Economists defend international trade. According to economic theory, specialization and trade create more efficient use of global resources, increase the level of global output, and raise living standards. Discuss the difference between theory and economic reality. Students should construct their discussion contributions based on the economic theory of comparative advantage and the following two articles:

1. "A healthy re-examination of free trade's benefits and shocks -An interview with John Van Reenen of MIT" May 4th, 2018 The Economist by C.W. and

2. "What governments can do for the losers from free trade - Subsidised jobs, opportunity zones, and patient capital can make a big difference" May 22nd, 2018 - by By Jared Bernstein The Economist

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A healthy re-examination of free trade's benefits and shocks -An interview with John Van Reenen of MIT May 4th, 2018 The Economist by C.W.

ECONOMISTS have long argued that free trade makes everyone richer. But lately, that view has come under attack, most notably from President Donald Trump. Economists are asking themselves some tough questions. Is free trade always a good thing? Do the losers from free trade need to be compensated? To explore the basics of free trade, The Economist spoke to John Van Reenen an economist at MIT. The conversation has been lightly edited for clarity.

The Economist: At its most basic level, what is free trade?

John Van Reenen: Free trade means allowing good and services to move as freely as possible across different countries. As countries developed, they started making and swapping things among people within the borders of their own country. As transport improved, they could start buying and selling stuff abroad. For a long time there were big barriers to international trade. At a time when governments struggled to raise tax from their own people, levying heavy import duties on things coming in from abroad was easier to implement. But economists eventually won the argument, which said that keeping those barriers as low as possible was sensible policy.

With free trade, you come into more contact with foreign companies, new ideas, new people

The Economist: Is free trade good for economic growth?

John Van Reenen: As I see it, there are four big benefits. The first one can be traced all the way back to David Ricardo in the early 1800s. It allows countries to specialise in producing what they do best. For instance, the French are good at making wine, the British not so good. But the British are good at producing The Economist. Without trade, Britain would have to produce and consume its own its own wine. But with trade, Britain and France can focus on what they do best, with the French exchanging wine for more copies of The Economist. This is sometimes called "comparative advantage".

As time has gone by, trade is increasingly not just about exchanges in final goodsnewspapers versus wine but "intermediate" goods. Think of a car. Thousands and thousands of parts go into making a car. Increasingly what has happened is that one part is made in France, another in Germany, another in Japan, and so on. Then they can all be combined in a fourth country like Britain. Even for a complex thing like a car, nations can specialise in what they are good at.

The second benefit of trade is that it makes markets bigger. If you are producing just for one country, your market is quite limited. But with trade, you can also start selling things to customers all over the world. That means that things like spending large amounts of money on researchself-driving vehicles or whateverlooks a lot more viable. The lump-sum costs of such investment are spread out, so we can get more innovation, which is the key to growing national income.

Free trade increases the size of the pie. But it doesn't mean that everyone is better off. Some get a smaller slice of the pie

The third benefit relates to productivity differences between firms. Some firms are really productive, others are really poorly managed. What happens when you have trade, is that you have much stronger competition. Domestic firms are competing not just with other domestic firms but with firms all over the world. The lessefficient ones face more competition, so they shrink and they exit the market. Or they shape up. And the really innovative firms can expand. So it's about creative destruction, reallyshifting resources from less productive firms to more productive ones.

The final benefit, which economists sometimes forget, relates to politics. With free trade, you come into more contact with foreign companies, new ideas, new people and so on. That's mutually beneficial. And it is a political force for cooperation. Think of Europe. Since the second world war, those countries have had lower trade barriers, and that period has coincided with an unprecedented period of peace and cooperation.

The Economist: What are the downsides of free trade?

John Van Reenen: There are well-known downsides. The way I like to think about it is that free trade increases the size of the pie. The overall amount of material wellbeing expands. But just because the size of the pie expands, it doesn't mean that everyone is better off. There are going to be some losers whose slice of the pie is so much smaller that they would have been better off with less trade. However, because the overall size of the pie has got bigger, the government can compensate the losers which can still make everyone better off. Let's think about how this might happen. In the 1980s China began opening up to the rest of the world. China was a low-wage country, so it started selling a lot of low-end manufactured goods like clothes. Although that's a great thingpeople can buy cheaper clothesworkers in richer countries who were producing manufactured goods now faced much tougher competition. Workers in Bradford no longer just competed with those in Birmingham, but also those in Beijing. Those workers, especially less skilled ones in those industries, can be very seriously affected.

It's important to take a longer-term view. The education system needs to make people resilient to shocks

I think economists underestimated the China shock. That may explain why policies to compensate the losers were insufficientespecially in America where the social safety net, such as for health care, is so threadbare. If there had been better policies, there would be much less of a political backlash against trade than we are seeing right now.

The Economist: What can countries do to compensate those people who do lose out?

John Van Reenen: There are lots of different options. The first thing I would emphasise is that you want to grease the wheels of mobilityto make it easier to move from one firm to another, or one industry to another, or one place to another. Putting up barriers to doing that is costly. For instance, planning regulations sometimes make housing in dynamic parts of the country very expensive, which makes it difficult for people in struggling areas to move there.

You also want to help citizens get the skills to move. So-called "active labour market policies" are important here. Scandinavian countries like Denmark do these quite well. Rather than protecting jobs by increasing the costs of downsizing which ends up making employers reluctant to hire, these nations have generous unemployment-benefit systems combined with a lot of help for people who have become unemployed. Retraining is well resourced. Governments also enforce looking for work pretty strongly.

It's also important to take a longer-term view. Your education system needs to make people resilient to shocks. You want people to be well educated, and you want that education not to be too tightly linked to a particular skill. Having general skillsliteracy, numeracy, social skillsis the right idea. So, when people are hit by tough times, they can reskill and move around more easily.

