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David Ricardo’s (1817) example of comparative advantage illustrates the basis for mutually beneficial exchange. The Ricardian framework is intuitive when we consider how we conduct our daily lives. We do not produce the large majority of items that we consume. Instead, our productive efforts are, quite often, specific to a particular product. Often, this is a good or service that we rarely, if ever, consume. Effectively, as individuals, we exploit our comparative advantages by specializing in the production of a good or service (or a narrow range of goods and/or services) for which we are most productive. We then utilize the compensation we receive from providing these products to acquire the goods and services that we are relatively less adept at producing. Similarly, Ricardo’s example ends with Britain producing cloth, which is then exported to Portugal in exchange for port wine. The result of the countries’ specialization in production and the subsequent exchange is that the populations of both countries can collectively consume more cloth and more port wine than if they chose not to specialize in what they do relatively well and then trade for the items they are relatively poor at producing.

In the examinations undertaken thus far, we have not differentiated between types of trade flows. Ricardian models of international trade are largely based on a notion of inter-industry trade. The Heckscher-Ohlin Theorem, for example, predicts that capital-abundant countries will specialize in the production of capital-intensive products and then export such products to labor-abundant countries in exchange for labor-intensive products. Thus, the United States would be expected to trade more intensively with labor-abundant countries and the products being imported by the United States would be those that are not typically produced in the United States. The study of trade-induced job loss associated with intra-industry trade (IIT) requires us to focus on the Smooth Adjustment Hypothesis (SAH). The SAH states that labor-related adjustment costs are positively related to the likelihood that a worker switches industries; thus, such adjustment costs are expected to be lower if the trading pattern is characterized by a greater incidence of intra-industry trade as compared to inter-industry trade.

We see that a considerable portion of the US public expresses negative opinions when asked about varying facets of international trade. As has been discussed, this anti-trade senti-ment is persistent over time and not at all insignificant. Public opinion poll results indicate that, typically, about 30 percent to 50 percent of Americans hold negative views of international trade. The extent of anti-trade sentiment exhibited by the American public is largely out of step with public opinion elsewhere in the world, where positive views are more frequently expressed. In fact, comparing the United States to other countries for which data are available, it would seem that, generally speaking, Americans are among the most, if not the most, trade-wary people in the world. It is thought that worries of trade-related labor market dynamics underlie these negative views of international trade. Specifically, it is commonly believed that many Americans are worried that international trade, particularly increased imports, will lead to job loss and/or reduced wages for domestic workers.

Our earlier analyses have provided empirical evidence in support of the notion that increases in the levels of exports and import competition are positively and negatively related, respectively, to both production worker employment and wages and to the wages of nonproduction workers. Further, we reported considerable variation in the effects of trade when we allowed for variation across cohorts of trading partners that were categorized based on average income levels. We have also found evidence of a positive statistical relation between shifts in the sources of US imports from relatively high-wage countries to low-wage countries and job loss in US manufacturing industries. In this chapter, we look at two additional factors that may affect whether and to what extent domestic employment is affected by international trade.

The calibration exercise presented in chapter 3 illustrates that the United States has lost comparative advantage in the production of a number of goods during the period from 1968 through 2008. In other words, some of the goods that were produced in the United States in years past are now being produced elsewhere in the world. This may appear to be more detrimental for US workers than it really is. In fact, the loss of comparative advantage is representative of labor market churning, in which the production of goods for which the United States has retained comparative advantage has increased in magnitude and/or production in the United States has shifted toward new goods and services. This entails a reallocation of labor, and other factor inputs, from those firms and industries that have declined domestically toward those firms and industries for which production has expanded. Still, while it is predicted that the typical worker gains, through greater purchasing power, as a result of the changes in factor endowments, it is possible that some workers have experienced negative consequences. For example, as part of the labor reallocation process, domestic workers may experience job loss, job displacement, and/or a stagnation or decline in their real wage.

When examining the labor market consequences of international trade, we repeatedly find effects that are so minor that they appear unlikely justification for the degree to which anti-trade sentiment is observed in US public opinion polls. Given the lack of a pronounced negative influence of trade on either wages or employment, in chapter 9 we considered the Smooth Adjustment Hypothesis as an explanation for the weak trade-related labor market effects. We reported evidence that labor market adjustment costs, in the form of employment change, are lower for industries characterized by increasing intra-industry trade and, in particular, increasing vertical intra-industry trade. In chapter 10 , we examined the effectiveness of public policies that are designed to assist trade-displaced workers. Such policies may also serve to reduce opposition to trade, and more effective polices may engender increased support for international trade. Finally, in chapter 11 , we offered loss aversion and imperfect information as plausible explanations for the low support for trade among members of the US public and for the differences that we see between the level of support for trade demonstrated by US residents and the populations of most other countries.

