Thirty years ago, the average person in China lived on less than $2 a day. Not so much wow. What happened? How can they afford this kind of extravaganza? By opening their economy and trading with us, is largely how.
Unlike in the 100‐meter backstroke, in trade everybody can win. Thanks to China’s greater global integration, hundreds of millions have been lifted out of grinding poverty. But due to trade with China, America’s poor are doing better, too.
A recent working paper by University of Chicago economists Christian Broda and John Romalis shows that trade with China — as brought to you by beloved institutions such as Wal‐Mart — has done more for poor families than rich families. Trade even helps to hold real income inequality in check.
How rich you are in real terms depends both on how much money you have and the prices of the things you tend to buy. Poorer families spend a bigger share of their budget on goods whose prices are affected by international trade — like cotton shirts and canned fish. Wealthier families spend a bigger share on services that don’t face the same kind of global price competition — like yard work and psychoanalysis.
This means the rich have faced a higher effective rate of inflation than the poor have — so much so that the gap in real incomes has stayed put, even as the nominal gap has gone through the roof. According to Broda and Romalis, prices of consumer goods heavily used by poorer Americans have fallen most rapidly in sectors where the Chinese have become most involved.
Sure, zero‐sum nationalistic athletic spectacles are great. But a positive‐sum system that helps most everyone is even better. So go ahead and root for America. But don’t forget that when it comes to improving the welfare of the American poor and reducing inequality, Chinese trade gets the gold.
Will Wilkinson explains why trade with China has helped poor Americans on Marketplace (August 13, 2008) [MP3]