Trade in goods, trade in services and outsourcing How do attitudes differ?

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1 Trade in goods, trade in services and outsourcing How do attitudes differ? Lars Calmfors 1, Girts Dimdins 2, Marie Gustafsson 3, Henry Montgomery 4 and Ulrika Stavlöt 5 22 April 2008 Abstract Free trade in goods has become more or less generally accepted. On the other hand, the debates on wages for posted workers in several EU countries as well as the controversy around the new EU Service Directive show that there are much more hostile attitudes towards free trade in services. However, for economists it is natural to analyze trade in services and their labour market implications in a similar way as trade in goods. The objective of the project is to document to what extent attitudes towards trade in goods, trade in services and offshoring (outsourcing) differ and to explain what factors that could account for this. First, we examine the rational (conscious) arguments that people may have against free trade in services and offshoring. Some of these arguments deal with people s perceptions of the changes in expected utility that would result from the opening up of international trade in services and offshoring, whereas others deal with the perceptions of the effects on broader values such as fairness and social cohesion. Second, we look at a number of psychological (unconscious) factors that are known to affect people s judgments in public policy issues. Such factors are usually related to people s motivation to maintain psychological and emotional comfort and coherent self-image. Two studies are presented in this report. The results from a nation wide survey with 1000 respondents showed that free trade in services and offshoring is more negatively evaluated than free trade. The results also show that rational factors cannot account for the difference in attitudes to different types of trade. Our conclusion was that there must exist some psychological mechanisms that cause this overall more negative attitude towards trade in services and offshoring. The result from experiments showed that it was possible to separate more permanent specific attitudes underlying the attitude towards free trade in goods from unstable and contextual specific attitudes that are constructed on the spot in order to make one s position more coherent. It was also found that the attitude may depend on personality oriented factors (prevention or promotions focus) as well as social psychological factors (ingroup favoritism). We hope that the results of the present investigation may be useful in the area of trade politics for improving the communication between economists and people in general. 1 Institute for International Economic Studies, Stockholm University, SE Stockholm 2 SSE Riga, Strelnieku 4a, LV 1010, Latvia 3 Department of Psychology, Stockholm University, SE Stockholm 4 Department of Psychology, Stockholm University, SE Stockholm 5 SIEPS, Svante Arrhenius väg 21A, Stockholm This research was supported by a grant from the Institute for Labour Market Policy Evaluation (IFAU). We thank seminar participants at the Psychology department, Stockholm University and Sofi, Stockholm University for providing helpful comments.

2 1 Introduction 1.1 General background One of the most hotly debated labor market issues in the EU in recent years has concerned trade in services and how it should be regulated. A highly controversial aspect is the balance between the country-of-origin and the country-of-destination principles. A crucial issue is to what extent service providers from other EU countries with temporarily posted workers should be bound by wage regulations or collective wage agreements in host countries that make it more difficult for them to compete with domestic firms. In Sweden, the so-called Vaxholm conflict in the building industry has become the symbol for this issue. But similar debates have been raging in, for example, France and Germany. At the EU level, there has been a heated discussion on the new so-called Service Directive, which is supposed to open up more of the service sector for intra-eu trade. A key issue has concerned the relationship to the earlier Posted Workers Directive (European Commission 1996), according to which posted workers from other EU countries should be subject to national pay and other labor market regulations. It now seems clear that the final directive will be based on the country-of-origin principle and will not interfere with the earlier Posted Workers Directive (see European Commission 2006). 1.2 Economic analysis and public opinion For economists it is natural to analyze trade in services and their labor market implications in a similar way as trade in goods. In trade theory, exports of goods are regarded as a way of indirectly exporting labor (see standard textbooks as Caves et al. 1999, or Krugman and Obstfeld 2006). Trade in goods is under certain conditions a perfect substitute for mobility of production factors (capital and/or labor) and leads to equalization of wages and returns on capital among trading countries. Established trade theory predicts that in the long run there are overall gains from trade for all involved countries because aggregate income is raised when countries specialize in production according to their comparative advantages. There are, however, both groups of winners and groups of losers within each country. The short-run consequences can be analyzed with the help of the co-called specific-factors model, which shows that immobile production factors (for example, labor with specific skills) lose in import-competing sectors but gain in export sectors, whereas mobile production factor (for example, labor with general skills which can be used in any sector) are not much affected. There may also be substantial adjustment costs for labor that is re-allocated (OECD 2005). 1.3 The objective of the study Free trade in goods has become more or less generally accepted. The prevailing attitude (judging from revealed preferences ) seems to be that the overall aggregate gains for society in the long run justify both short-run adjustment costs and long-run 2