The examination of trade-induced industry-level employment effects presented in chapter 4 reveals modest wage and employment effects. Exports and imports were found to be positively and negatively related, respectively, to the employment of production workers and nonproduction workers and to average industry-level wages of production workers. In this chapter, we continue our examination of the relationship between international trade and domestic employment using an alternative measure of import competition. Developed by Schott (2002), the value share measure of import competition is the share of industry-level imports sourced from nations where Gross Domestic Product (GDP) per capita is less than 5 percent of the US level. The rationale is that lower labor costs confer an advantage to foreign firms. If relative GDP per capita is a proxy for United States-foreign wage differentials, then nations with GDP per capita levels below the US level may be potential sources for import competition. A potential advantage of the value share measure is that, unlike traditional measures of import competition (e.g., import penetration rates, import price indexes, and trade-weighted exchange rates), the value share measure avoids potential simultaneity and, thus, may permit a more definitive analysis of a hypothesized causal link between imports and domestic job loss.

As was discussed in the initial chapter, public opinion polls indicate that a considerable portion of the US public expresses negative opinions when asked about varying facets of international trade. This opposition to trade is persistent and not at all insignificant. Additionally, the extent of anti-trade sentiment exhibited by the American public is largely out of step with public opinion elsewhere in the world. In fact, it appears that the United States may be one of the most trade-wary societies in the world. Before attempting to understand why it is that Americans are less supportive of trade as compared to people in most other countries, it is worthwhile to illustrate the extent to which Americans are unsupportive of trade and the cleavage in public opinion on the issue between Americans and the rest of the world.

More than five million workers have been certified as trade displaced by the Department of Labor since the Trade Expansion Act of 1962 created the Trade Adjustment Assistance (TAA) program. The Trade Promotion Authority Act of 2002 reauthorized TAA, merged the North American Free Trade Agreement (NAFTA)-Transitional Adjustment Assistance program with TAA to establish the Consolidated TAA program, and created a demonstration wage insurance program dubbed Alternative TAA (ATAA). These programs serve the dual purpose of 1) reducing opposition to trade liberalization and 2) assisting trade-displaced workers as they transition to reemployment. Several studies have documented long-run monetary losses stemming from job displacement. We detail these studies and their findings below. The effectiveness of public programs designed to aid displaced workers in terms of reducing earnings losses has yet to be evaluated. Surely, understanding the performance of existing policy may assist future policy formulation; thus, we explore how stylized versions of the Consolidated TAA and ATAA programs perform in terms of reducing the earnings losses that stem from job displacement.

Almost two hundred years have passed since the publication of David Ricardo’s On the Principles of Political Economy and Taxation. Ricardo instructs us to devote our limited resources toward the production of what we do best, as defined by our opportunity cost of production, and to then trade the resulting output for what we are relatively less capable of producing. This description of the passage quoted above, while correct, is incomplete, however. Ricardo’s words do more than prescribe a course of action. Much to the contrary, what they offer is a description of our individual behavior. Perhaps this explains why, during the past two centuries, no one has proposed a legitimate counterargument to comparative advantage as the basis for mutually beneficial exchange.

We build on the analysis presented thus far by shifting our focus from the potential influence of international trade on industry-level employment and wages to whether trade correlates with a heightened probability that a worker experiences job displacement. Using worker-level data, we first estimate displacement probabilities for 32 worker types, defined by level of education, gender, race, and union affiliation. We then perform a series of counterfactual exercises to examine the effects of import competition on these displacement probabilities. To discern the relationship between trade and job displacement, we match individual worker observations from the 1984–2000 Displaced Worker Surveys (DWS) to industry-level data and estimate a series of binomial logit specifications.

The analysis presented in chapter 7 indicates that the likelihood a worker will experience job displacement is positively related to the level of import competition faced by the industry in which she/he is employed and is negatively related to the level of the industry’s exports. The net effect of trade on the probability of job displacement is, however, quite minimal for the typical worker. Even so, there is evidence of variation in the effects of trade on the likelihood of job displacement across worker types (e.g., comparing across worker attributes/characteristics such as gender, race, education, and union affiliation). Geographic location may be an additional factor that determines variation in displacement probabilities. Considering location, we continue to seek evidence of a pronounced role of trade in labor market outcomes to explain the negative views of international trade held by a considerable proportion of the American public.