Americans' beliefs about trade, and why compensation matters

Do people understand trade policy? Or rather, do they understand trade policy the way that economists understand it? Given current debates in the US and elsewhere, it would be fair to question people's (or politicians') understanding of trade policy, and to consider what it is about trade that generates negative reactions. After all, the aggregate benefits of free trade are one of the things about which economists most agree.

Last year, Stefanie Stantcheva won the John Bates Clark Medal (which is awarded annually to the American economist under age 40 who has made the most significant contributions to the field). Stantcheva's medal-winning work included three main strands, one of which was the use of "innovative surveys and experiments to measure what people know". One of the papers from that strand of research is this 2022 NBER Working Paper (revised in 2023), which describes Americans' understanding of trade and trade policy and importantly, it answers the question of why people support trade (or not).

The paper reports results from three large-scale surveys in the US run between 2019 and 2023, with a total sample size of nearly 4000. The surveys also included experiments that primed respondents to think about trade from particular angles. Overall, Stantcheva is interested in teasing out the factors that affect Americans' support for trade policies. Essentially, she tests the mechanisms that are described in Boxes I-V in Figure 2 from the paper:

Box I picks up views on whether trade lowers prices and increases variety for consumers. Box II picks up the threats from increasing trade to workers in import-competing sectors. Those two boxes together constitute self-interest as an effect on people's views on trade policy. Their views might also be affected by broader social and economic concerns, such as trade's efficiency effects (Box III), its distribution impacts (Box IV), and patriotism, partisanship, or geopolitical concerns (Box V).

Before we turn to the specific results on the mechanisms, it is worth considering Americans' overall views on trade first. Stantcheva reports that:

Most respondents (63%) are supportive of more free trade and decreasing trade restrictions in general... Only 36% believe that import restrictions are the best way to help U.S. workers.

Nevertheless, there is support for more targeted trade restrictions. 40% of respondents believe the US should restrict food imports to ensure food security. 54% think the US should protect their “infant” industries. 78% support protection of key consumer products, namely food items and cars. 50% believe the US should restrict trade in key sectors, such as oil and machinery...

And general knowledge about trade policy is not too bad, as:

...almost 80% of respondents know what an import tariff is, but just around half know what an import quota is. Two-thirds of respondents appear to understand the basic price effects of tariffs and export taxes, i.e., that an import tariff on imported goods will likely raise the price of that good and that an export tax will increase the price of the taxed good abroad. The final question... considers a scenario in which the US can produce a good (“cars”) at a lower cost than the foreign country. Respondents are asked whether, under some circumstances, it would still make sense to import cars from abroad. 68% of respondents agree that it could make sense. This suggests that respondents either understand the concept of comparative advantage or have in mind some model of love-for-variety or quality differential.

So far, so good. How do Americans perceive the impacts of trade? Figure 9 Panel A reports perceptions related to the self-interest motivation (Boxes I and II from the figure above):

From the bottom of that figure, it is clear that a majority of Americans believe that they are better off from trade, but a substantial minority (39%) believe that they are worse off. Still focusing on the self-interest motivations (Boxes I and II), Stantcheva finds that:

In general, a respondent’s (objective) negative exposure to trade through their sector, occupation, or local labor market is significantly positively correlated with a feeling that trade has made them worse off and that it has negatively affected their job. People exposed to trade through their job also feel worse off as consumers and are less likely to believe that trade has reduced the prices of goods they buy, perhaps because they feel that their purchasing power is lower than it would otherwise be. Furthermore, college-educated respondents are significantly less likely to feel negatively impacted in their role as consumers and workers.

Notice those results are mostly consistent with the figure above. What about consumer gains through reduced prices on imported products? Stantcheva reports that:

...the belief that prices decrease from trade is not significantly related to either support for trade or redistribution. Consistent with this lack of correlation, the experiment priming people to think of their benefits as consumers (precisely, the prices and variety of goods they purchase) does not move their support for trade either.

