10 August 2018

Technology and free trade are progressive and disruptive in similar ways

by IFT

Consider advances in technology – they are in many ways unsettling: to established jobs, to established competitors, to unfamiliar consumers. But such is the way of progress.

As Harvard Economist Dani Rodrik has argued: “trade creates disruptions in exactly the same way that technological changes does”.

As advocates for free trade, we should be honest about these disruptions from the off. And we should help to find ways of mitigating any shocks to employment and domestic sectors.

However, we must also be firm in our anticipation of the benefits. We have economic theory and economic history on our side. Caving to special interests results in concentrated gains for those, and dispersed losses for everyone else. Let’s look at an example.

Concentrated gains:

In 2009, Barack Obama imposed a tariff of 39% on car and truck tyres from China (where they were previously 3-4%), initiated in part to project US jobs. The Peterson Institute have calculated that this measure saved up to 1,200 jobs in the domestic tyre industry.

Dispersed losses:

However, due to this tariff, the price for tyres increased, and was passed on to the consumer, at a cost of $1,1Bn. Each job saved therefore cost 900,000$. But it gets worse: the raised price for tyres led to a fall in spending on other items. This fall in spending in other parts of the economy is estimated to have destroyed 3,731 jobs – a net loss of 2,531 jobs in the US economy.

Although this is a story about the consequences of protectionism, rather than liberalisation, you can predict some of the consequences of the latter by flipping the story. If one were to find tyre tariffs at 39% and reduce them to 4%, one can confidently expect to see consumer prices fall, and more jobs created in other sectors than lost in the tyre industry.

But the vast gains of the many shouldn’t numb free traders to the losses of the few. We should be honest about these, and look to help where possible – all the while remaining confident in the expediency of trade: the ultimate instrument for poverty alleviation, conflict resolution and social justice.