How Much Does Trade With the South Affect Workers in the North?

Does trade with developing countries have a small and benign effect on workers in industrial countries, as most economists have maintained, or a large and adverse effect, as the general public and advocates of protection believe? A review of the evidence suggests that neither of these positions is tenable. The methods that economists have conventionally used to measure the effect of North-South trade are biased downward. The true size of this effect remains uncertain, but some recent studies suggest that it is much larger than previously estimated. Trade with the South has probably significantly altered the sectoral composition of employment in the North, shifting workers out of manufacturing and into nontraded services. More important, it has probably significantly worsened the relative economic position of unskilled workers in industrial countries, and may also have aggravated the problem of reconciling low inflation with low unemployment. Even so, the adverse side effects of trade with the South are much smaller than is popularly supposed. And the popular remedy—protection—is clearly wrong. What is needed instead is more action by governments to offset the reduction in the relative demand for unskilled labor through training and education, job creation, and income redistribution.