China and Walmart: Champions of Equality?

Like many people, I am still somewhat puzzled and confused by Christian Broda and John Romalis:

China and cheap imports: Champions of equality: The U.S. presidential campaign has sometimes sounded like a contest to prove who despises trade the most.... This public debate has taken for granted that inequality... has risen as a result of globalisation. But has it really?.... How rich you are depends on two things: how much money you have and how much the goods you buy cost. If your income doubles but the prices of the goods you consume also double, then you are no better off. Unfortunately, the conventional wisdom on US inequality is based on official measures that only look at the first....

Inflation differentials between the rich and poor dramatically change our view of the evolution of inequality in America. Inflation of the richest 10 percent of American households has been 6 percentage points higher than that of the poorest 10 percent over the period 1994 – 2005..... Why has inflation for the poor been lower than that for the rich? In large part it is because of China and Wal-Mart!

Poor families in America spend a larger share of their income on goods whose prices are directly affected by trade... the higher your income, the more you spend on services, which are less subject to competition from abroad....

This trend can partly be explained by China. In U.S. stores, prices of consumer goods have fallen the most in sectors where Chinese presence has increased the most.... The expansion of superstores – like Wal-Mart and Target – has also played an important role in accounting for the inflation differentials between rich and poor. Superstores sell the same products as traditional shops at much lower prices....

What is really worrying is that, despite these facts, we have had a backlash against China and Wal-Mart in America.... We need to remind politicians and the public that the gains from trade are broadly shared. Every time the discussion over trade is diverted towards the problems facing specific producers, be they farmers in France or textile workers in the U.S., we miss the central point. Trading allows everyone, and especially the poor, to buy things that they could not otherwise afford...

Let's run through the Heckscher-Ohlin logic:

Set the prices of luxuries as numeraire. Then the relationship between changes in log wages w and profits log r depends on changes in the log price p of necessities and on the shares of capital in the production of luxuries and necessities according to:

This means that the change in the wages of workers as a function of the change in the prices of necessities will be:

The real incomes of wage-earners depend not just on what happens to wages but what happens to the prices of things they buy, and so if a share θ_w of their income is spent on necessities:

And here's the catch. The necessities-share θ_w of wage-earners has to be less than one, but the change in log wages is greater than the change in log prices. So wage earners' real income goes in the same direction as necessities prices--no matter how fast the prices of necessities are falling:

When Broda and Romalis assert that trade is causing the prices of tradeable necessities to fall rapidly, they are either (a) breaking the H-O framework in some way, or (b) implicitly asserting that capital is the scarce factor in the United States and thus the factor of production whose returns are reduced by globalization.

It is not clear to me how they propose to break the H-O framework. And I do not find (b) plausible.

I prefer http://www.j-bradford-delong.net/2008_pdf/20080530_stolper to break the H-O framework in a Smithian division-of-labor direction: asserting that the scarce factors that lose from trade are organizational and technological expertise and that there is substantial implicit and explicit cross-ownership of factors that together make trade nearly win-win. But I don't see Broda and Romalis going there...

Comments

[jerry]

Three tenured economists celebrating always low wages and wondering why the peasants aren't thrilled.... Not one of whom seems to understand that this isn't free trade, but heavily subsidized trade.

Trade subsidized through losses of economic (and pyschological) security, losses of vacation benefits, losses of retirement benefits, losses of environmental victories, losses of child labor protection, losses of occupational safety, and gains in overly packaged products that all too quickly make their way to the dump. (As I think Professor DeLong has observed in the past, if you're rich, you'll find your iPods, cars, and computers have dramatically decreased in price and increased in quality, followed by my corollary, of course, if you're poor and can't afford iPods, cars, or computers, then perhaps your quality of living has actually fallen.)

And yes, the loss from trade IS organization and technological, but those aren't the only losses. It is sad these three economists have had their observations of reality filtered with tenure. Perhaps a stint of unemployment/underemployment or mere credible threat of job loss would help sharpen their observational skills vis a vis the economy and the peasant in the future.

Stop tenure, because a mind is a terrible thing to waste.

[PeeDee]

I'm afraid I don't understand the math arguing that inequality hasn't opened up because a Maybach costs much more than a Rolls did, while a cheap barbecue has dropped in price (and quality). The fact remains that the rich can purchase 20x more barbecues than the poor when before they could only purchase 10x. To me that is increasing inequality.

Just because the rich like oranges, and oranges have gotten expensive more quickly than apples is no excuse to compare apples and oranges...

[marc sobel]

I think some of the reasons for the backlash include a widespread belief that Walmart has immoral and in many case illegal labor practices. Now you can argue that this is false or that this is what I think you would call an externality. (something that economists don't count.) but the backlash is not the result of a series of equations but because of the effect Walmart has on its employees and for that reason its competitors.

[notsneaky]

"It is not clear to me how they propose to break the H-O framework."

Well, they actually seem to use Ricardo with goods differentiated by quality country specific goods (the model in the appendix looks sort of like the Feenstra-Hanson one) and skilled and unskilled labor as factors of production. In the empirical implementation they assume an expenditure/utility function which is "income class specific". This is the problematic part (one of them) in my view.

[SERO]

Great whistling, Prof, but it's oh so dark in America.