What Israel's Top Economist Thinks of Trump's Trade Wars

Prof. Elhanan Helpman won't say, but his research shows the president’s got it wrong

U.S. President Donald Trump speaks to members of the media following a meeting during the Group of Seven (G7) Leaders Summit in La Malbaie, Quebec, Canada, on Saturday, June 9, 2018
Bloomberg/Cole Burston

To hear Prof. Elhanan Helpman lecture is a rare almost festive event. For decades he has been celebrated as the greatest Israeli economist of our generation and the only one regarded as having a realistic chance of winning the Nobel Prize in Economics. (The Israelis who have already won it, Daniel Kahneman and Robert Aumann, were working in areas other than pure economics). 

In Israel, Helpman is also well known for repeatedly being offered – and turning down – the post of Bank of Israel governor. If Prime Minister Benjamin Netanyahu decides to approach him yet again with the offer later this year, we can be confident that if he does the answer will be no.

Anyone who heard Helpman lecturing recently at a conference of the Herzilya Interdisciplinary Center’s Aaron Institute for Economic Policy can see how much more comfortable he is at his desk at Harvard University publishing groundbreaking studies on the effects of globalization on the economy. He doesn’t want to do more than this.

Helpman religiously refrains from drawing policy conclusions from his own studies. The only reason he agreed to deliver the lecture at all was to mark imminent publication of his new book, “Globalization and Inequality.”

Jumping to the end of the book, Helpman concludes that the contribution of globalization to the problem of growing income disparity in the United States is small – no more than 20%. If true, that means that U.S. President Donald Trump is wrong when he declares trade wars with China on the grounds that the Chinese are taking American jobs.

If Helpman were not such a serious and dispassionate professor of economics, he would probably say that Trump is an amateur who bases his policies on gut feelings and doesn’t allow fact-based research to onfuse him. Only Helpman chooses his every word carefully, so the take on Trump in only mine.

Helpman’s conclusions about the limited impact of globalization on inequality in the U.S. aren’t intuitive. Inequality has been growing steadily since the 1970s throughout the developed world, as the wage gap between educated and less-educated workers widens.

His findings are actually surprising, since the proportion of educated workers in the labor force has grown a lot, hand-in-hand with the widening pay gap. The law of supply and demand would have predicted exactly the opposite – that the growing supply of educated workers would bring down their wages.

Among economists there are three explanations for this phenomenon.

The first is the erosion of workers’ bargaining power, as a result of the decline of trade unionism. The second is globalization: If Chinese workers can make iPhones for the equivalent of 40 cents per hour, U.S. companies will lay off their American staff and replace them with cheaper Chinese workers. The third is the impact of technology, which has boosted the productivity of educated workers while reducing demand for less-educated ones.

Helpman’s research focuses on the second explanation, the one believed by Trump, and the rationale for the trade war opened with China.

However, unlike Trump who is pursuing his policies based on instinct, Helpman reaches his conclusions based on quantitative research. He has even calculated the cost of globalization on the American economy: 2.4 million jobs.

That sounds like a lot, until you realize that every quarter between nine and 12 million Americans change jobs. And even that 2.4 million figure is high because it only relates to jobs lost to Chinese imports that compete with American-made products.

The number ignores the positive impact that globalization has on U.S. companies: The Chinese not only manufacture iPhones but a lot of intermediate products that American manufacturers need and which enable them to lower the price of their own exports. If you offset that factor, the total number of American jobs lost to international trade is close to nil.

In his 20 years at Harvard, Helpman has devoted his research almost entirely to the U.S. economy (the one time he tried to do research on Israel, he was frustrated by the lack of data available from the Central Bureau of Statistics and opted to do research on Brazil instead). 

However, researchers who have employed his models in other developed economies, for example in Europe, have reached pretty much the same conclusions that he has.

On the balance, globalization has been a positive phenomenon that has narrowed inequality between nations, especially between countries like China and India, on the one hand, and Western nations.

It has also reduced the prevalence of poverty globally: In the 1980s, the UN estimated that two billion of the world’s five billion people lived in poverty; today the figure is one billion out of a world population of seven billion.

But what about the pay premium the most educated workers now enjoy?  

Globalization offers only a partial answer. Helpman believes that it is technology that explains the phenomenon, by raising their productivity even as their numbers grow. But, there are no economic models that can prove that – the first are only starting to be developed now.

And, what about Israel? Helpman is just as reticent about addressing Israeli policies as he is American policies. Still, you can conclude from what he says that Israel’s policies of opening up its market to imports two or more decades ago helped create the thriving economy we have today. Buying Blue-and-White wasn’t so patriotic after all.