So, in terms of self-interest, Americans' support for trade is more negative when they are negatively affected as workers, but is not more positive when they are positively affected as consumers. In my ECONS102 class, we talk about the tension between the gains from trade and loss aversion. Every trade involves gaining something, in exchange for giving something up. However, quasi-rational decision-makers are affected much more by losses than equivalent gains (what we call loss aversion). So, loss aversion might mean that many profitable trades are not undertaken, because the decision-makers prefer to keep what they have, rather than giving it up for something that may be objectively worth more. In the case of Stantcheva's survey respondents, the workers who are negatively impacted experience a loss, which would be weighed much more heavily than the gain that a consumer receives.

An alternative explanation is salience. Job losses are very visible and impactful on the people who lose their jobs and those around them. Consumers' gains in terms of lower prices and increased variety, on the other hand, are not really as visible - many people wouldn't even notice them, unless they were pointed out to them. So even if people weren’t loss averse, attention would still be drawn disproportionately to the negative impacts of trade, rather than the positive. Taken altogether, Stantcheva's results here are not surprising.

What about the broader social and economic concerns, and their impact on views about trade? In terms of efficiency effects (Box III), Stantcheva reports that:

Respondents are generally optimistic about these effects. For instance, 61% of respondents think that international trade increases competition among firms in the US, 69% that it fosters innovation, and 62% that it generates more GDP growth.

Moreover:

...efficiency gains from trade are significantly associated with more support for free trade... This relation can be seen in the correlations and the experimental effects: the Efficiency treatment significantly improves support for free trade.

And interestingly:

Respondents who believe that trade can improve innovation, competitiveness, and GDP are more supportive of redistribution policy to help those who do not benefit from these efficiency gains.

Turning to distributional impacts (Box IV), Stantcheva reports that:

Overall, respondents know that trade can have adverse distributional consequences through the labor market. Just around half of all respondents believe that trade has, on balance, helped US workers. 79% of people think that trade is the reason for “unemployment in some sectors and the decline of some industries in the U.S..” More respondents (63%) believe that high-skilled workers could easily change their work sector if their jobs were destroyed by trade than that low-skilled workers could switch sectors (37%)...

Consequently, around two-thirds of respondents think that trade is a major reason for the “rise in inequality” in the US. Notably, despite being aware of the potential adverse distributional consequences of trade, a majority (62%) of respondents believe that, in principle, trade could make everyone better off because it is possible to “compensate those who lose from it through appropriate policies.”

It is interesting that so many people believe in the compensation principle (although I bet that few of them would know that term for it). And it turns out that belief in the compensation principle is really important, as:

...the strongest predictor of support for free trade is the belief that, in principle, losers can be compensated... free trade. As long as respondents believe that adverse consequences from trade on some groups can be dampened by redistributive policy, they are likely to support more free trade, even if they believe that there are adverse distributional consequences. The perceived distributional impacts of trade also substantially matter for support for compensatory redistribution. Respondents who believe that trade hurts low-income and low-skilled workers and that it fosters inequality support redistribution much more.

Finally, in terms of patriotism, partisanship, or geopolitical concerns (Box V), Stantcheva reports that:

...those who worry about geopolitical ramifications from trade restrictions, i.e., retaliatory responses, are more likely to support policies to compensate losers from trade rather than support outright trade restrictions. Patriotism is significantly correlated with support for trade restrictions in many industries and to protect U.S. workers, as well as with lower support for compensatory transfers...

Stantcheva draws a number of conclusions from her results, including:

First, respondents perceive gains from trade as consumers to be vague and unclear but perceive potential losses as workers to be concentrated and salient. Actual and perceived exposure to trade through the labor market is significantly associated with policy views...

Second, people’s policy views on trade do not only reflect self-interest. Respondents also care about trade’s distributional and efficiency impacts on others and the US economy...

Third, respondents’ experience, as measured by their exposure to trade through their sector, occupation, and local labor market, shapes their policy views directly (through self-interest) and indirectly by influencing their understanding and reasoning about the broader efficiency and distributional impacts of trade.

