Comparing Some Benefits and Costs from Eliminating the U.S. Trade Deficit with Low Wage Countries

Abstract

This paper presents estimates of the consumers’ surplus that would be lost if manufactured goods currently being imported to the U.S. from low wage countries were instead produced domestically. The study focuses on reducing the imports of consumer goods from such countries by about $600 billion, enough to eliminate the trade deficit in consumer goods with China, Mexico, and other major low wage trading partners. Estimates of the increase in compensation to U.S. workers that would result from such a curtailment in trade are also presented. These estimates have been made using a computational model that, unlike other studies, does not require strong assumptions regarding consumer preferences and production functions. The model was calibrated with data from the U.S. Census Bureau, Bureau of Economic Analysis, and Conference Board. Another departure from previous studies is the size of the reduction in the trade deficit. The reduction considered here is considerably less and, therefore, more likely to result from policy changes, than the reductions others have analyzed. At most, these estimates lend weak support to the claim that the loss to consumers from the price increases precipitating from a meaningful, but far less-than-draconian, curtailment in trade would be greater than the compensation that workers stand to gain from it. In fact, it is more likely that there would be a net benefit to a large number of workers, contrary to what other studies have found.