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May 1,2007

Embracing the Challenge of Free Trade:
Competing and Prospering in a Global Economy

Ben S. Bernanke
Board of Governors ofthe Federal Reserve System
to the
Montana Economic Development Summit 2007
Butte, Montana
May 1, 2007

Trade is as old as humanity, or nearly so. Archaeological sites demonstrate that
ancient peoples traded objects such as rare stones and shells across fairly long distances
even in prehistoric times (Guisepi, 2000). Over the centuries, with stops and starts, the
. volume of trade has expanded exponentially, driven in large part by advances in
transportation and communication technologies. Steamships replaced sailing ships;
railroads succeeded canal barges; the telegraph supplanted the Pony Express. Today, in a
world of container ships, jumbo jets, and the Internet, goods and many services are
delivered faster and more cheaply (in inflation-adjusted terms) than ever before.!
Today I will discuss the crucial economic benefits we receive from the ongoing
expansion of international trade. I will also address the adverse effects of trade and some
possible ways to mitigate them. I will argue that one possible response to the dislocations
that may result from trade--a retreat into protectionism and isolationism--would be selfdefeating and, in the long run, probably not even feasible. Instead, our continued
prosperity depends on our embracing the many opportunities provided by trade, even as
we provide a helping hand to individuals and communities that may have suffered
adverse consequences.

The Benefits of Trade
At the most basic level, trade is beneficial because it allows people to specialize
in the goods and services they produce best and most efficiently. For example, we could
conceivably all grow our own food and provide our own medical care. But because
farming and medicine require special knowledge and skills, a far more efficient
arrangement is for the farmer to specialize in growing food and for the doctor to
specialize in treating patients. Through the specialization made possible by ~ade, the
farmer can benefit from the doctor's medical knowledge and the doctor can enjoy lunch.


The opportunity to trade allows everyone to play to his or her own strengths while
benefiting from the productive skills of the whole community. Indeed, economists have
demonstrated that trade betwecm two people can be beneficial even if one of them is more
skilled than the other at every task, so long as the more-skilled person specializes in those
tasks at which he or she is relatively more productive.
What applies to individuals applies to nations as well. Two centuries ago the
economist David Ricardo famously observed that, if England specialized in making cloth
while Portugal specialized in producing wine, international trade would allow both
countries to enjoy more of both goods than would be possible if each country produced
only for domestic consumption and did not trade. As in the case of individuals, this
conclusion applies even if one c~ountry can produce both cloth and wine more cheaply
than the other, so long as each (:ountry specializes in the activity at which it is relatively
more productive. A telling confinnation of Ricardo's insight is that, when nations go to
war, their first order of business is often to try to block the other's access to trade. In the
American Civil War, the North won in large part because its blockade of Southern ports
prevented the Confederacy from exporting its cotton. In the twentieth century, the fact
that Great Britain and its allies were able to disrupt German trade more successfully than
Germany could impede the flow of goods into and out of Great Britain bore importantly
on the ultimate outcomes of both world wars.
Patterns of trade are dete:rmined by variations in a number of factors, including
climate, the location of natural r1esources, and the skills and knowledge of the population.
I suppose that one could grow roses commercially here in Montana for Valentine's Day,
but it would likely require climate-controlled greenhouses complete with artificial
lighting--very expensive. A much less costly solution is for Montanans to grow and sell

-3wheat, then use the proceeds to buy roses from localities where the weather is balmy in
This is all standard textbook material, and it may well leave you unconvinced of
the importance of international trade. After all, the United States is a big country, and we
can certainly achieve many of the benefits of specialization by trading within our own
borders. How important is it for the health of our economy to trade actively with other
countries? As best we can measure, it is critically important. According to one recent
study that used four approaches to measuring the gains from trade, the increase in trade
since World War II has boosted U.S. annual incomes on the order of$10,000 per
household (Bradford, Grieco, and Hufbauer, 2006). 2 The same study found that
removing all remaining barriers to trade would raise u.s. incomes anywhere from $4,000
to $12,000 per household. Other research has found similar results. Our willingness to
trade freely with the world is indeed an essential source of our prosperity--and I think it is
safe to say that the importance of trade for us will continue to grow.

