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David A. Price of the Richmond Fed serves as interlocutor in an interview with “Laura Alfaro: On global supply chains, sentiment about trade, and what to learn from Latin America” (Econ Focus, Fourth Quarter 2024, pp. 22-25). Here are a couple of comments from Alfaro that stuck with me:
On lessons for the United States from Latin America, Alfaro comments:
On the negative side, I don’t see the United States paying attention to unsustainable fiscal debt. Politicians have been just offering to spend money and this at some point comes back to roost. One does start to worry. It is true that the United States has advantages. It’s the biggest economy in the world; it has its own currency, which is the reserve currency. So we tend to assume that it can go on forever — that when the end of the world comes, U.S. sovereign debt will be around along with the cockroaches. But it is not endless.
For Americans, anti-trade attitudes seem inextricably intertwined with negative attitudes regarding trade with China. The “Great Reallocation” refers to the pattern that, as the US has raised tariffs on imports from China since 2017, products are instead being partially produced in China, finished in third countries, and then imported to the US from these third countries. Alfaro describes the pattern of US public opinion in this way:
There seems to be a backlash against globalization, but it’s in rich countries. People think it’s global, but it’s not. It’s Brexit; it’s the United States. I did this work with Davin Chor and Maggie Chen. … We were thinking that what’s going on is people have not been explained the benefits of globalization. … And so in an arrogant way, we thought we would teach them. That was the objective of the paper: Let’s give people facts about trade to see if we convince them that trade is good.
And what are these facts? The U.S. has never seen the level of employment it has seen during globalization. If you look at the number of employed people in the U.S. in the last 20 years, U.S. unemployment is low, and the U.S. keeps employing people. So we gave these facts. We also showed the fact that the price of goods has come down. To keep it simple, we showed them the price of computers, the nominal price. We didn’t even go into real and nominal. The nominal price of computers has gone down. And of clothes. We also showed them that with tariffs, prices went up.
Unsurprisingly, if you tell them there was a loss of manufacturing jobs, people go against trade. But even if you tell them everything positive — it created more jobs, it lowered prices, tariffs increase prices — the process still made them more against trade. And these were randomized experiments. So we did this for five years, because we were thinking no, we did something wrong the first time. But the outcomes were very stable.
And so we went and asked people: I just told you trade was good, why are you still against trade? What we found is that people cannot differentiate trade from a link with China and jobs. It doesn’t matter what you tell them, it instantly triggers an association with China. So we walked away a little bit more humble because our models are not models that deal with national security. And that’s a concern that they mentioned. We economists should probably try to think more about how to incorporate national security concerns.
Our conclusion is that if we do want people to support trade — and as I said, I do think trade has benefits, and we do need to do things to improve redistribution, retooling, reskilling — if we want people to be open to it, we need to address the concerns about the particular bilateral interaction with China. Perhaps that reallocation is one way to deal with it. Let’s try to trade a little bit more with Vietnam and some other countries.
However, in our own work what we have found is that even as the U.S. has directly imported less from China, the main trade partners of the U.S. are importing more from China. Mexico is importing more. Europe is importing more. And Vietnam is importing more. So even though directly the U.S. is diminishing the exposure, indirectly the exposure might still be there. Therefore, one still needs to worry because people eventually may also note that the relation is indirect, given the concerns of the bilateral relationship with China.
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