Solving Problems Caused By International Trade : The Indicator from Planet Money Free trade may solve problems for businesses transacting across borders, but it can make life painful for their workers.

Solving Problems Caused By International Trade

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Everyone, it's Cardiff and Stacey. And this is THE INDICATOR FROM PLANET MONEY. Today is part two of our conversation with professor Kimberly Clausing. On yesterday's show, you might recall professor Clausing explained why the story about trade and its effects on income inequality is more complicated than you might have heard.


And on today's show, professor Clausing talks to us about what else is contributing to income inequality, why it's a bad idea to turn back the clock on trade and which policies would help make sure that the benefits of trade are spread out to all workers. And that is coming right up after the break.


GARCIA: OK, Dr. Clausing, welcome back to the podcast.


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

GARCIA: Not that you went anywhere - still the same - still in the same place, right, but spread across two different episodes. So in part one, we discussed the kind of complicated relationship that expanding trade with other countries has for inequality inside the United States. And it's not a straightforward story. But to complicate the story even further is the next topic we're going to discuss, which is sort of setting into context the extent to which trade contributes to wider inequality versus other factors. So what can you tell us about that?

CLAUSING: Yeah, so there's been a big flurry of economic studies that have looked at how important trade is and income inequality, and they've all found that there's some effects there. But one of the interesting things when you look at these studies is that it leaves a lot of the income inequality unexplained. So going to the income inequality question, one big disruptor is technological change. So when we use computers to do things that we used to use labor for, that reduces the demand for the workers who would have done what the computer would have done, whether it's a data entry or working as a bank teller or pumping gas or things that - you know, that we might be able to replace with...

GARCIA: With, like, spreadsheets and ATMs and, like...


GARCIA: ...Other new kinds of technologies.

CLAUSING: Yeah, yeah - and swipe and go and all of that. All right, so that has really displaced a lot of demand for labor whereas if you think about your computer - makes you more productive - right? - because you can write stories faster, and you can communicate faster. So it's making you more productive, but it's reducing the demand for other people's labor.

GARCIA: True. Although as a podcast host, they have not yet come up with a technology that helps me speak faster and still be intelligible, interestingly enough. And I hope that never happens.

CLAUSING: (Laughter) Well, some people do listen to you on faster speed, so...

GARCIA: Fair, fair.



GARCIA: But this is a really interesting dilemma here about how to disentangle the effect of trade versus the effect of technology on income inequality. And a point that you make in your book that I thought was especially fascinating was that when it comes to rising inequality because it turns out that college educated workers have had their wages grow faster than non-college educated workers, it happens in almost every sector, or maybe it happens in every single sector, not just in those economic sectors where trade has expanded a lot.

CLAUSING: Yeah. That's a very interesting finding because it tells us that something else is driving the fact that in every sector, people want more educated workers and also actually in every country so that you see demand for skilled workers going up in places like India and China. And if this were just a straightforward story about comparative advantage, you'd think, oh, well, they're the ones making the products that have less-skilled labor, so that should be increasing the demand for the lower-skilled people in their country and reducing the demand for their more highly educated workers. But that's not what you see in the data. You see across all the countries of the world an increased demand for those with lots of education.

GARCIA: So is it fair to characterize all this evidence as pointing towards a conclusion that, yes, trade does lead to some higher income inequality but that other factors probably lead to a lot more?

CLAUSING: Yes. And in addition to technological change, some of these factors include increasing market power of companies relative to workers. So we've seen a decline of unionization and more concentration of the economy in the hands of fewer companies. And we might even think about social norms, which are something that economists don't talk about very often but are probably important here. If you look at CEO pay, for instance, the typical CEO now makes 300 times with the median worker in their company makes whereas if you go back to 1980, that was 30 times.

GARCIA: I think a lot of people will listen to this interview, and they'll hear, yeah, OK, trade is not the biggest contributor to income inequality; there are other things. But given that it is a contributor, why do it in the first place? Why not just seal ourselves off and put up both proverbial and physical walls and just not trade with anybody? What - what's the point?

CLAUSING: Yeah. And I think that is an attractive leap that some people make - right? - because they think, OK, well, we can't do anything about robots, and we can't - and some of these other things are hard to change, so why not just restrict trade? And I actually think that there's some real dangers of hurting the very people you're trying to help if you restrict trades.

So look at the tariffs that we've just put in place over the last year. We've seen a lot of disruption. The soybean farmers have lost a lot of ability to sell their product abroad because of retaliation by our trading partners that have responded to our tariffs. So, you know, we run the risk of disrupting a lot of global supply chains when we just sort of willy-nilly put tariffs on. And that can hurt workers, too, by subjecting them to additional labor market shocks.

GARCIA: Plus as a - kind of a political bonus, it turns out that countries that trade more tend to also be more peaceful countries. That was an interesting component in your book.

CLAUSING: Yeah. I mean, I think that one reason that countries form trade agreements with each other is in part get along better. So if you look at one of the more famous trade agreements - is the European Union, which started off as actually a coal and steel trade agreement between six members of Europe not that long after World War II.

They used to be killing each other, and they thought, you know, one way that we might (laughter) reduce that tension is if we become more dependent on each other for products that are really intensively used in armaments. And coal and steel were two of those products, and then they moved from that to more and more economic integration until they're now so economically interdependent that I think it would be, you know, much more difficult to imagine conflict between them due to this mutually assured economic destruction.

GARCIA: OK, last question - so we know that trade is worth it now. We know that it has many benefits, that those benefits tend to outweigh the costs. But given that there are some costs and that those costs fall disproportionately on certain categories of workers, what can we do to maybe offset some of those costs? What are some good ideas, do you think?

CLAUSING: So I think the most direct and helpful things that we could do to help workers would be to make changes in the tax system that basically help the economy to correct this increasing income inequality that we've seen. So the tax system is a very powerful tool where you can take more from those that have really succeeded wildly over the past 35 years and reduce the burdens faced by those at the bottom of the income distributions.

Another thing you can do is invest more in those communities that have been left behind. So for instance, those communities that faced the fiercest competition from the Chinese imports were often very geographically concentrated. And so I think making investments in those communities and giving workers in those communities access to resources could help them cope better with this disruption.

GARCIA: All right, the book is "Open: The Progressive Case For Free Trade, Immigration, And Global Capital." And we've just talked about Chapters 4 and 5.


GARCIA: There's all these other chapters.


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

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


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.


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