In practice, the benefits of trade flow from a number of sources. By giving
domestic finns access to new markets, trade promotes efficient specialization, pennits
economies of scale, and increases the potential returns to innovation. 3 U.S. firms
increasingly seek to expand production and profits through new eXQort opportunities;
indeed, U.S. exports grew about 9 percent in real (that is, inflation-adjusted) terms last
year. Export-oriented U.S. manufacturing industries include producers of aircraft,
construction equipment, plastics, and chemicals. The United States also excels in the
manufacture and export of sophisticated capi,tal goods and scientific equipment. Outside
of manufacturing, a number of U.S. high-tech companies, jncluding software developers
and online service providers, are world leaders in their fields. American films and music

-4attract large worldwide audiences. Montana's exports include wheat, metal ores, and
high-tech materials that are critical to the production of semiconductors.
Firms that emphasize exports are among America's most dynamic and productive
companies. Relative to firms that produce strictly for the domestic market, exporters tend
to be more technologically sophisticated and to create better jobs. Among U.S.
manufacturers, for example, exporters pay higher wages and add jobs more rapidly than
non-exporters (Bernard and Jensen, 1999). A significant portion of U.S. international
trade is conducted by multinational firms; studies show that these firms generally pay
higher wages than purely domc;:stic firms, both in the United States and in developing
countries (Doms and Jensen, 1998; Bhagwati, .2004, p. 172). U.S. firms with a global
reach tend to be better diversified and are better able to respond to new market
opportunities wherever they may arise.
Exports are important, but so are imports. Without trade, some goods would be
extremely expensive or not available at all, such as the Valentine's Day roses of my
earlier example or out-of-season fruits and vegetables. Trade also makes goods available
in more brands and varieties; examples include automobiles, consumer electronics,
garments and footwear, wines, ~md cheeses. One of the great attractions of globalization
is that it brings to consumers the best of many cultures. And of course, global trade
allows many types of goods, especially consumer goods, to be purchased at lower prices.
Lower prices help all consumers but may be especially helpful to those with tight
budgets. Indeed, a number of the large, import-intensive retail chains in the United States
are focused on low- and moderate-income consumers, who benefit from being able to buy
a wide variety oflower-priced goods.

-5Another substantial benefit of trade is the effect it tends to have on the
productivity of domestic firms and on the quality of their output. 4 By creating a global
market, trade enhances competition, which weeds out the most inefficient firms and
induces others to improve their products and to produce more efficiently. The U.S.
manufacturing sector, which is perhaps the sector most exposed to international
competition, has achieved truly remarkable increases in its productivity in the past decade
or so. In addition, international supply chains, made possible by advances in
communication and transportation, reduce costs and increase the competitiveness of U.S.
firms. Trade also promotes the transfer of technologies, as when multinational firms or
transplanted firms bring advanced production methods to new markets.
Trade and finance are closely linked and mutually supporting, and in recent
decades international financial flows have grown even more quickly than trade volumes.
The globalization of finance plays to the strengths of U.S. financial institutions and
financial markets. The United States has a large surplus in trade in financial services, and
U.S. firms "are leaders in providing banking, investment, and insurance services to the
world. Financial openness allows U.S. investors to fmd new opportunities abroad and
makes it possible for foreigners to invest in the United States. The ability to invest
globally also permits greater diversification and sharing of risk.
Trade benefits advanced countries like the United States, but open trade is, if
anything, even more important for developing nations. Trade and globalization are lifting
hundreds of millions of people out of poverty, especially in Asia, but also in parts of
Africa and Latin America (Bhagwati, 2004). As a source of economic growth and
development in poor countries, trade is proving far more effective than traditional
development aid (Easterly, 2006). The transition economies of central and eastern

