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Free trade critics love to cite this economist. But he actually thinks trade is essential.

China Daily Life - Steel Economy
A steelworker in China.
(Kevin Frayer/Getty Images)

Gordon Hanson is an economist at the University of California San Diego, and you'd expect him to be a fierce critic of free trade. He's a co-author of perhaps the most famous study showing the downside of trade for American workers, which concluded that exports from China in the 1990s and 2000s cost the US a huge number of manufacturing jobs.

Yet Hanson is anything but anti-trade. Those job losses, Hanson told me, were inevitable so long as rich countries were willing to trade with relatively poorer countries like China. Those poor countries needed trade, Hanson argues, in order to fuel the massive declines in extreme poverty we've seen since World War II.

"Exports were what allowed China to grow," Hanson told me. "We haven't seen poverty fall dramatically in any country that kept itself closed."

In other words, there was a trade-off: Rich countries lost a significant number of jobs, but poor countries gained enormously. What follows is a transcript of our conversation about why this had to be the case, edited for length and clarity.

Zack Beauchamp: How important is trade for economic growth, and thus poverty reduction, in developing nations?

Gordon Hanson: It’s essential for their economic development.

What are the challenges that developing economies face? Their labor productivity is low relative to the rest of the world, and that's why their incomes are low. How do you raise labor productivity? You bring in new capital, and a lot of the times you do that through importing.

To import, you have to export. You bring in new types of intermediate products, which enhance the value of the goods you can produce.

You want to raise the demand for the value of the stuff you make. If you're a low-income economy, you only have so much demand there for the stuff that you're really good at producing. Opening up to the rest of the world allows you to vastly expand the markets for the stuff that you make, and in return for those exports you are capable of importing goods and capital and technology that make you get better at what you're doing.

ZB: Some of your recent work has looked at US job losses as a result of increased exports from China. To what extent was that an inevitable part of the Chinese development story, because China needed to export in order to accomplish the goals that you just described, and that was going to inevitably involve a lot of low-wage (by developed country standards) manufacturing jobs?

GH: Yeah, I think US job losses in manufacturing — especially the labor-intensive, less skill-intensive part of manufacturing — are inevitable when the US opens its economy to the rest of the world. [And] the US did that a long time ago.

When the US really opened its markets in the post–World War II era, the other countries that were open to trade were primarily other rich countries. The trade that developed in the '60s and '70s and even into the '80s primarily was what the economists called North-North, rich country to rich country.

That didn't involve big losses and labor-intensive manufacturing for the US, because we were trading cars for airplanes and electronics for chemicals. It was intra-industry trade with Japan and Germany and the UK and France and Canada. That was an artificial world. That was a world where a pretty small fraction of the world’s population was actually involved in producing for global markets.

When developing countries began to change those policies and really open themselves to trade in the '80s and especially the '90s, then we saw what we kind of knew would ultimately be the US pattern of specialization — which was not in these really labor-intensive manufacturing goods that those developing countries are great at making.

ZB: So the US policies like permanent normal trade relations with China only accelerated something that was ultimately going to happen?

GH: It was inevitable.

Once China became part of the global economy, what was going to happen was the US getting out of the really labor-intensive stuff as China moved into that, and that's specializing, and more skill- and technology- and capital-intensive industries. It didn't happen earlier because, for many complicated historical reasons, China just wasn’t part of the global economy. Latin America wasn’t that much part of the global economy either until the 1980s and 1990s.

ZB: So we've got a trade-off story here. When developing countries started opening their economies, trade volume increased — which led to inevitable job loss in the developed world. But in the developing world, it helped produce the great miracle of declining poverty by fueling economic growth. So the story is inseparable from the story of the tremendous decline in extreme poverty we've seen in the past several decades.

GH: Yeah. We haven't seen a country that got rich, and we haven't seen poverty fall dramatically, in any country that kept itself closed. That openness is a necessary condition for development, [though] it’s not a sufficient condition.