3 losses for certain groups. The debates on wages for posted workers in several EU countries as well as the controversy around the new EU Service Directive show that there are much more hostile attitudes towards free trade in services. Indeed, there seems to be considerable public support for imposing local wages on workers posted by foreign service providers with temporary activity in the host country (see, for example, TCO 2005). Such a right is also granted to host countries according to the Posted Workers Directive. This stands in stark contrast to trade in goods, where there are usually no attempts to regulate wages in competitor countries. The objective of the study is to document to what extent attitudes towards trade in goods and trade in services differ and to explain what factors could account for this. Such attitudinal differences are likely to explain why groups exposed to international competition in service markets are more successful in lobbying for protective regulations than groups exposed to competition in goods markets. There would seem to be great benefits from co-operation between economists and psychologists in this area. We will examine several hypotheses to explain why attitudes are more negative towards trade in services than in goods. These hypotheses can be classified into two broad categories of factors. First, we will examine the rational (conscious) arguments that people may have against free trade in services. Some of these arguments deal with people s perceptions of the changes in expected utility that would result from the opening up of international trade in services, whereas others deal with the perceptions of the effects on broader values such as fairness and social cohesion. Second, we will look at a number of psychological (unconscious) factors that are known to affect people s judgments in public policy issues. Such factors are usually related to people s motivation to maintain psychological and emotional comfort and positive self-image. Broadly speaking, these two groups of factors correspond to the division of cold and hot cognition in cognitive psychology (Clore and Schnall 2005; Redlawsk 2002). Cold cognition denotes rational processing of arguments, whereas hot cognition relates to motivated reasoning that is influenced by affective biases (i.e., emotions associated with an attitude object) and often uses cognitive shortcuts and simplified information processing. Although our classification into two sets of cognitive factors does some violence to reality, it is helpful for structuring various hypotheses. The research aims at answering four basic sets of questions: 1. How different are attitudes towards trade in goods, trade in services and offshoring? 2. What background variables have relevance to explain differences in attitudes. 3. Which relative importance do people attach to different rational arguments against the free entry of foreign service providers with low wages (unfair competition, too fast adjustment, exploitation of foreign labor, threats to social cohesion etc.)? 4. How are attitudes affected by psychological factors such as coherence seeking, salience of information, ingroup-favouritism, identification and motivational orientation? 3

