The 30% Solution: Gains from Trade

The 30% Solution: Gains from Trade

The 30% Solution: Gains from Trade

In 2022, total US exports of goods and services were $3 trillion, while imports were $3.9 trillion.

This overall trade provides benefits to the economy: sellers who have access to global markets (ask a farmer!), buyers who have greater access to products with the price/quality mix they prefer, and heightened competitive pressures on domestic producers to do better. However, the gains are not distributed evenly, and in some cases–say, workers in an industry facing especially strong competition from imports–people can experience outright losses.

How big are the overall gains? What should we think about the losses?

Gary Clyde Hufbauer and Megan Hogan of the Peterson Institute for International Economics offer some insights in “America’s payoff from engaging in world markets since 1950 was almost $2.6 trillion in 2022” (Policy Briefs 23-17, December 2023).

To summarize economic gains from trade, Hufbauer and Hogan first point to pre-2017 research on more than a dozen studies of international trade, which “calculated an average `dollar ratio’ of 0.24.” They write:

Simply put, the dollar ratio is the dollar increase in GDP divided by the dollar increase in two-way trade. In language familiar to economists, the dollar ratio is the elasticity of income (GDP) with respect to trade. Expressed another way, the calculation indicates that a 1 percent increase in trade yields a 0.24 percent increase in GDP—i.e., a $1 billion increase in two-way trade increases GDP by $240 million.

They redo and update these calculations based on a newer wave of studies and suggest an updated “dollar ratio” of 0.30–that is, a $1 billion increase in two-way trade increases GDP by $300 million.

What about those who experience losses from trade? Hufbauer and Hogan offer essentially two responses. One response is to put the number of those who suffer from trade in the context of job churn in the larger US economy. After all, there are also workers who lose jobs because their employer is losing market share to domestic competitors, perhaps because of a shift in consumer preferences, or shifts in the skill level of workers that US employers are looking for, or because of below-average management. Other US workers may lose jobs because of automation and new technology. Many more workers switch jobs, looking for higher pay or better opportunities, especially if they sense that their current employer may be in trouble. The second response is to argue that all US workers who are laid off from a job deserve government support through unemployment insurance and other programs, while they move to a new job. They write:

Compared with our estimate of US workers who lost or changed jobs because of increased imports (242,000 annually between 2019 and 2022), roughly 50 million American workers change their jobs each year. A small fraction of these workers is “displaced,” meaning laid off, including a smaller fraction displaced by imports. Displacement reduces earnings over the long term. Throughout the vast US economy over the past two decades, annual displacement ranged from under 1 percent to over 3.5 percent of the labor force (1 million to 5 million workers). All displaced workers, including those displaced by trade, deserve better public safety nets.

Of course, if you find these estimates of the gains from trade to be implausible, and instead you would prefer to see a substantial decline in international trade–take heart! This is your time! US trade in goods and services as a share of GDP have been declining since the Trump administration. However, international flows of data, information, and foreign investment have continued to rise. The forms of globalization have shifted, but the technologies driving greater global connectedness continue to develop.

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

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