[The export-driven growth story] was especially true in the countries that were particularly good in manufacturing, because those are the sectors where you're going to be employing lots and lots of labor. So as you engage the global economy, you're going to see this dramatic improvement in the standard of living. That was the story for East Asia. It’s also been mostly the story for Southeast Asia.

un poverty chart
Note: Prior to late 2015, the international definition of extreme poverty was $1.25 a day. Since it's been moved up to $1.90 a day, the numbers in this chart are likely an undercount (even though the trend remains true).
(Javier Zarracina/Vox)

Where it’s happened much more slowly than lots of people expected, myself included, is in Latin America and in Mexico. We haven't had the productivity miracle that we've had in Asia as a consequence of globalization.

Latin America is a complicated region. It’s a place that looks very different from Asia in terms of its comparative advantage. Mexico is the only Asia-like country in the region. A couple of parts of Central America are, too, in that manufacturing is the center of what it does on the export side.

Most of the rest of Latin America is really about commodity production. It’s copper and iron ore and soy and corn and beef and wheat and all of that. The region had strong growth in those sectors in the 2000s during this big commodity boom that we had. That doesn’t tend to raise living standards quite as dramatically as we've seen in Asia.

ZB: Let's talk about China specifically. Some have argued that exports weren't critical to declines in Chinese poverty. You seem to think they're wrong.

GH: I think the evidence works strongly to the contrary. Exports were what allowed China to grow.

It’s China’s strongly export-oriented regions where we've seen the most dramatic wage growth. That wage growth has benefited workers, many of whom used to live in rural areas. Those workers send money home and helped reduce poverty in China’s formerly destitute countryside.

This has been the story in development in countries throughout history. It was the story for US development. The US got rich by moving workers to the parts of the country where they were experiencing rapid job growth. You think about right now we're celebrating the 100th anniversary of the Great Migration, the movement of the African Americans from the South to the North.

Those individuals moved into industrial jobs in the North, saw dramatic increases in their earnings, and that led to sharp declines in poverty nationally. The parts of the South where they came from, many of those remained poor. But people from the South, many of whom no longer lived there, were much wealthier. That exact situation has played itself out in China over the last 25 years.

[So] to say that poverty reduction in China doesn’t have anything to do with its export boom, I think, runs strongly counter to the facts.

ZB: So what about US bilateral trade deals — our free trade agreements with countries like Panama and South Korea? Did they help reduce poverty?

GH: Well, the big part of poverty reduction came with the ability of countries to join the World Trade Organization and have access to markets in the rest of the world. That’s much less of a US bilateral trade policy than about US multilateral trade policy.

The US, along with Europe, Japan, Canada, Australia, and other similar countries, built the global trading system through multiple rounds of negotiation for the General Agreement on Trade and Tariffs (GATT), which then morphed into the WTO in 1994. Countries that liberalized said, "Okay, we're now going to join the global community of trading nations." They could join the WTO and benefit from access to markets for all those other WTO members.

If you want to think about the aspects of the US trade policy that mattered most for poverty reduction, it was that component. The bilateral deals had been much less important, in part because we're making bilateral deals with countries that had already liberalized quite a bit. NAFTA mattered, but what the US did through the seven or eight rounds of GATT and WTO negotiations over 40 years mattered much, much more.

ZB: You said NAFTA mattered in poverty reduction. One argument you hear from critics of NAFTA is that it impoverished Mexican farmers: US farm subsidies made importing farm goods cheaper for Mexico, so America's big agricultural companies made a bunch of money while Mexican farmers were put out of their jobs. Do you think that's fair?

GH: I don't think the question is what happened to Mexican farmers. I think the question is what happened to people who are from rural Mexico.

There were many Mexican farmers who were hurt under NAFTA. Then again, separate the farmers from individuals from rural Mexico. Many of those individuals are doing much better today as a consequence of integration with the US economy. They've done better, not necessarily by staying where they were but by moving. Either moving to take jobs in northern Mexico in maquiladoras [factories] or moving to the US.