4 The research is carried out in two stages. In the first stage, we have collected data from a representative sample of Swedish respondents. In this survey, we have included questions about attitudes towards both free trade in goods, free trade in services and offshoring. We also measured a number of other factors that have been shown to correlate with attitudes towards free trade, like gender, age, sector affiliation, education, general attitudes towards the EU, political outlook etc (Mayda and Rodrik 2005). In the second stage, we conducted studies to test specific hypotheses, derived from the national survey. An overall question was to find out whether specific attitudes could predict participants opinions in the free trade debate. We were also interested to examine what kind of attitudes that separate participants that hold the opinon that free trade should be restricted by the Swedish Model from those who supports that free trade in services should be treated equal as free trade in goods. 1.4 Earlier studies There are some earlier studies of the attitudes towards trade in goods. Mayda and Rodrik (2005) used survey data from the World Values Survey and the International Social Survey Programme to relate individual attitudes to the two standard models of international trade discussed above: the specific-factors model (distinguishing among individuals employed in the import, export and non-tradables sectors, respectively) and the Heckscher-Ohlin model (distinguishing between skilled and unskilled labor). They found support in both data sets for the hypothesis that individual attitudes to free trade reflect economic self-interest according to the models: for example, skilled workers had a favourable attitude towards trade in developed (high-income) countries (where they are likely to gain from it), but a negative attitude in developing (lowincome) countries (where they are likely to lose). Mayda and Rodrik also found that factors as social status, relative income, values, identities and attachment to neighbourhood, community and nation played an important role in determining attitudes. O Rourke and Simnott (2001) and Beaulieu, Benarroch and Gaisford (2001) both used data from the International Social Survey Programme. Like Mayda and Rodrik, O Rourke and Simnott found that attitudes were consistent with economic self-interest (as defined by Heckscher-Ohlin theory). They also found that patriotism and chauvinism were strongly related to protectionist attitudes. In contrast to Mayda and Rodrik, Beaulieu, Benarroch and Gaisford found that skilled workers in both highincome and low-income countries are more likely to favor trade liberalization than unskilled workers. Finally, Scheve and Slaughter (1998), using the 1992 National Election Studies Survey (only US data) found support for the importance of economic self-interest (again as defined by Heckscher-Ohlin theory) for attitudes towards new US trade 4

5 barriers. In addition, they found that home ownership correlated with protectionist attitudes. The cited studies have looked at people s attitudes towards free trade in goods only, disallowing a direct test of the correlation between attitudes towards free trade in goods and free trade in services. We are not aware of any existing empirical studies that have focused on differential attitudes towards different types of trade. 2 Analytical framework To what extent do attitudes to trade in goods, trade in services and offshoring differ and what attitude patterns do we expect to find across individuals according to economic and psychological theory? What relative importance has the various possible motives that have been advanced in the public discussion? We address these questions by empirically analyzing attitudes towards trade in goods, trade in services and offshoring, using individual-level survey data and various psychological experiments. The hypotheses to be tested are identified by exploring, first, international survey data on attitudes to free trade, second, standard models of trade and third, psychological models of attitude formation. 2.1 Attitude towards free trade predicted by other attitude surveys Public opinion polls reveal that the general public tends to express anti-trade views. However, whereas there seem to be larger support to free trade in principle, the attitude to free trade in practice reveals strong reservations. For example, when the 2007 Pew Global Attitude Survey asked about if trade with other countries was good for the own country, large majorities in all 47 countries included in the survey said that international trade is a good thing for their countries. At the same time were the fractions of individuals who are in favour of limiting imports of foreign products ranging from 55 % in the International Social Survey Program (ISSP) to 60 % in the World Value Survey (WVS) data set. In a recent study Pew found that majority respondents in the U.S. hold the view that free trade is good for the economy, but when combined with its impact on jobs, attitudes turn negative. 6 The same pattern can be found when the Europeans are asked about their general attitude towards the inner market. When asked about the effects on the own country of the possibility for products from other Member States to be marketed in the own country under the same conditions as domestic products, 75 % (89 % for Sweden) of the EU citizens are very or fairly positive. Somewhat more surprising is perhaps that almost as many, 70 % (89 % for Sweden), of the EU citizens are very or fairly positive to the effects for the own country for the possibility for citizens from other Member States to work in the own country and for citizens from own country to work elsewhere in the European Union (Eurobarometer 2006). It is striking how this resonates with the heated debates on trade in services that have raged in several EU countries. This suggests that despite an intuitive understanding of many of the benefits 6 5