-6Europe have also benefited greatly from trade, especially trade with the rest of the
European Union. A recent study by the World Bank compared two groups of developing
countries, dubbed the "globalizers" and the "nonglobalizers." Collectively, the
globalizers have doubled the ratio of trade to their gross domestic product (GDP) over the
past twenty years, in part because of sharp cuts in tariffs on imports; the nonglobalizers,
collectively, have seen a decline in their trade-to-GDP ratio over the same period (Dollar
and Kraay, 2004). Among the globalizers, economic growth accelerated from 2.9 percent
per year in the 1970s, to 3.5 pc::rcent in the 1980s, to 5 percent in the 1990s. In contrast,
the nonglobalizers have seen their growth decline from 3.3 percent per year in the 1970s
to 0.8 percent in the 1980s and 1.4 percent in the 1990s. The study also found that,
among the globalizers, absolute poverty declined significantly and the degree of income
inequality changed little. 5
If trade is so beneficial, why do we sometimes see political resistance to freer,
more open trade? Notably, negotiations in the so-called Doha Round of trade talks now
under way have proceeded very slowly, notwithstanding a consensus among economists
that all countries involved woulld enjoy substantial benefits from further trade
liberalization. One important reason is that, although trade increases overall prosperity,
the benefits for some people may not exceed the costs, at least not in the short run.
Clearly, the expansion of trade helps exporting firms and their workers. As consumers,
nearly all of us benefit from tracie by gaining access to a broader range of goods and
services. But some ofus, such as workers in industries facing new competition from
imports, are made at least temporarily worse off when trade expands. Because the
benefits of trade are widely diffhsed and often indirect, those who lose from trade are
often easier to identify than those who gain, a visibility that may influence public

-7perceptions and the political process. That said, the job losses and worker displacement
sometimes associated with expanded trade are a legitimate economic and social issue. In
the remainder of my remarks, I will focus on the impact of trade on U.S. jobs--both
positive and negative--and discuss some possible policy responses.

Trade and Jobs
Does opening U.S. markets to foreign producers destroy jobs at home? The
expansion of trade or changes in trading patterns can indeed destroy specific jobs. For
example, foreign competition has been an important factor behind declining employment
in the U.S. textile industry, including in my home state of South Carolina. Job loss--from
any cause--can create hardship for individuals, their families, and their communities. I
will return shortly to the question of how we should respond to the problem of worker
For now, however, I will point out that trade also creates jobs--for example, by
expanding the potential market overseas for goods and services produced in the United
States, as I have already discussed. Trade creates jobs indirectly as well, in support of
export activities or as the result of increased economic activity associated with trade. For
example, gains in disposable income created by lower consumer prices and higher
earnings in export industries raise the demand for domestically proguced goods and
services. Domestic production and employment are also supported by expanded access

to raw materials and intermediate goods. The U.S. jobs created by trade also tend to offer
higher pay and demand greater skill than the jobs that are destroyed--although a
downside is that,. in the short run, the greater return to skills created by trade may tend to
increase the wage differential between higher-skilled and lower-skilled workers and thus
contribute to income inequality (Bemanke, 2007).

- 8The effects of trade on employment must also be put in the context of the
remarkable dynamism of the U.S. labor market. The amount of "churn" in the labor
market--the number of jobs crleated and destroyed--is enormous and reflects the
continuous entry, exit, and resizing of firms in our ever-changing economy. Excluding
job layoffs and losses reversed within the year, over the past decade an average of nearly
16 million private-sector jobs have been eliminated each year in the United States, an
annual loss equal to nearly 15 percent of the current level ofnonfann private

