How China and Walmart Helped the Poor

Americans do not suffer from low self-esteem. Unlike European politicians, our politicians routinely refer to the United States as “the greatest country on earth” and to American workers as “the best in the world.” There are of course many reasons to be proud of being American. But just like workers in other countries, American workers are good at making some things and not so good at making others. And that’s fine. In a global economy, you do not need to excel at everything. In fact, you shouldn’t even try. It is much better to let other countries provide things for you, as long as you are good enough to offer something else in exchange. It makes sense: David Beckham should focus on being the best possible soccer player and let others build his house, cut his hair, and make his clothes.

Economists argue about almost everything, but they all agree on the principle of comparative advantage. The key insight is that if each country concentrates on the industries in which it is relatively more productive, everybody wins. Each country exports the product it is particularly good at making and in exchange imports other goods produced relatively more efficiently abroad. The net result is that we all end up a little richer. Actually, we end up a lot richer. America’s national income today is billions of dollars higher than it would be without international trade. This part of the globalization promise has worked so well that we now take it for granted. American consumers today expect that most electronic goods—from computers to wall-sized flat-screen TVs—will become cheaper year after year. Evidence shows that prices of consumer goods have fallen most in sectors where imports from China have increased the most.

 Interestingly, this trend has benefited the poor more than the rich. Two economists at the University of Chicago recently studied the consumption patterns of households with different incomes. Every time a participant in their study came back from shopping at the grocery store, she scanned all the products purchased. Using this remarkably rich data set, the economists discovered that the price of the goods purchased by the typical low-income consumer tended to increase much less than the price of goods consumed by the typical high-income consumer. Since 1994, the price index for the poorest 20 percent of families has grown three times more slowly than the price index for the richest 20 percent.

There are two plausible explanations: China and Walmart. Low-income consumers tend to buy proportionally more goods that are made in China and other low-wage countries—things like toys, cheap clothes, and affordable consumer electronics. Thanks to globalization, the price of these goods has risen less than others over the past fifteen years, and in many cases, like that of consumer electronics, it has actually declined. By contrast, consumers with higher incomes tend to buy proportionally more personal services—everything from haircuts and housecleaning to restaurant meals and health services. Since personal services are less exposed to foreign competition, high-income consumers end up benefiting less from globalization.

 The expansion of superstores such as Walmart has also played a role. Since low-income consumers shop twice as frequently in superstores as high-income consumers, the impact is larger on the poor than on the rich. And even if low-income consumers do not shop at Walmart, they tend to benefit from the price competition it creates, as many of its stores are in low-income areas. The economist Emek Basker studied the impact that the opening of a Walmart superstore had on local prices and found not only that Walmart’s prices were lower but also that the entry of a new superstore caused other local stores to lower their prices by 6 to 12 percent.

The principle of comparative advantage tells us that countries with different industrial structures have the most to gain from trading with each other and the least to lose in terms of job losses. Emerging countries such as China, Brazil, and India have economies that are different enough from America’s that the gains from trade are potentially large, with job growth in the United States concentrated in the innovation sector. Once you see things from the point of view of comparative advantage, the standard perspective on international competition offered by many in the media starts to look silly. The traditional view is that if one of our trading partners, such as China, becomes more productive, it’s terrible news for us, because it means that that country will steal our jobs. But trade is not a zero-sum game like a football match, where if your opponent wins you lose. The reality is that if one of our trading partners becomes more productive, the goods we are buying from that country become cheaper. This makes us—the consumers—a little richer.

Overall, the effect of imports from low-wage countries has been highly uneven, with less skilled workers taking most of the job losses. At the same time, these imports cost less, and that saves consumers money. One of the paradoxes of globalization is that the very people who have been hit the hardest in terms of jobs have gained more as consumers.