6 of a free internal market, the general public has strong reservations about embracing such a policy. Thus, since this study s main focus is towards labour market issues, i.e., towards free trade with the new EU countries that compete with lower wages, we can from the above reasoning predict that attitudes to free trade will be negative in general. Along this line of reasoning we should also expect that the specific attitudes to trade will be even more negative than the general attitudes. Turning to the attitudes of individuals with various background characteristics, a majority of surveys (see for example ISSP, WVS, Eurobarometer) display the same patterns. Mayda and Rodrik (2005), who base their analysis on the ISSP and WVS data sets, find evidence of strong effects of gender (being male increase pro-trade attitude), age (older appear to be more protectionist), level of education (more education increase pro-trade attitude), real income (real income is positively associated with pro-trade attitudes), citizenship in the country (protectionist attitudes), right-wing political affiliation (pro-trade) and subjective social class (self-evaluated high social status has positive impact on pro-trade attitudes). They also test for area of residence and trade union membership without significant results. Raw data from Eurobarometer 2007 confirm these findings on socio-economic patterns; younger and well-educated respondents, managers and students more often tend to hold a positive opinion than their counterparts. Several studies have used data from the Eurobarometer to examine the determinants of attitudes towards the European integration. If we assume that the public across Europe views free trade of the inner market as an integral part of the European integration process, we should expect that the empirical results concerning European integration will be analogous to the attitudes towards free trade with new EU countries. Jonung and Vlachos (2007) summarize the following pro-trade determinants of public opinion towards European integration as high-income earners, well-educated, men, right ideology, close to border, weak national identity/pride, perceived high benefits/high expectations and countries suffering heavily during world war two. These background characteristics are consistent with the pattern exposed from the trade related surveys. From this empirical literature we can expect following variables to exert a significant impact on the attitude towards free trade: age, gender, education, political affiliation, real income, citizenship, area of residence and trade union membership. This pattern is perceived fairly similar across results and no particular attitude difference towards type of trade can be deducted at this stage. 2.2 Attitude towards free trade predicted by trade theory It is likely that economic factors play a significant role in shaping individual preferences over trade. Among the economic determinants, we should expect that the returns on the factors markets are particularly important (Mayda 2005). The standard models of trade have well-defined implications for the distributive consequences of trade and hence for individual attitudes. 6

7 The Heckscher-Ohlin model is used for long-run analysis and focuses on small open economies characterized by constant returns to scale, perfect competition and perfectly mobile factors across sectors. Trade takes place between countries with differences in relative factor endowments. A main feature of the Heckscher-Ohlin model is that the impact of trade on factor rates of return depends on the individual factor type and each country s factor endowment. The Stolper-Samuelson theorem states that a factor supply shock in terms of increased trade in goods or trade in services will lower the factor returns of the individuals who own the factors with which the economy is relatively poorly endowed and vice versa. In the model most commonly three factors of production are assumed, namely capital, skilled labour and unskilled labour. If capital is assumed being internationally mobile, then the difference between the fraction of skilled and unskilled labour in the traded goods or services and the importing country is crucial for making distributional labour market predictions. In our case, Sweden can be ranked as a country well endowed with high-skill labour relative to the skill-composition of labour content in trade. Thus, individuals that are considered to be high-skilled, often proxied by the level of education, are winners from free trade. This means that we would expect the variable education to be positively correlated with a pro-trade attitude. Moreover, if we as in Mayda (2005) assume that GDP per capital can be used as a proxy of the relative skill composition, then it is clear that the skill content of Swedish import of goods is lower than the skill content of Swedish import of services. Whereas the ratio of trade in goods from high income countries relative to low income countries are a little more than one, the ratio for trade in services is 80 to 20 percent (however, the absolute level is lower for trade in services). This means that individuals with higher education should be more positive to trade in goods than to trade in services if skilled and unskilled labour is complements and capital is internationally mobile. Next turning to short run analysis, using the specific-factors model, it is assumed that each industry employs some factor used only in that particular industry and thus that some factors of production are being immobile across sectors. If we assume that labour is being immobile in the short run, attitudes towards free trade are determined by sector of employment, rather than by factor type. The specific factor in the importcompeting sector will be more protectionist, than the specific factor in the exportcompeting sector. In other words, individuals working in sectors where the home country has a comparative advantage are expected to be more pro-trade than individuals working in sectors with comparative disadvantage. Individuals working in non-traded sectors can be pro-trade or indifferent and it is ultimately an empirical issue. 2.3 Attitude towards free trade predicted by psychological research Attitudes towards trade will also be influenced by psychological factors that people may not normally be aware of. Psychological factors can either be situational or individual. In the present experimental studies we will examine how attitudes change as a consequence of context. We will also examine some individual differences between people who are positive to free trade versus people that support the Swedish 7

