Theory is essential for understanding the world. It helps us understand and predict the world around us. The theory is like a pair of glasses. A good pair will help you look better. Bad pairs make things worse. And it’s useless to not be a pair.
One of the main issues these days is that the Trump administration’s trade policy is a guide to terrifying bad theories. To make matters worse, they don’t seem to easily grasp right).
This post is intended to be a corrective lens for ropes. Of course, none of this matters to true followers. This post is for them. This post is for those who want to understand trade theory.
International trade is no different from domestic trade. Whether you’re trading with Brett in Boston, Brad in Baton Rouge or Bobby in Berlin, the same principles are retained. Specifically, people consider margins when buying and selling desions. They will buy good when the marginal cost of doing good exceeds the marginal profit of making good. In other words, they buy when it’s cheaper to make it easier to buy. Or they’ll sell when they can get more for sale than they cost to make it.
Ricardo’s simple model in which comparative advantage determines patterns of trade showed that it holds again and again, both at the individual and international level. Technical elaboration is occurring (e.g., Heckher-Ohlin’s Standard Trade Model, Stolper-Samuelson and Price Equalization Factor, specific factor models, product lifecycle theory, etc.) but sticks to simple models.
People think and act on margins, so they should go through international trade patterns to reflect these margins. In other words, states generally need to import things that have poor literacy (i.e. low production/service) and export things that have relatively good ones. Furthermore, wages are linked to productivity, so wages in the import competitive industry should be relatively low, and wages in the export capacity industry should be expected to be relatively high. Certainly, that’s what we see.
Written by the Peterson Institute for International Economics, J. Bradford Jensen and Lori G. Kölzer show that the overwhelming majority of trade dangerous jobs are in the low-productivity and low-paid sectors. The sectors with the highest conversation, productivity and wages are exporters (see Figures 4 and 7). These data are a bit outdated (reports have been in 2008), but I’m working on updating the numbers. The pattern has not changed. Just numbers.
Trade patterns follow certain logic and are not random, so unemployment from trade should not be expected to be random. Protectionists want to implicitly assert that unemployment in trade is eithher random (and therefore cites average wages) or that unemployment in trade is non-Rondom, but in total, companies are looking for the most productive and most expensive businesses (and therefore focusing only on productivity industries and wages). However, unemployment is in low-wage areas and employment benefits are in high-wage areas.
To Constent, jobs “saved” by tariffs will also be those low-productivity jobs at the expense of high-productivity jobs. For example, consider textiles. Textile manufacturing in the US faces solid competition from overseas. According to BLS, the textile-manufactured Whirker has earned an Anherge of $17.78/hour. This is the national average of 54.4% ($32.66). Conversation, Oil, Oil Extractors – one of our main exports – costs an average of $28.39 per hour. (Note: These data exclude managers and other supervisory workers. They are merely non-surveillance.) Tariffs can “save” low-productivity jobs, but at the expense of higher-productivity jobs. (To challenge it, it is true that the two industries selected are opposite polarity of scale, but the points remain.)
Now, of course, as trade expands, subtextile workers could be fired. What are their options? Are they destined to live in the public? After all, their skills are no longer needed in the US economy (economists call them “structural unemployment”). The answer is: Probably not. Even the Rea Chivore low-productivity services jobs pay for almost the same ASSE low-end manufacturing jobs. Food preparation workers buy an average of $17.32 per hour. Retail Sales Worker: $17.05/hour. Is nausea in wages of textile manufacturing workers falling? Certainly they are on par with wages. If the worker did not have welfare along with textiles, I may not be working as a retailer or food preparation worker Aisher. And all this assumes that workers will not take steps to retrain them. If they acquire skills in greater demand, they can raise wages.
Life happens on margins. Therefore, trade adjustments occur both in margins. A good theory can help to use the potential impacts of tariffs along different margins (and to show what impacts are likely to occur).
Finish with a graduate school HR story:
I was taking the Robin Hanson Law & Econ GRAS class (Econ 841). For some of the grades, the original paper had to be presented. I came up with a variety of clever models that I thought were. The math worked well and was cleanly removed. I presented the paper, and Dr. Hanson said, “This is interesting, but where is economics?” That simple question blew my model away. I learned two important lessons of the day.
A good theory prevents bad vision. Bad theories are misleading, no matter how many flashy Greek letters you put in, even if you need more and more.