Overall, I take away from this paper that Americans have more correct views about trade than I suspected. Their support for trade is not determined simply by self-interest, but is more nuanced. However, negative impacts weigh far more heavily for those who are negatively impacted than the weight attached to positive impacts for those who are positively impacted. That may relate to loss aversion, and to the more concentrated nature of negative impacts compared with more diffuse positive impacts. That asymmetry also explains why a majority have positive views of trade (since fewer people will have been negatively impacted on the whole). The most surprising aspect to me, though, was the views on the compensation principle. Those results provide a clear policy prescription. To get more people on board with trade, making compensatory policy more explicit and salient may help to ensure that there is greater support for trade. On the other hand, politicians who want to exploit the negative views on trade might benefit from obscuring any such compensatory policies. Unfortunately, there are too many who are willing to do just that.

[HT: Marginal Revolution, last year]

The economic impacts of the 2008 NZ-China Free Trade Agreement

New Zealand was the first Western developed country to sign a free trade agreement with China, and it came into force in 2008. At the time, the New Zealand government estimated an increase in exports to China of between NZ$225 million and NZ$350 million (between US$180 million and US$280 million), and Ministry of Foreign Affairs and Trade (MFAT) estimated an increase of 0.25% in GDP. How did things actually turn out?

That is the question addressed in this 2021 article by Samuel Verevis (MFAT) and Murat Üngör (University of Otago), published in the Scottish Journal of Political Economy (ungated earlier version here). Now, the challenge with this sort of exercise is that we can observe what happened to New Zealand with the FTA in place, but we cannot observe what would have happened if there had been no FTA (the counterfactual). And that is a problem, since what we really want to know is the difference in outcome between what really happened and the counterfactual.

Verevis and Üngör solve that problem by using the synthetic control method. Essentially, they use a weighted average of the outcomes of other countries (donor countries), that closely follows the trends in the New Zealand data before the FTA came into force in 2008, and then use the same weights to create a 'synthetic New Zealand' counterfactual for the period after 2008. The key assumption with this approach is that there isn't some other change that affected New Zealand differently from the donor countries at the same time as the FTA came into force.

Verevis and Üngör first look at the effect on New Zealand exports to China. The results are summarised in Figure 3 from the paper:

The black solid line is actual New Zealand exports to China (in nominal US dollar terms). The red dashed line is the counterfactual created using the synthetic control method. The vertical dotted line reminds us that the FTA came into force in 2008. Notice that, prior to 2008, the two lines follow each other closely. That is what we should expect with this method, since the synthetic control is designed to closely mimic New Zealand data. After 2008, the lines diverge dramatically, with actual New Zealand exports to China far higher than the counterfactual. Verevis and Üngör note that:

In the post-intervention between 2009 and 2015, NZ's actual exports to China were more than 120%, on average, higher than the synthetic counterparts.

Eyeballing Figure 3, the increase in exports was in the order of US$6 billion at its peak, so the government's expectations of US$180-280 million wildly underestimated the trade impact of the FTA. What about GDP though? Verevis and Üngör's preferred results for GDP actually show a decrease, as shown in Figure 7 from the paper:

Verevis and Üngör estimate that:

In the post-intervention era, the 2009–2017 period, the synthetic real GDP per capita was 4%, on average, higher than the actual GDP per capita.

However, there is good reason to doubt that there was such a negative impact of the FTA on GDP. The Global Financial Crisis (GFC) also occurred in 2008-2009, alongside this FTA coming into force. Verevis and Üngör argue that the GFC affected all countries, so is not a problem for their analysis. However, they acknowledge that the GFC didn't affect all countries equally. And when, in a robustness check, they exclude all Eurozone countries and Iceland, they find no significant impact of the FTA on New Zealand GDP per capita. Overall, I take from this that there is limited evidence in favour of a GDP impact of the FTA (in either direction). Of course, the concurrent GFC critique also applies to their earlier analysis of the impact on exports to China. When Verevis and Üngör re-run the analysis of exports while excluding Eurozone countries, the impact is smaller, but there is still a very large positive impact of the FTA.

