Turns out global trade is good for you and me

It is all the rage that global trade is bad for the middle classes. We have only just finished consuming the research from the “China Shock” that suggests that the injection of a massive cheap labor pool, represented by China entering the global workforce, may have overwhelmed western governments ability to develop support policies to help transition workers replaced by this China ‘shock’ of workers. As such global trade has been painted as the bad boy, and we are all now looking for ways to protect ourselves from global trade.

Well, it turns out that the China Shock may be a concern for specific industries and disruptions, but global trade overall has lifted the middle classes incomes and not made the richer as rich as we first were led to believe.

In Tuesday’s US print edition of the Financial Times there was a most fascinating article titled, “Incomes study tears up ‘elephant chart’“. The so called elephant chart refers to a graph from research by economist Branko Milanovic who famously demonstrated how global trade created a gap in incomes for middle classes (which went down) at the same time as for the rich (which went up). New analysis of the data suggests this conclusion is wrong and that the gap is much, much smaller and that middle class incomes were not negatively impacted; and Milanovic even updated his original thesis with new data and he now seems to agree with the new review.

The new analysts has found that some of the data used in the original analysis acted as out-layers to the broad tend and by removing that data, the great majority of peoples’ incomes don’t fall. For example, data from emerging markets that experienced accelerating population growth dragged down income data. The large number of Chinese families, for example, made it appear that the US poor were further up the income scale. Other data from former soviet states in Eastern Europe and Japan also caused issues in the data.

The bottom line according to the new analysis is that the middle-class incomes have not been negatively impacted by global trade, but regional differences do exist so analysis needs to look carefully at country specific data. Additionally the rich have not gotten that much richer – in fact the very rich lost the largest proportion of income during the period under review. 

If only our politicians understood this report.  But since its findings do not reinforce their message, it will likely be ignored.  

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