employment. The vast majority of these job losses occur for a principal reason other
than international trade (Kletz(lr, 2001; Bernanke, 2004). Moreover, during the past ten
years, the 16 million annual job losses have been more than offset by the creation of
about 17 million jobs per year--some of which, of course, are attributable to the direct
and indirect effects of trade. Truly, the U.S. labor market exhibits a phenomenal capacity
for creative destruction.
If trade both destroys and creates jobs, what is its overall effect on employment?
The answer is, essentially none. In the long run, the workings of a competitive labor
market ensure that the number of jobs created will be commensurate with the size of the
labor force and with the mix of skills that workers bring. Thus, in the long run, factors
such as population growth, labOlr force participation rates, education and training, and
labor market institutions detennine the level and composition of aggregate employment.
To see the irrelevance of trade tiQ total employment, we need only observe that, between
1965 and 2006, the share of imports in the U.S. economy nearly quadrupled, from 4.4
percent ofGDP to 16.8 percent. Yet, reflecting growth in the labor force, employment
more than doubled during that time, and the unemployment rate waS at about 4-112

-9percent at both the beginning and end of the period. Furthermore, average real
compensation per hour in the United States has nearly doubled since 1965.
Although many readily accept that balanced trade does not reduce aggregate
employment, some might argue that the United States' current large trade deficit must
mean that the number of U.S. jobs has been reduced on net. However, the existence of a
trade deficit or surplus, by itself, does not have any evident effect on the level of
employment. For example, across countries, trade deficits and unemployment rates show
little correlation. Among our six Group of Seven partners (the world's leading industrial
countries), three have trade surpluses (Canada, Germany, and Japan). However, based on
the figures for February of this year, the unemployment rates in Canada (5.3 percent) and
in Germany (9.0 percent) are significantly higher than the 4.5 percent rate in the United
States; and Japan's unemployment rate, at 4.0 percent, is only a bit lower. 7 Factors such
as the degree of flexibility in the labor market, not trade, are the primary source of these
cross-country variations in unemployment.
What About Outsourcing Abroad?
The debate about the effects of trade on employment has been intensified by the
phenomenon of outsourcing abroad, or "offshoring." Offshoring has been driven by
several factors, including improvements in international communication, the
computerization and digitization of some business services, and the existence of
educated, often English-speaking workers abroad who will perform the same services for
less pay. A portion, though not all, of these wage differentials reflects differences in
skills and productivity; for example, out sourced programming work is usually simpler
and more routine than programming done in the United States.

- 10-

The increase in outsourcing abroad has led to dire predictions about a wholesale
"export" of U.S. jobs in coming years. Although globalization and trade will continue to
be forces for economic change, concerns about a massive loss of jobs due to offshoring
do not seem justified. Companies have found outsourcing abroad profitable primarily for
jobs that can be routinized and sharply defined. Certainly, advancing technology will
continue to increase the feasibility of providing services from remote locations. For the
foreseeable future, however, most high-value work will require creative interaction
among employees, interaction which is facilitated by physical proximity and personal
contact. Moreover, in many fic~lds, closeness to customers and knowledge of local
conditions are also of great importance. These observations suggest that, for some
considerable time, outsourcing abroad will be uneconomical for many types of jobs,
particularly high-value jobs.8
Moreover, a balanced discussion of outsourcing abroad should reflect that, just as
U.S. firms use the services of foreigners, foreign firms make considerable use of.the
services of U.S. residents. Many do not realize that, in contrast to its trade deficit in
goods, the United States runs a significant trade surplus in services--particularly in
business, professional, and technical services. This country provides many high-value
services to users abroad, including financial, legal, engineering, arc]ritectural, and
software development services, whereas many ofthe services imported by U.S.
companies are less sophisticated and hence of lower value. 9 A recent study of twentyone occupations that are most likely to be affected by outsourcing found that net job
losses were concentrated almost exclusively in the lower-wage occupations and that
strong employment gains have occurred in the occupations that pay the highest wages. 10