Ultimately, what can we take away from this study? The NZ-China Free Trade Agreement increased trade between New Zealand and China, but didn't really impact income in New Zealand (at least on average). Why might the value of exports to China increase but GDP remain unaffected? Verevis and Üngör show that exports to the rest of the world were largely unaffected, so it wasn't simple substitution from exporting to other countries to exporting to China instead. It's quite possible that the increase in exports to China was offset by an equivalent increase in imports from China, leaving net exports unchanged. Unfortunately, Verevis and Üngör don't look at imports, so we are left to guess.

Finally, an 'upgraded' FTA between the two countries came into force in 2022. Given that many of the trade frictions had already been removed by the original agreement, the upgraded FTA likely had a smaller impact. In terms of GDP, it probably wouldn't be too much of a stretch to think that the impact will be similarly imperceptible to the impact from the original agreement.

The changing system of regional economic development in New Zealand

I just finished reading the edited volume Economic Development in New Zealand, edited by James Rowe and published in 2005. Edited volumes are difficult to review, particularly when the collection of chapters have only a loose connection and lack a common thread, and that was the case with this book. Instead, I want to share one overall takeaway from reading the book, and that is how the policy environment for regional economic development has changed immensely since the 2000s. This matters because the way that we organise regional development determines who sets priorities, where capability accumulates, and whether regional growth is sustainable or merely a sequence of centrally funded projects.

So, what has changed? We can think about how leadership and decision-making has changed, how funding and strategy-setting has changed, and how the roles of business, educational institutions, and the research sector have changed.

In the mid-2000s, regional economic development had a lot of prominence, and it has seen a bit of a revival in recent years. However, there are some substantial differences in how that prominence manifests between the two eras. In the mid-2000s, regional economic development was led by the regions. The central government had an important role in setting the policy environment and steering the direction through funding, but regional development initiatives typically came from the regions. This is exemplified by the Regional Partnerships Programme (RPP), which involved central government funding regions to develop their own plans, build capability, and then back major initiatives coming out of those plans. Business had a strong role in partnership with government, not just as part of the RPP, but more generally. Region-wide strategy and plan development tended to rely on input from local business and industry leaders. There was also an important role for training , research and development, and innovation, and so universities, polytechnics, and Crown research institutes were all closely involved in regional development.

Fast forward to today, and regional development has been embodied in the Provincial Growth Fund, which has a lot of different aims, one of which is to "create jobs, leading to sustainable economic growth", and more recently the Regional Strategic Partnership Fund, which had a much more narrow aim to "make regional economies stronger and more resilient to improve the economic prospects, wellbeing and living standards of all New Zealanders". In both cases, it is central government that is largely the decision-maker, in addition to funding the initiatives, rather than the regions themselves. Business input is now largely channeled through consultation and deal-making, rather than input into the strategic direction of regional development. The rhetoric for business has changed to more of an emphasis on innovation and increasing productivity. That applies to the education and research sectors as well, where the role has shifted to more of a focus on core skills development and innovation, rather than being part of regional strategic plan development.

In between the mid-2000s and today, regional development did go through a bit of a quiet patch. It is clearly back in vogue now, although the policy environment and systems have changed tremendously. What that means is that there is not much from Rowe's edited volume that translates directly to today's situation, sadly. The initiatives that the authors were writing about are long gone, even the AUT Masters degree in Economic Development that one chapter describes has long since closed down. However, the value in reading Rowe's book is that it provides a useful reminder that regional development has long been a goal of central government, and that there is more than one way to approach that goal.

This week in research #111

Here's what caught my eye in research over the past week:

• Hu and Su find that housing wealth appreciation significantly improves individual happiness in China
• Díez-Rituerto et al. (with ungated earlier version here) study gender differences in willingness to guess in multiple-choice questions in a medical internship exam in Spain, and find that, in line with past research, women answer fewer questions than men, but that reducing the number of alternative answers reduces the difference between men and women among those who answer most of the questions
• Chen, Fang, and Wang (with ungated earlier version here) find that holding a deanship in China increases patent applications by 15.2 percent, and that deans' misuse of power distorts resource allocation