way you could define it. And it kind of goes all the way down the spectrum. So high school dropouts might be more likely to make the least skilled goods. And then the most skilled goods might even require advanced degrees. If you look kind of across the educational spectrum, you'll see that as workers get more and more skilled, the U.S. is more likely to have an export industry in that area.

GARCIA: So in a way, it seems like expanding trade would increase the divergence between those two kinds of workers. Is that right?

CLAUSING: Yes. And that's exactly what trade theory predicts. I think one of the things that has really kept a lot of economists busy lately is figuring out just how important that is relative to other things that are also driving income inequality because we know this is one factor. But that doesn't mean it's the only factor because we know there are a lot of other culprits in this story, too.

GARCIA: Yes. And we are definitely going to talk about those other culprits. But before we talk about them, I kind of want to stay on this theme of how trade affects inequality because on the one hand, as we've just discussed, it can be a contributor to wider income inequality. On the other hand, it is also the case that trade might mitigate other kinds of inequality, like in the things that we buy and the things we consume. Right?

CLAUSING: Yeah. That's one of the really interesting things to think about when you think about trade or the economy in general - is that we all have sort of two economic roles. We produce something - in my case, economics - and we consume things - all sorts of things that we buy. And when you look at the variance in consumption patterns across Americans - and this is also true, by the way, in other countries - you see that those at the bottom of the income distribution actually buy more imported products than those at the top.

It's often because those are less expensive versions of the same products. So if you imagine, for instance, going to Walmart - right? - the things that you buy there might be more likely to be imported than what you find at your local farmer's market. For consumers at the bottom of the income distribution, the studies have shown that, actually, when you raise a tariff, for instance, that their tariff cost is about three times that of those at the top.

GARCIA: Professor Kimberly Clausing, thanks so much for being here.

CLAUSING: Thank you so much for having me. It's been a real pleasure.

(SOUNDBITE OF MUSIC)

GARCIA: This episode of THE INDICATOR was produced by Constanza Gallardo, edited by Paddy Hirsch. And our intern is Willa Rubin. THE INDICATOR is a production of NPR.

(SOUNDBITE OF MUSIC)

GARCIA: I liked, by the way, how you described your comparative advantage as just economics...

(LAUGHTER)

GARCIA: ...Because, like, for a fleeting second, I had, like, this existential crisis where I was like - what's mine, talking - sitting in front of a mic and talking? (Laughter).

CLAUSING: Yeah. I think it's telling interesting stories to help inform people about the world.

GARCIA: Yeah. That sounds good to me. I think I'm going to run with that.

CLAUSING: OK.

GARCIA: Thanks.

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