- 11 Further expansion of trade in services will help, not hurt, the U.S. economy and the labor
Just as discussions of the outsourcing of business services tend to ignore the
services U.S. finns sell to other countries, so do discussions of the movement of jobs
offshore ignore the fact that foreign finns also move jobs to the United States. Between
1996 and 2004 (the most recent data available), the employment of U.S. residents by
majority-owned nonbank affiliates of foreign companies operating within the United
States increased by about 1 million jobs. In 2004, U.S. affiliates of foreign companies
accounted for more than $500 billion in value added (about half in manufacturing) and
about $180 billion in exports. Globalization and offshoring work both ways.
Responding to Job Displacement
Although trade has many positive effects in the labor market, nothing I have said
this morning is intended to minimize the real costs imposed on workers and communities
when new competition from abroad leads to job losses and displacement. What can be
done to help workers who lose their jobs as a consequence of expanded trade?
Restricting trade by imposing tariffs, quotas, or other barriers is exactly the wrong
thing to do. Such solutions might temporarily slow job loss in affected industries, but the
benefits would be outweighed, typically many times over, by the co_sts, which would
include higher prices for consumers and increased costs (and thus reduced
competitiveness) for U.S. firms. Indeed, studies of the effects of protectionist policies
almost invariably find that the costs to the rest of society far exceed the benefits to the
protected industry. In the long run, economic isolationism and retreat from international
competition would inexorably lead to lower productivity for U.S. firms and lower living
standards for U.S. consumers (Bemanke, 2004).

- 12The better approach to. mitigating the disruptive effects of trade is to adopt
policies and programs aimed at easing the transition of displaced workers into new jobs
and increasing the adaptability and skills of the labor force more generally. Many
suggestions for such policies have been made. Currently, the government's principal
program for helping workers displaced by trade is the Trade Adjustment Assistance
program, which is up for renewal before the Congress this year. As now structured, the
program offers up to two and a half years of job training, allowances for job search and
relocation, income support for eligible workers, and health insurance assistance for some.
Elements of other proposals being discussed (Kletzer and Rosen, 2006; Kling, 2006;
Mann 2003, 2004) include job-training tax credits and wage insurance; which would help
offset pay cuts that often occur when displaced workers change jobs. Another approach
is to focus on establishing poli(:ies that reduce the cost to workers of changing jobs, for
example, by increasing the portability of pensions or health insurance between
employers. As new technologies expand the range of occupations that may be subject to
international competition, measures to assist affected workers become all the more
important. It would not be appropriate for me to endorse specific programs; that is the
prerogative of the Congress. However, I can safely predict that these and other policy
proposals to address concerns about worker displacement will be the subject of active
debate in coming years.
More generally, investing in education and training would help young people
entering the labor force as wellllS those already in mid-career to better manage the everchanging demands of the workfi)rce (Bernanke, 2007). A substantial body of research
demonstrates that investments in educ.ation and training pay high rates of return to
individuals and to society as a whole (Acemogulu and Angrist, 2001; Becker, 1964; Card,

- 13 1999; Topel, 2004). Importantly, workforce skills can be improved not only through
K-12 education, college, and graduate work but also through a variety of expeditious,
market-based channels such as on-the-job training, coursework at community colleges
and vocational schools, extension courses, and online training. An eclectic, marketresponsive approach to increasing workforce skills is the most likely to be successful.
Whatever the specific approaches chosen, helping workers who have lost jobs-whether because of trade or other causes--to find new productive work is good for the
economy as well as for the affected workers and their families. Moreover, if workers and
their families are less fearful of change, political pressure in favor of trade barriers or
other measures that would reduce the flexibility and dynamism of the U.S. economy
would be reduced (Kull, 2004).

