Sunday, April 27, 2008

NAFTA and Global Trade

From Today's New York Times

"No matter how hard economists look for trade’s fingerprints on these inequities, they find it plays only a bit part. Josh Bivens of the Economic Policy Institute estimated that rising trade with poor countries increased wage inequality between college and high school graduates by about 7 percent over the past quarter-century — but the wage gap has widened by more than six times that amount over that period. And many economists think Mr. Bivens overstates trade’s impact. Robert Lawrence of Harvard, who was an adviser to President Bill Clinton, concluded that the increase in wage inequality since the 1990s had little to do with trade."

Is trade really associated with rising inequality? One might think so, because trade brings "gains" and "gains" are supposedly being allocated to the rich. 

This might not be the case. Out of MarginalRevolution:

"Looking at trade data between 1994 and 2005, Broda and Romalis construct inflation rates for different income groups and find that rates for the richest outpaced rates for the poorest by about 4 percent over the period. Since income inequality between the top and bottom 10 percent of earners grew by about 6 percent, the different inflation rates among income groups wipes out about two-thirds of the rise in inequality."

In other words, the inflation rate on consumer goods for rich people has been raising much faster than the inflation rate on goods for everyone else. And where do the low-end consumer goods come from?
That's right, a large portion seem to be arriving from China and other developing nations. So, trade's effect on inequality is somewhat mitigated (or perhaps might even be an equalizer in incomes).

Furthermore, the income of the very wealthy has been increasing rapidly since the early 1970s, and through the 1980s. The 80s happened to be a period where growth in international trade was relatively small relative to the 70s and the it's very tough to conclude that trade has historically been a factor in increasing inequality. If anything, trade has only been increasing inequality fairly recently (which is the subject of Krugman's latest paper).

Rather, the income inequality can probably be described as arriving from more...structural issues. Rising CEO pay, entertainment salaries, etc. And those probably aren't influenced much by trade at all.

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