Who wins and loses from global trade?

Why are most economists more in favor of free trade than the general public?

One reason may be that the models economists use to evaluate the impact of global trade often overlook some significant ways it affects jobs, income and social services.

The vast expansion in international trade that began in the 1990s with China's emergence as a major source of manufactured goods led to considerable research on trade's impact on the economy, particularly the labor market. This research overwhelmingly supported the idea that specialization and trade among nations raises national income.

This theory holds that it is possible for trade to make everyone better off if the gains from are widely distributed throughout the population. But the reality is more complex, and that's largely because the distribution of the costs and benefits of trade have been highly unequal.

For example, recent research by economists David Autor of MIT, Gordon Hanson of the University of California-San Diego and various coauthors finds that "the distributional consequences of trade and the ... losses associated with adjustment to trade shocks are substantial."

According to these findings, increased trade with China reduces manufacturing employment in the U.S., and labor markets are affected "along other margins which have escaped notice in earlier research." In particular, over and above the employment effects, labor markets facing increased competition from China experience a fall in labor-force participation, lower wages, and increased use of federal disability and social insurance programs (the fall in labor force participation produces a long-run negative impact that is often absent from models used to evaluate international trade). Notably, these effects aren't confined to the manufacturing sector.

Such conclusions may seem obvious to those who over the last three decades have watched multinational corporations ship millions of jobs around the world to China and other low-wage havens. But the latest findings on trade reveal something important -- perhaps even fundamental -- in how it affects the global economy.

In particular, the authors emphasize that it is important to distinguish between the effects of international trade on the median, as opposed to the individual, worker. For example, they find that the impact on the income of the median worker is "comparatively modest" at "approximately 3 percentage points per year." But there is substantial variation in the income and employment effects across various demographic groups.

While both high- and low-wage workers are affected by international trade, the research finds that "high-wage workers appear to primarily obtain 'safe harbor' in equally highly paid work, often outside of manufacturing. Low-wage workers, by contrast, churn primarily within the manufacturing sector and experience reduced earnings at both the initial employer, where the initial shock transpired, and at subsequent employers."

As a result, the costs, distributional impacts and effects on social insurance programs "may color how workers perceive global economic integration," the researchers conclude.

It's worth emphasizing this isn't the same thing as saying that expanding international trade is harmful. Specialization and trade produces overall gains for the U.S. economy according to both theoretical and empirical work.

What it does say is that public support for trade will require the gains be distributed much more evenly than they have been in recent decades.