To sum up, international trade in goods, services, and assets, like other forms of
market-based exchange, allows us to transform what we have into what we need or want
under increasingly beneficial terms. Trade allows us to enjoy both a more productive
economy and higher living standards.
Of course, current trading arrangements are far from perfect. Some features of
the world trading regime, such as excessive restrictions on trade in services and the
uneven protection of intellectual property rights, are both unfair and economically
counterproductive. Working through the World Trade Organization or in other venues,
we should continue to advocate the elimination of trade distortions and barriers in our
trading partners even as we increase the openness of our own economy. We should also
work to ensure that both we and our trading partners live up to existing agreements under
the World Trade Organization. When trading partners do not meet their obligations, we

- 14should vigorously press our case. Ultimately, a freer and more open trading system is in
everyone's best interest.
Although expansion of trade makes the u.s. economy stronger, as I have noted
today, the broad benefits of trade and the associated economic change may come at a cost
to some individuals, firms, and communities. We need to continue to find ways to
minimize the pain of dislocation without standing in the way of economic growth and
change. Indeed, the willingness to embrace difficult challenges is a defining
characteristic of the American people. With our strong institutions, deep capital markets,
flexible labor markets, technological leadership, and penchant for entrepreneurship and
innovation, no country is better placed than the United States to benefit from increased
participation in the global economy. Ifwe resist protectionism and isolationism while
working to increase the skills and adaptability of our labor force, the forces of
globalization and trade will continue to make our economy stronger and our citizens
more prosperous.

- 15 References
Acemoglu, Daron, and Joshua Angrist (2001). "How Large Are Human Capital
Externalities? Evidence from Compulsory Schooling Laws," in Ben S. Bernanke and
Kenneth Rogoff, eds., NBER Macroeconomics Annual. Cambridge, Mass.: MIT Press,
Becker, Gary S. (1964). Human Capital: A Theoretical and Empirical Analysis with
Special Reference to Education. New York: National Bureau of Economic Research.
Bernanke, Ben S. (2004). "Trade and Jobs," speech delivered at the Distinguished
Speaker Series, Fuqua School of Business, Duke University, March 30,
___ (2006). "Global Economic Integration: What's New and What's Not?" speech
delivered at the thirtieth annual economic symposium sponsored by the Federal Reserve
Bank of Kansas City, Jackson Hole, Wyo., August 25,
___ (2007). "The Level and Distribution of Economic Well-Being," speech delivered
at the Greater Omaha Chamber of Commerce, February 6,
Bernard, Andrew B., and J. Bradford Jensen (1999). "Exceptional Exporter Performance:
Cause, Effect, or Both?" Journal ofInternational Economics, vol. 47 (February), pp. 125.
Bernard, Andrew B., J. Bradford Jensen, and Peter K. Schott (2006). "Trade Costs,
Firms, and Productivity," Journal o/Monetary Economics, vol. 53 (July), pp. 917-37.
Bhagwati, Jagdish (2004). In Defense of Globalization. New York: Oxford University
Bradford, Scott C., Paul L. E. Grieco, and Gary Clyde Hufbauer (2006). "The Payoffto
America from Globalisation," The World Economy, vol. 29 (July), pp. 893-916.
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and David Card, eds., Handbook ofLabor Economics, vol. 3A. New York: Elsevier, pp.
Cox, Michael, and Richard AIm (2007). "The Best of All Worlds: Globalizing the
Knowledge Economy," in Federal Reserve Bank of Dallas, 2006 Annual Report, pp. 3-

Davis, Steven, John Haltiwanger, and Scott Schuh (1996). Job Creation and
Destruction. Cambridge, Mass.: MIT Press.

