Debates between free-traders and protectionists routinely devolve into competing variations of class warfare – each claiming the cause of the “common man” against a wealthy and entrenched elite.
Whereas protectionists argue that trade liberalization primarily benefits the rich, displacing disproportionate numbers of working-class employees, free-traders rush to the defense of working-class consumers, whose pocketbooks are undoubtedly harmed by tariffs and restrictions.
“The D.C. trade debate often devolves into a typical (and admittedly boring) ‘jobs versus consumables’ choice, with advocates for each side predictably sticking to their preferred positions,” writes Scott Lincicome of the Cato Institute. “As usual, however, this framing is far too simplistic.”
In a new study, “The Distributional Effects of Trade,” researchers Kirill Borusyak (University College London) and Xavier Jaravel (London School of Economics) conclude that the influence of trade policy tends to reach everyone pretty evenly — from rich to poor, educated to non-educated, industry to industry, and so on.
“Contrary to common wisdom, we find that import shares are flat throughout the income distribution: the purchasing-power gains from lower trade costs are distributionally neutral,” the authors conclude. “ … There is little impact of a fall in trade costs on inequality, even though trade shocks generate winners and losers at all income levels, via wage changes … Thus, our findings run against a popular narrative that ‘trade wars are class wars.’”
In his Capitolism newsletter, Lincicome helps distill the study’s key findings and summarizes what they mean for the popular debate.
First, Lincicome notes the “egalitarian nature” of our import consumption, which appears to balance out rather evenly across different demographics:
“[The authors] find … little variation in import consumption across all relevant income groups (i.e., from poor to rich Americans): overall, about 12.6 percent of Americans’ total annual spending is on foreign goods and services, and the difference among income groups is quite small (ranging from 11.7 percent to 12.9 percent).
“… Poorer Americans surely spend more of their paychecks on goods (see this recent David Henderson discussion for more), but a lot of that consumption is food, which is mostly produced domestically. While richer and poorer Americans tend to buy the same stuff from abroad, moreover, we do so in different amounts, at different price points or levels of quality, with different shares of imported content, and from different places. As the authors put it, “subsectors with a high import share, such as Computers and Electronics, are purchased disproportionately more by high-income consumers, while subsectors without much imports, such as Food, are purchased relatively more by low-income groups.”
And we all buy about the same low share of foreign services, which aren’t traded as much as goods but represent a large and growing share of our total consumption.
Second, Lincicome observes that various trade “shocks” also appear to spread their ripple effects rather evenly, across one’s income, industry, and education. Researchers assessed several scenarios — including trade liberalization with China and Trump’s 2018 tariffs — and found “a surprisingly small amount of difference across income groups, with average welfare of Americans in each group gaining about 2 percent from a 10 percent decrease in trade costs.”
While some did suffer from such shocks — between 4.4 percent and 8.5 percent in each subgroup — the differences did not fall into our typical class-driven categories for victims of trade liberalization. Indeed, according to one scenario, “more than 90 percent of Americans in all groups – poor, middle class, and rich –ended up better off following a decline in U.S. trade barriers.”
As Lincicome concludes, the results have significant implications for truth-telling when it comes to our political debates and policymaking:
“So, it turns out, both trade skeptics and free traders may have been wrong about globalization and inequality, in ways that challenge the current conventional wisdom about why the American working class needs ‘America First’ (Trump) or “worker-centric” (Biden) trade policies to offset a widening rich-poor gap.
“Trade wars aren’t class wars after all, and instead they (and trade liberalization) affect almost all of us in the same ways. That should be seen as good news in Washington – at least for those of us who want to see U.S. trade policy get back to real-world economics and geopolitics and stop being a totem in the current culture wars.”
In addition to reframing the policy focus, such evidence also offers an opportunity to reflect on the nature of trade itself. For free-traders in particular, these are results that we ought to expect: Trade policy affects people evenly across classes and categories because, by its very nature, trade binds us all together.
Far from representing a Marxian crisis of history — a zero-sum conflict between rich and poor, cultural elites and marginalized manufacturers — global markets embody vast and complex networks of human relationships and businesses: connected, cooperative, and interdependent.
What goes and flows before and beyond those relationships is not just the simple transfer of material stuff, nor is it a combative tug of war between competing classes and special interests. Rather, it is the voluntary exchange of goods and services among creative persons, driven by service and (ideally) love of neighbor.
When we seek to coerce or control those relationships from the outside in, such efforts will certainly have their select victims. But we should also expect them to bring disruption to that wider web of human relationships, across occupations, consumer types, and classes, whether seen, unseen, or unforeseen.
Lincicome concludes with a bit of pessimism, believing that “the trade policy class struggle will inevitably continue — regardless of what the data say.” But while he may be right about America’s political class and its crony counterparts, as everyday workers and creators and consumers, we have plenty of opportunity to reflect a different order altogether.
As we offer up our gifts to our communities, our countrymen, and the global economy, and as we work to expand the freedom and channels for doing so, we should be realistic about the struggle and disruption that free exchange is bound to involve. But we should be just as honest about the abundance that such effort and investment is bound to yield on behalf of all people.
On the whole, we can move forward with hope, service, and contribution, adapting our work to the needs of the world around us — regardless of class or creed, status or station — and uniting with others to cultivate new pathways, ideas, and partnerships for creative exchange.