Backlash Against Globalization and the Gains from Trade

Disconnect between economists and general public

Surveys often point to large disparities between economists and the general public when it comes to their respective views on free trade. For example, a 2011 survey conducted among members of the American Economic Association revealed that more than 93 per cent of economists agreed with the statement: “Tariffs and import quotas usually reduce general economic welfare” (see Fuller and Geide-Stevenson, 2014). At the same time, the views among non-economists on free trade are far from consensus. According to a 2010 Pew Research Survey, only 26 per cent of respondents in the US felt helped by international trade. This disconnect can be partially explained by the approach trade economists generally take when calculating the welfare effects of free trade – measuring aggregate gains for a country. While this measure is informative and reflects the gains of an average consumer, it masks the true gains across different population groups, especially in countries with high levels of income inequality.

Income inequality and heterogeneous gains from trade

People differ in income levels, creating differences in consumption patterns. The rich generally consume more manufacturing goods and services, whereas the poor often spend a lion’s share of their income on food, housing, and other necessities. International trade benefits countries via increased access to lower priced goods; however, price reductions across different products are far from uniform. Hence, the exact gains from trade for a particular person depend on their specific consumption bundle.

Manufacturing goods, for example clothing and electronics, react more acutely to falling international trade barriers than food products. This is due to the fact that the productivity dispersion across countries is much larger in manufacturing than in agricultural goods. For example, productivity differences across firms that grow potatoes are much smaller than across firms that manufacture computers. Essentially, free trade thus tends to benefit those consumer groups that spend a larger share of their income on manufacturing goods and services rather than on food. Economic analyses based on an average consumer can therefore vastly overestimate the gains to the poor, while severely underestimating the gains to the rich. Under a hypothetical decrease in trade barriers of 15 per cent, the gains of rich consumers could be 16 percentage points higher than those of the poor.

Distributional effects of trade should not be overlooked. Trade policies are often informed by economic analyses based on aggregate gains from trade. While there is little disagreement among economists that reducing trade barriers will generally lead to aggregate gains, it is important to realize that trade also has strong distributional effects. These effects must be taken into account when evaluating potential benefits of free trade, especially for countries with high inequality.