8 model with restrictions on salary competition. For convenience in this report, the theoretical background is presented in part 4, together with the studies conducted. 2.4 Hypotheses to be tested The above overview of applicable economic and psychological theory as well as the results from other empirical studies suggests a number of testable hypotheses regarding the formation of attitudes towards free trade in general and towards different types of trade in particular. Age. There are some evidence that younger in general are more pro-trade than older, although the relationship not necessary is linear. One possible explanation could be that younger can adjust more easily to structural changes than older. We can not establish any convincing arguments for why age would matter for attitude towards different types of trade. Gender. Many empirical studies find that men are more positive to trade than women. Possible explanation could be the lower levels of labour-market participation of women or the differences in the labour-market positions of women relative to men (Mayda and Rodrik 2005). However, individuals labour market status is often already controlled for in the estimations and no empirical evidence of these stories have been found. We have no prior expectations on gender effects on the attitudes to different types of trade. Education. The level of education is commonly used as a proxy for skill-level to test the Heckscher-Ohlin model of trade. In accordance with the model and in line with several empirical studies, we expect respondents with high education to have a more positive attitude towards trade than respondents with lower education, since demand on high-skilled should increase with specialization on skill-intensive production. An alternative explanation could be that people with high education could have a better understanding of the gains of trade, also for other people. We also expect the attitude towards trade in services and offshoring to be negatively correlated with education. Political affiliation. A right-wing political attitude is commonly associated with protrade attitudes. One explanation could be that capital owners, that to a larger extent have right-wing sympathies than workers, are gaining more than workers from free trade. We have no prior expectations on the effects of political outlook on the attitudes to different types of trade. Attitude towards the EU. We expect respondents with a positive attitude towards the EU to have a more positive attitude towards free trade. Employment status. We expect employed to have a more positive attitude towards free trade than unemployed. It is also reasonable to assume that students and entrepreneurs gain more than others from free markets within the EU and would therefore be less protectionistic. 8

9 Sectoral affiliation. If respondents form attitudes from a short-sighted perspective, we would expect respondents employed in the traded sectors to be more negative towards free trade in goods than respondents working in non-traded sectors. In addition, we expect respondents working in (non-traded) service sectors to be more negative towards trade in services. Trade union membership. In Sweden the trade unions have a long pro-trade tradition. However, in recent years the trade unions have been very active in the debate on free trade in services as a consequence of the EU membership and are strongly advocating the so called Swedish model, which for some debaters are interpreted as a more protectionistic position. We are not aware of any simple economic theory that would explain this but whatever underlying story, we expect trade union membership to be negatively correlated with attitudes towards trade in services and offshoring and positive towards trade in goods. In line with the overall findings from international surveys on trade attitudes, we predict that the general attitudes towards all types of trade are negative. One hypothesis is therefore that many people oppose free trade in goods as well, but do not care to take actions against it because they realize that it is entrenched through a number of international agreements that are very costly for an individual country to deviate from. As it is easier to oppose liberalization in new areas, such as services, people are more likely to act in accordance with their attitudes there. If this hypothesis is true, people s attitudes towards free trade in goods and free trade in services should be significantly correlated. From the above reasoning, we expect that perceived economic self-interest will play an important role in forming general trade attitudes. 3 Part 1: rational (conscious) factors /economic selfinterest 3.1 Survey Data from a sample of 1000 individuals in Sweden has been collected by Pilen Affärsutveckling AB during January The survey has been carried out by telephone interviews. The data set covers information of a random sample respondents aged years. For each individual, the data set contains responses on general and specific attitudes to different types of trade. In addition, the data set includes a large number of background variables, e.g., age, gender, education, employment status, sector of the economy, trade union membership, political party preference, country of birth, urban vs. rural residence and attitude towards the EU. To measure individual attitudes to trade in goods, trade in services and offshoring in general, the resondents were asked to evaluate following questions according to a scale from very good to very bad : 9

