Thoughts On Trade, Growth And Inequality From “Fostering A Dynamic Global Economy”

The Kansas City Fed’s Jackson Hole symposium this year focused on the causes, implications and remedies for the slowdown in economic growth. Major themes revolved around productivity, fiscal policy, and international trade. Here I discuss some of the major points relating to international trade and inequality, encompassing a paper by Nina Pavcnik (Dartmouth), comments by David Dorn (Zurich), and panel remarks by Ann Harrison (UPenn), Cathy Mann (OECD), Peter Schott (Yale), and John Van Reenen (MIT).

I think one of the things that the struck me in this portion of the conference was the magnitude of the profession’s shift in the view of how trade affects both growth and the distribution of income. The first time I taught international trade 23 years ago, there was little academic debate over whether it made sense to pursue trade liberalization. Now, when I teach international trade, issues of income distribution and inequality are front and center. Another development that I found remarkable was that the general agreement that the standard trade measures – from trade adjustment assistance to tariffs – I>as implemented have had little impact on mitigating the negative effects of trade competition on labor. On the other hand, the debate over what proportion of the increase in inequality is attributable to technology versus trade continues, with I think the view that the majority is ascribable to technological progress persists.

To begin with, Nina Pavcnik’s paper, The Impact of Trade on Inequality in Developing Countries*:

This paper assesses the current state of this evidence and highlights its implications. While the focus is mainly on developing countries, in part because we have more evidence in that context, the discussion draws parallels to developed countries. Some key findings emerge across several developing countries, and some of these are also seen in developed countries.

Frictions that impede workers from moving across industries, firms, or locations are a continuing theme in the developing country context, shaping trade’s uneven impact. Consequently, trade influences worker earnings through several factors: industry affiliation, firm affiliation, and location of residence all play a role in shaping trade’s impact on inequality. Individual demographic characteristics––especially age and education––also play a role, in part because younger and more educated individuals tend to more easily adjust to changes in trade.

Effects of trade on earnings are geographically concentrated and uneven within a country, depending on the region’s exposure to import and export shocks. Why are the effects of trade concentrated in local labor markets? Part of the answer is low and imperfect inter-regional worker mobility, especially in the short run after large adverse trade shocks.
Overall, the effects of trade on poverty and earnings inequality, through earning and employment, are context specific. They depend on the nature of trade policy changes or trade patterns and the mechanisms involved; on the mobility of workers and capital across firms, industries, and geographic locations; and the position of affected individuals in the income distribution of a country. As the reforms in India, Vietnam, China, and Brazil illustrate, focusing on how workers are affected by trade beyond formal manufacturing – including in agriculture, services, and the informal sector – is key in this assessment for developing countries.