The assessment of trade just given indicates that international trade is always a good thing, that it just extends the benefits of the ideal market beyond a country’s borders. But in fact, trade, even within a country, can be a disaster for some people despite producing overall benefits for the country. In the United States, for example, when auto manufacturing plants moved from the high labor cost (unionized) states of the Northeast and Midwest to the low labor cost (non-unionized) southern states, it hurt an entire region. On the other hand, the lower labor costs helped keep down the price of cars for all consumers. Trade theory suggests that the winners could have compensated the losers with something to spare but of course that rarely happens and workers in the trade competitive industry usually find themselves worse off, at least temporarily[1].
It is important to note that even displaced workers benefit from lower prices. Garment workers displaced in the US by imports were able to buy imported clothes for less than they could have produced them themselves[2]. To recap: the lowering of prices relative to wages from “cheap imports” amounts to a general wage increase, as we’ve noted. As we’ve also seen, wages are directly related to productivity, so in an industry affected by trade, real wages in the importing country could only fall to the point where productivity times wages between the two countries (importer and exporter) are roughly equal in that industry. In short, the real determinant of a wage differential between countries at full employment is productivity. Trade allows both countries to focus on producing goods and services where relative productivity is highest, and neither country can be made worse off, in the aggregate, through trade. So, countries can only be made better off, in the aggregate, by trade[3].
That said, displaced workers in an importing country can be made relatively worse off, and not just in the short run. To understand how, we only have to remember that not all goods and services can be traded, and that labor cannot always freely flow from one occupation to another. People holding jobs that are not subject to trade will benefit from the lower prices resulting from trade while the workers in trade competitive industries will find their skills in less (or no) demand.
The result is an increase in income inequality. Further, the increase in supply of labor resulting from workers being displaced by trade (internal or external) will bring down wages generally in jobs for which these workers could compete.
Overall economists attribute most of the job losses in manufacturing in the US to automation and other productivity increases rather than to trade competition. In the US, manufacturing’s share of real GDP has remained at around 12% from the 1940’s through today, while the share of employment in manufacturing has declined from around 28% to below 10%[4]. In other words, we manufacture as much stuff now as we ever did (more in real dollar terms since GDP has grown) but do it with far fewer workers and at lower cost. Workers displaced from jobs because of automation or trade find other work as the economy grows, often in services. We will look at the implications of this shift, as well as the relative contributions of automation, trade, and immigration in Part II.
[1] Historically when jobs migrated, so did workers, and in the US we have seen a migration of workers from the former “rust belt” states to the South. With the advent of income support programs worker mobility has declined in “developed” countries. This leads to problems associated with regional underemployment and income decline. In the US an excess rural population is made possible by various support programs as well.
[2] Poor working conditions in other countries are the equivalent of lower wages and do not affect the conclusions about comparative advantage. There are moral reasons to seek that these be addressed.
[3]This applies to trade between two countries. An exporting country can be harmed if its exports are hurt by competition from a new competitor, but that is not an argument against trade as a whole, rather an argument for trying to limit foreign competition through trade secrets and patents and other means. Also, a country can be hurt by competition for resources, but presumably the resources were either not available or more expensive domestically. The economist Paul Samuelson pointed out the multi-party trade issue.
[4] “Is U.S. Manufacturing Really Declining?” Federal Reserve Bank of St. Louis. November 4, 2017. https://www.stlouisfed.org/on-the-economy/2017/april/us-manufacturing-really-declining. However, “real” output is “adjusted” for “quality” which can lead to an overstatement. For a less rosy assessment of US manufacturing see Baily, Martin Neil, and Barry P. Bosworth. 2014. “US Manufacturing: Understanding Its Past and Its Potential Future.” The Journal of Economic Perspectives: A Journal of the American Economic Association 28 (1): 3–26.