DeLong: Why We Should Presume Free Trade Is Win-Win: A Multisector Stolper-Samuelson Finger Exercise
Distributed Co-Creation

China and Walmart: Champions of Equality?

Like many people, I am still somewhat puzzled and confused by Christian Broda and John Romalis:

China and cheap imports: Champions of equality: The U.S. presidential campaign has sometimes sounded like a contest to prove who despises trade the most.... This public debate has taken for granted that inequality... has risen as a result of globalisation. But has it really?.... How rich you are depends on two things: how much money you have and how much the goods you buy cost. If your income doubles but the prices of the goods you consume also double, then you are no better off. Unfortunately, the conventional wisdom on US inequality is based on official measures that only look at the first....

Inflation differentials between the rich and poor dramatically change our view of the evolution of inequality in America. Inflation of the richest 10 percent of American households has been 6 percentage points higher than that of the poorest 10 percent over the period 1994 – 2005..... Why has inflation for the poor been lower than that for the rich? In large part it is because of China and Wal-Mart!

Poor families in America spend a larger share of their income on goods whose prices are directly affected by trade... the higher your income, the more you spend on services, which are less subject to competition from abroad....

This trend can partly be explained by China. In U.S. stores, prices of consumer goods have fallen the most in sectors where Chinese presence has increased the most.... The expansion of superstores – like Wal-Mart and Target – has also played an important role in accounting for the inflation differentials between rich and poor. Superstores sell the same products as traditional shops at much lower prices....

What is really worrying is that, despite these facts, we have had a backlash against China and Wal-Mart in America.... We need to remind politicians and the public that the gains from trade are broadly shared. Every time the discussion over trade is diverted towards the problems facing specific producers, be they farmers in France or textile workers in the U.S., we miss the central point. Trading allows everyone, and especially the poor, to buy things that they could not otherwise afford...

Let's run through the Heckscher-Ohlin logic:

Set the prices of luxuries as numeraire. Then the relationship between changes in log wages w and profits log r depends on changes in the log price p of necessities and on the shares of capital in the production of luxuries and necessities according to:

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This means that the change in the wages of workers as a function of the change in the prices of necessities will be:

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The real incomes of wage-earners depend not just on what happens to wages but what happens to the prices of things they buy, and so if a share θw of their income is spent on necessities:

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And here's the catch. The necessities-share θw of wage-earners has to be less than one, but the change in log wages is greater than the change in log prices. So wage earners' real income goes in the same direction as necessities prices--no matter how fast the prices of necessities are falling:

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When Broda and Romalis assert that trade is causing the prices of tradeable necessities to fall rapidly, they are either (a) breaking the H-O framework in some way, or (b) implicitly asserting that capital is the scarce factor in the United States and thus the factor of production whose returns are reduced by globalization.

It is not clear to me how they propose to break the H-O framework. And I do not find (b) plausible.

I prefer to break the H-O framework in a Smithian division-of-labor direction: asserting that the scarce factors that lose from trade are organizational and technological expertise and that there is substantial implicit and explicit cross-ownership of factors that together make trade nearly win-win. But I don't see Broda and Romalis going there...