Must-read: Dani Rodrik: “The Trade Numbers Game”

Must-Read: I had thought that we understood rather well why freer trade created substantial winners and losers–that the shifts in the prices of goods from moves to freer trade caused magnified shifts in the rewards to factors that were used intensively in the production of such goods. And the consequences for the overall level of employment seem, to me at least, to be limited to the era of “Depression Economics” that we entered in 2007 and from which we have not emerged: NAFTA did not raise unemployment in the United States.

So I find myself failing to grasp large pieces of the very sharp Dani Rodrik’s argument here:

Dani Rodrik: The Trade Numbers Game: “The Trans-Pacific Partnership (TPP)… is the latest battleground in the decades-long confrontation…

…between proponents and opponents of trade agreements…. The pact’s advocates have marshaled quantitative models that make the agreement look like a no-brainer…. There is no disagreement between the models on the trade effects…. The differences arise largely from contrasting assumptions about how economies respond to changes in trade volumes sparked by liberalization. Petri and Plummer assume that labor markets are sufficiently flexible that job losses in adversely affected parts of the economy are necessarily offset by job gains elsewhere…. Capaldo and his collaborators offer a starkly different outlook: a competitive race to the bottom in labor markets…. The Petri-Plummer model is squarely rooted in decades of academic trade modeling…. By contrast, the Capaldo framework lacks sectoral and country detail; its behavioral assumptions remain opaque; and its extreme Keynesian assumptions sit uneasily with its medium-term perspective….

Economists do not fully understand why expanded trade has produced the negative consequences for wages and employment that it has. We do not yet have a good alternative framework to the kind that trade advocates use. But we should not act as if reality has not severely tarnished our cherished standard model….

The uncertainties do not end with macroeconomic interactions. The Petri-Plummer study predicts that the bulk of the economic benefits of the TPP will come from reductions in non-tariff barriers (such as regulatory barriers on imported services) and lower obstacles to foreign investment. But the modeling of these effects is an order of magnitude more difficult than in the case of tariff reductions…