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Technology and Trade

John van Reenen of the London School of Economics gave a very neat paper recently.
A huge literature has demonstrated the growth in inequality in the U.S. and Europe in the past two decades, with most papers pointing to skill-biased technical change, and others pointing to the growth in international trade. This new study combines the two, showing how the expansion of imports from low-wage countries, particularly China, has induced European and American firms to switch to higher-technology products, to innovate more and to reallocate workers to plants that use more up-to-date technologies.
These changes in the nature of production, which have been strongest in those industries and those times where/when imports from China have grown most, may have contributed substantially to the decreasing relative earnings of the less-skilled. So it is not only trade, not only technological change that has altered Western labor markets; it’s the interactions between them, worked out through the profit-maximizing behavior of firms.
No question this competition enhances U.S. well-being in the long run; but what about the short run?