I see that Gary Hufbauer and Cathleen Cimino have responded to my earlier post criticizing their colleague Adam Posen's Financial Times column touting the wonders of trade. They cover a lot of ground in their response, but I will just address two main points:

1) The pattern of trade that we have put in place over the last three decades has been a major factor reducing the wages of most of the work force (the 70 percent that lack college degrees).

2) The large trade deficit that we have at present is costing the country millions of jobs. If we eliminated the deficit, the direct and indirect effect would lead to roughly 6 million additional jobs, enough to bring the economy back to full employment.

On the first point, Hufbauer and Cimino (HC) focus largely on the impact of NAFTA. Certainly the impact of NAFTA would be considerably less than trade more generally since Mexico only accounts for about 8 percent of our imports and only about 60 percent as much as we import from China. In my column I was referring to the impact of trade more generally on wages, following Posen's piece which was a diatribe about progressives and trade.

While HC are dismissive of the idea that trade can have much negative impact on wages, it is not necessary to look far to find evidence of this effect. Lindsey Oldenski's, whose work is cited by both Posen and by HC, recently wrote a paper which has the following in the abstract:

"I fi nd that o ffshoring by U.S. firms has contributed to relative gains for the
most highly skilled works and relative losses for middle skilled workers. An increase
in off shoring in an industry is associated with an increase in the wage gap between
workers at the 75th percentile and workers with median earnings in that industry,
and with a decrease in the gap between workers earning the median wages and those
at the 25th percentile. This pattern can be explained by the tasks performed by
workers. Off shoring is associated with a decrease in wages for occupations that rely
heavily on routine tasks and an increase in wages if the occupation is nonroutine and
communication task intensive."

I referred to work by David Autor, which also finds a substantial negative impact of trade on the wages of less educated workers as well as a recent analysis by Paul Krugman that suggested the expansion of imports from China likely has a large negative impact on the wages of less-educated workers. At this point, the fact that trade has had a negative impact on the wages of a large segment of the U.S. workforce really should not be controversial. The question is the size.

In response to my complaint that existing trade deals have deliberately put manufacturing workers in direct competention with their low-paid counterparts in the developing world, while leaving in place the barriers that protect doctors, lawyers, dentists, and other highly paid professionsals from the same competition, HC comment:

"Neither we nor Posen support the protection of any US profession from competition."

This is an interesting comment. I have looked in vain for any writing by Posen, Hufbauer, and Cimino complaining about such protection. That is striking since the potential for gains from increased trade in highly paid professional services would be enormous. If we could use trade to bring the pay of our doctors in line with the pay they get in other wealthy countries, the savings from this alone would be close to $100 billion a year (roughly 0.6 percent of GDP). Our manufacturing workers get paid considerably less than their counterparts in many west European countries, is there any reason our doctors should get paid twice as much?

Back in 2002 when President Bush put temporary tariffs on imported steel that peaked at 30 percent on some types of steel, Gary Hufbauer was quick to denounce the costs of the policy, even though this policy had far less cost than the protection of doctors alone. Given their opposition to protection of highly paid professionals, why are Hufbauer and his colleagues unable to ever find the time to denounce these protectionist policies that both impede economic growth and increase inequality?

HC's discussion of the trade deficit and its impact on unemployment is at best evasive. They write:

"Yet the CEPR blog embraces this mistaken worldview [that trade deficits cause unemployment] by asserting that the United States has undergone a “massive loss of demand due to the trade deficit,” and that by importing $500 billion a year more than it exports, the United States is “creating demand in Canada, the European Union, Mexico, and elsewhere, rather than in the United States.” The CEPR post concludes that the $500 billion trade deficit, “coupled with a standard multiplier of 1.5, translates into $750 billion of lost annual output (roughly 4.5 percent of GDP). This in turn would come to about 6 million jobs. That is close to enough to get us back to full employment.”

"This assertion puts the blame where it doesn’t belong. As stated above, trade deficits rise at precisely those times of maximum employment in the United States, ....

"Most important, blaming trade deficits overlooks the fundamental economic reality that fiscal and monetary policy is what ensures that the potential gains in output from efficient trade are translated into actual gains in output."


Let's see, HC tell us that "trade deficits rise at precisely those times of maximum employment in the United States." While there is a correlation between growth and a rise in the trade deficits (we buy more imports when the economy is growing), the trade deficit rose to $564 billion in the last quarter. Do Hufbauer and Cimino really want to say this was a time of "maximum employment in the United States?"

Apart from the ad hominem comment about this being a mistaken view, HC give us no reason to question the simple macroeconomics that a trade deficit creates a gap in demand. As we teach in intro econ, aggregate demand is equal to consumption, plus investment, plus government spending, plus exports minus imports [Y=C+I+G+(X-M)] (My original post asked for any theory showing how consumption or investment will be qualitatively larger because we are importing more. None is supplied here.) It's cute that they tells us that:

"fundamental economic reality that fiscal and monetary policy is what ensures that the potential gains in output from efficient trade are translated into actual gains in output."

But the fundamental economic reality that those who pay attention to the unemployment rate know is that we are very far from anything resembling full employment. HC are welcome to complain that the reality doesn't correspond to their worldview, but why should anyone care? Fiscal and monetary policy are not bringing us to full employment, nor is there any remotely plausible scenario in which they will any time in the near future.

In a context where we have an economy operating well below its full employment level of output, the trade deficit is a drain on demand, end of story. Contrary to what HC claim, this is not mistaken, it is simple national income accounting.

I wish them well in their efforts to boost demand with larger budget deficits. This would be good. I also agree that monetary policy could be more aggressive. But we all have to live in the real world and in that world reducing the trade deficit through a lower valued dollar (a view I share with HC's colleagues at PIIE, Joe Gagnon and Fred Bergsten) would be a great way to move toward full employment.