But it is also important to be realistic. Some people, especially older people, are not going to be able to retrain if they were made unemployed by structural economic changes. For these people, there is nothing wrong with a reasonably generous welfare state and direct investment to support communities that are under stress from trade, technology or any other crisis. But remember: thanks to free trade, you can afford that, because the overall size of the pie is bigger.

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What governments can do for the losers from free trade - Subsidised jobs, opportunity zones and patient capital can make a big difference May 22nd 2018 - by By Jared Bernstein The Economist

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities. Previously, he was chief economist and economic adviser to Vice-President Joe Biden and executive director of the White House Task Force on the Middle Class. In 1995-96, he was Deputy Chief Economist at America's Department of Labour. He is the author of numerous books on economics. Follow him on Twitter at @econjared When I joined the Economic Policy Institute in the early 1990s, we were among the only economists documenting how certain groups of workers and their communities were increasingly displaced by trade. The unions were our allies, but from the centre left to the right, we were castigated as protectionists who failed to understand the basics of comparative advantage.

At the time, the elite consensus was that everyone benefits from trade, and any "transitional costs" were quick and painless. Our growing trade deficits were nothing more than evidence of other countries' willingness to lend to us, so we might happily consume more than we produce. Not only could all this clearly be seen in the data to be empirically false (later verified by careful academic work), but it was inconsistent with trade theory, which unequivocally predicts that production workers in the rich country will be hurt by expanded trade with poorer exporters. It is now clear that globalisation's cheerleaders did globalisation no favour by ignoring the losers. In fact, they helped deliver President Donald Trump unto us, a claim for which there is also some empirical evidence. History has repeatedly shown that a reliable way to fuel nationalistic, insular, populist politics is to ignore the downsides of disruptive economic change. Now that we're finally more "woke" regarding trade's downsides, how can we help those left behind in its wake? The policy agenda should be guided by a phrase recently offered by French President Emmanuel Macron: "protection, not protectionism". Most essentially, workers displaced from high-value-added jobs need their income replaced, and, for cultural, political and dignity reasons, it should be through work. That doesn't imply bringing back jobs that are lost, but it does require policy to go further than supply-side-only interventions, like training or education support. Specifically, we need a programme where the government creates jobs in places where there are too few employment opportunities. An economist's typical response to geographical job deserts is mobility: families should go where the jobs are, which in America tends to mean to move from the heartland to someplace where you can get a soy-skim latte on any corner. In fact, research shows such mobility has long been trending down, meaning policy is going to need to bring jobs to workers.

This could take the form of either public or private (with a wage subsidy) jobs in infrastructure, including green infrastructure: insulation, renewable installations, upgrading public buildings, including public schools (which really need the help). Technical service jobs will also be important in this space, like health-care technicians. These positions will often require retraining. The apprenticeship modelearn while you learnis a natural for this population. Subsidised jobs, however, often pay too little for middle-age workers to support their families, even assuming a working spouse. This calls for expanded wage benefits that go far beyond our paltry "trade-adjustment assistance" programmes (displaced manufacturing workers refer to TAA as "burial insurance"). Boosting the Earned Income Tax Credit, a wage subsidy with bipartisan support, would help too. It is no coincidence that Sherrod Brown, a Democratic senator from Ohio who is acutely aware of the struggles of families hurt by trade, co-sponsored a bill to expand the EITC. To manage their costs, it is necessary for subsidised jobs to be time-limited. Even a generous programme of the type now under discussion would rarely support positions for more than a couple of years. So there needs to be an investment component to help generate lasting private-sector economic activity. However, investment capital has long abandoned most rustbelt areas. An interesting potential solution may be "opportunity zones" (OZs). Created in the 2017 tax plan, OZs create a tax incentive for investors to commit capital gains to funds that must invest in left-behind places. Previous place-based investment policies have not been particularly inspiring, but OZs are designed to incentivise more patient capital, which is what's needed if they are to make a lasting difference. The programme is in its infancy, but initial concerns that the tax breaks would go to gentrifying areas, as opposed to places that really need the help, do not seem to be realised.

If this agenda sounds like it's giving up on manufacturing employment, let me emphatically correct that. First, there is a need for an independent commission to analyse what's realistic in terms of preserving or expanding our factory sector. While most lost jobs are not coming back, could investment policy create the opportunity for America to claim market share in new industries, such as battery production? Could we expand our existing Manufacturing Partnership programme to help our small manufacturers grow by connecting them with global supply chains?

If your answer to this is "we don't pick winners," then a) you're wrong (look at our tax code), b) you're stuck in the old thinking that got us into this mess in the first place, and c) let's see what a non-partisan commission led by scholars without thumbs on the scale comes up with. Finally, we need to recognise that trade deficits are far from benign. Mr Trump is, of course, wrong to consider them scorecards. But left unchecked, they can make weak economies weaker and even at full employment, they hurt export-sensitive places and sectors. This doesn't mean we should pursue balanced trade. It meansand note that this view is increasingly held by mainstream economiststhat we should rigorously push back on countries that manage their currencies to boost their trade surpluses and our deficits. The venerable theory of comparative advantage never argued that trade created only winners. Rather, it correctly and powerfully argued that increased trade could generate enough benefits that the winners could compensate the losers and still come out ahead. But it is an economic theory, devoid of politics. In the American case, it's not simply that the winners have failed to compensate the losers. It's much worse: they've used their winnings in our pay-to-play political system to buy politicians and policies to protect and build on their winnings at the further expense of the losers. Given that model, it's no surprise that those on the wrong side of globalisation would push back against it, or that some charismatic, faux-populist would surface to represent their legitimate grievances. In other words, if we want to help globalisation, we'd better start helping those hurt by it.