Tuesday, March 4, 2008

Brief primer on the effects of free trade

A lot of people think that free trade is good. Many find it confusing, but realize that almost all economists are convinced free trade is good. Therefore, it is probably good. I will give a brief overview of the topic without any math or the underlining economic justifications, just the results.

Short-term:
The labor and capital in the exporting sector wins. The labor and capital in the import competing sector loses. The gains to the export sector are larger than the losses to the import competing sector.

Medium-term:
The capital in the export competing sector wins. The capital in the import competing sector loses. The effects on labor are ambiguous and depends on whether they buy more imports or exports. Gains to the economy are still bigger than losses.

Long-term:
The factor that is relatively more abundant in the country wins. (In the US, capital and skilled labor.) The relatively scarce factor loses. (Unskilled labor) Gains are still bigger than losses.

How are the long-term, medium-term, and short-term defined? By how easy it is for one factor to switch to another sector. This is why efficient capital markets, and job retraining are important. They allow capital and labor to shift into the jobs and industries that are growing. It makes the long-run come quicker.

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