Moreover, some of the biggest changes you can't directly attribute to NAFTA. It was the end of the ejido system in Mexico, which allowed people to sell their land. That involved lots of dislocation, but it also allowed people to move to cities, allowed people to sell their land, get out of being small farmers. You had the end of agricultural subsidies; that was a very big deal in the country.

A Mexican berry farmer in Jalisco.
(Tim Johnson/McClatchy DC/TNS/Getty Images)

So there are two problems for the summary statement that NAFTA hurt Mexican farmers: 1) There are these other policy changes that were probably much more important than NAFTA, and 2) you want to focus on everybody in the region and not just the still-farming population.

Now, US immigration policy has played a big role in raising living standards for people born in Mexico. [Migrants] enjoy much higher living standards, and then the remittances that they send home support family members.

If you're talking just about Mexico, NAFTA helped a bit. But the de facto US immigration policy of allowing large-scale immigration from Mexico mattered much, much more for the well-being of individuals from the country.

ZB: Let me ask you a big-picture question. How much of this story is shared among economists? That is to say, how much of a consensus is there on the benefit of trade for poverty reductions?

Gordon Hanson: I think the fair statement to make is that trade is a necessary but not sufficient condition for poverty reduction.

There are plenty of countries that have fully liberalized their markets and haven’t seen big reductions in poverty. I don't think economists would say, "Trade globalization is the magic bullet. You do this and you're going to see massive reduction in poverty in the country." The evidence just doesn’t support that.

I think the evidence also doesn’t support the idea that you can have massive reductions in poverty without globalization. We just haven't seen it.

I think we've come to realize that when you talk about development, trade policy is one of many changes that need to happen in a society to allow income growth to occur.

This was part of the problem with NAFTA in Mexico. NAFTA was sold as the magic bullet: NAFTA was going to make Mexico rich. And it didn't make Mexico rich.

Research that I and others have done suggests that Mexico has had a nice little income boost overall from NAFTA — not to say that there weren’t segments of society that were hurt — but the wage gains that I was able to estimate were around the order of 10 percent. You're never going to deny yourself a 10 percent income gain, but that’s not transformative. That’s not China levels of poverty reduction.

ZB: What would happen if the US started reversing its historical pro-liberalization stance? If it got a little more protectionist and started, say, backing out of NAFTA and CAFTA or putting higher tariffs on China to try to revive the US manufacturing sector. What would be the effect do you think, specifically, on global poverty and the global economy?

GH: The US is still about 20 percent of global GDP. That’s a big number. [But] our overall influence on global economic activity is far greater than that 20 percent number would suggest.

The US is the most innovative and still the most productive economy in the world. When you shut down the US engagement with the world, you're cutting people off from access to the technology and the services and the manufacturing goods that essentially fuel economic growth elsewhere.

Think about the sectors where we've seen the most rapid productivity growth in the last 30 years. They're all technology-related; almost every one of those technologies was developed in the United States. The US has an outsize contribution to global productivity growth, because we are still the locus of innovation for the global economy.

What would President Donald Trump do? He almost certainly couldn't succeed in truly creating a Fortress America. It would be just raising barriers.

[That] absolutely would have a negative effect on the global economy. That’s just on the trade side.

The US also plays this enormously important role in the global economy, because the dollar is the global currency. In the public debate, people just don’t appreciate how important the dollar and then dollar-denominated assets like T-bills are for global trade and investment. For investment to flow smoothly between countries, you need to have a safe place to put your cash in between the long-term investments. It’s just fundamental to the global banking system.

If the US is less engaged in the global economy, if we trade less, the necessary corollary to that is that there are smaller capital growths between the US and the rest of the world, and we've diminished the rest of the world’s access to dollar-denominated assets as a consequence.

We shrink our role in the global economy. That would increase macroeconomic volatility. It would make financial crises more likely.

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