Domestic Distortions and the Deindustrialization Hypothesis
NBER Working Paper No. 5473
It is widely believed that U.S. trade deficits have displaced workers from highly paid manufacturing jobs into less well-paid service employment, contributing to declining incomes for the nation as a whole. Although proponents of this view do not usually think of it this way, this analysis falls squarely into the `domestic distortions' framework pioneered by Jagdish Bhagwati. This paper models the deindustrialization hypothesis explicitly as a domestic distortions issue, and shows that while it makes conceptual sense it is of limited quantitative importance.
Published: Feenstra, Robert C., Gene M. Grossman, and Douglas A. Irwin. The political economy of trade policy: Papers in honor of Jagdish Bhagwati. Cambridge and London: MIT Press, 1996.