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]
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