Of course, trade creates winners and losers. The most common opinion expressed on TV talk shows and in the current presidential campaign is that the winners are on Wall Street and the losers are ordinary people.
However, the latest research suggests the opposite is true. The biggest winners from free trade are in the bottom half of the income distribution. What’s more, these gains are so large that if real income were measured properly, inequality in the US has been falling not rising – precisely because of increased trade.
The argument for trade is straight forward. Trade is ultimately the trade of goods for goods. In any voluntary exchange, both parties are made better off. Both give up something they value less for something they value more.
But what if other countries sell to us without buying from us? That’s what a trade deficit means. It turns out that trade deficits aren’t bad. If China sells to us and just holds onto the dollars it gets in return, then China is holding paper and we are consuming the real goods they produced. That’s not bad for us.
What is more likely is that China uses the dollars it obtains to buy stocks and bonds and other financial assets back here in the United States. That’s not bad either. It means we get to consume the goods that China sends us and instead of buying goods from us China decides to increase the size of our capital market. Capital is something poor countries lack. Financial capital buys newer and better factories and equipment. It makes workers more productive and allows them to earn higher wages.