- 16Dollar, David, and Aart Kraay (2004). "Trade, Growth, and Poverty," The Economic
Journal, vol. 114 (February), pp. F22-F49.
Doms, Mark E., and J. Bradford Jensen (1998). "Comparing Wages, Skills, and
Productivity between Domestically and Foreign-Owned Manufacturing Establishments in
the United States," in Robert E. Baldwin, Robert E. Lipsey, and J. David Richardson,
eds., Geography and Ownership as Bases for Economic Accounting. Chicago:
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Easterly, William (2006). The White Man's Burden: Why the West's Efforts to Aid the
Rest Have Done So Much III and So Little Good. New York: Penguin Press.
Guisepi, Robert A. (2000). "The Stone Age: The General Picture," International World
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Hummels, David (2006). "Transportation Costs and Trade over Time," in David
Hummels, Anthony Venables, Harry Broadman, and John S. Wilson, rapporteurs,
Transport and International Trade: Round Table 130. Organisation for Economic Cooperation and Development and European Conference of Ministers of Transport. Paris:
Institute of International Education (2006). "New Enrollment of Foreign Students in the
U.S. Climbs in 2005/06," press release, November 13,
Kletzer, Lori G. (2001). Job Lossfrom Imports: Measuring the Costs. Washington:
Institute for International Economics.
Kletzer, Lori G., and Howard Rosen (2006). "Reforming Unemployment Insurance for
the Twenty-First Century Workforce," Hamilton Project Discussion Paper. Washington:
Brookings Institution, Septemb(~r.
Kling, Jeffrey R. (2006). "Fundamental Restructuring of Unemployment Insurance:
Wage-Loss Insurance and Temporary Earnings Replacement Accounts," Hamilton
Project Discussion Paper. Washington: Brookings Institution, September.
Kull, Steven (2004). Americans on Globalization, Trade, and Farm Subsidies, The
American Public on International Issues, PIPAlKnowledge Networks Poll, Program on
International Policy Attitudes and Knowledge Networks, January 22,
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Next Wave of Productivity Growth," International Economics Policy Briefs PB03-11.
Washington: Institute for International Economics, December,

- 17 -


_ _ (2004). "Global Sourcing and High-Tech Jobs: Productivity Gains and Policy
Challenges," presentation on "White Collar Outsourcing" at the Institute for International
Economics, March 11,
___ (2006). Accelerating the Globalization ofAmerica: The Role for Information
Technology, with Jacob Funk Kirkegaard. Washington: Institute for International
Topel, Robert (2004). "The Private and Social Values of Education," in Education and
Economic Development, proceedings of a conference held at the Federal Reserve Bank of
Cleveland, November 18-19, pp. 47-57,


Hummels (2006). Bernanke (2006) provides a brief history of globalization.


The estimates ranged from $7,000 to $13,000.


Cox and AIm (2007) discuss the benefits of trade in the modem global economy.

4 Bernard and Jensen (1999) find that exporting firms are more productive than non~exporters. Bernard,
Jensen, and Schott (2006) document the tendency of trade to reduce production at low~productivity plants
and to increase output at high~productivity plants in the United States, a shift that raises average


Refer also to Bhagwati (2004).

According to the Bureau of Labor Statistics (BLS), over the past ten years, gross job losses in the United
States have averaged about 7.8 million per quarter. Multiplying 7.8 million by 4 suggests that about 31
million U.S. jobs come to an end each year. This figure includes temporary layoffs, seasonal closings, and
other short-term job losses; some research suggests that longer~term job losses amount to about half of the
total (Davis, Haltiwanger, and Schuh, 1996). Dividing 31 million gross job losses by 2 yields about 16
million long-term job losses each year.

7 February 2007 is the latest month for which these rate comparisons are available. The data are from the
Bureau of Labor Statistics, which has adjusted them to approximate the U.S. definition of unemployment.

8 The economic importance of physical proximity is the underlying reason that people and businesses are
willing to pay high rents and other costs to live in or near major cities, where they can be near large
numbers of other people and businesses that have related expertise and interests. -

Another type of service in which the United States has a strong export position is higher education. In
2005-06, U.S. institutions of higher learning trained nearly 600•.000 foreign students, of whom about half
were studying for graduate and professional degrees. Many foreign students who study in the United States
spend at least some time here subsequently, adding their skills to those of the domestic workforce (Institute
of International Education, 2.006).


10 Mann (2.0.06, pp. 14.0-41) analyzes changes from 1999 to 2004. Updating the analysis with 2005 data
from the Bureau of Labor Statistics does not change these results. Some of the low-wage occupations, such
as data entry and word processing, may have lost jobs to automation rather than outsourcing.