10 1. Do you think it is good or bad that firms that produce goods in the new EUcountries, and that pay lower wages than firms in Sweden, can compete freely on the Swedish market? 2. Do you think it is good or bad that firms that produce services, e.g., construction, in the new EU-countries, and that pay lower wages to posted workers than firms in Sweden, can compete freely on the Swedish market? 3. Do you think it is good or bad that Swedish firms freely can move production to the new EU-countries, where the wages are lower than in Sweden? Not only do we want to know the respondents general attitude towards trade in goods, trade in services and offshoring, we also want to know why they have this opinon. In order to observe the motives behind the attitude, we let the respondents state whether they agree or disagree with five common arguments for and against free trade. 7 These five common arguments are repeated for all three types of trade. Giving trade in services as an example, the questions were Sweden can import services, for example in the construction sector, from firms in the new EU-countries, when firms provide temporary services with own staff posted in Sweden. If they pay lower wages than Swedish firms.. a... it is unfair competition for Swedish workers that is threatening wages and jobs. b... it is unfair to the staff employed in the firms from the new EU-countries since they receive less pay than the staff in Swedish firms c... it is good since this implies low prices for Swedish consumers d... it must not lead to fast changes on the Swedish labour market e... it is good since it makes it possible for firms from the new EU-countries to get commissions in Sweden and thereby more jobs are created for the citizens in the new EU-countries. The first, third and fourth arguments - or specific attitudes relate to economic selfinterest, either for the individual or for the home country. Respondents may regard wage competition as unfair for Swedish workers and fear fast changes on the labour market. On the other hand, respondents may also acknowledge the potential positive effects on domestic prices. The second and fifth arguments present an altruistic view directed towards the citizens of the new EU countries. Respondents may consider 7 A pre-test was conducted before the survey were designed. 50 random individuals at the central station in Stockholm were asked to answer the general attitude questions and then motivate, with their own words, their standpoint. The specific phrasing of their answers was used when designing the questions. 10

11 wage competition to be unfair for foreign workers but they may also recognize the positive welfare effects free trade may have for the new EU countries. For simplistic reasons, the specific attitudes will be denoted competition, wages, prices, changes and welfare in the further analysis Data The respondents indicated their responses to each question on a five-point Likert-type scale ranging from strongly disagree to strongly agree. Before the data analysis, responses to the questions regarding competition, wages and changes were reversed, to ensure that higher ratings consistently corresponded to a more positive attitude. Table 1 displays summary statistics of the raw data. Table 1. Summary data on individual attitudes towards different types of trade Goods Services Off-shoring Type of Trade N Mean SD N Mean SD N Mean SD General a, a, a, Competition a, b, b, Wages b, c, c, Prices c, c, d, Changes d, b, b, Welfare e, c, d, Notes: Data set from Pilen Affärsutveckling AB. Means are calculated across individuals in the sample excluding Don t know and missing values. Means in the same column that share a common subscript letter are not significantly different (p >.05). Means in the same row that share a common subscript number are not significantly different (p >.05). We can do some observations: 1. The means are 3 for each attitude, since the respondents were asked to select a range from 1 to 5 whether they agree or disagree. The first observation that we can do is that most averages are below 3 (remember that some attitudes are reversed). This is consistent with previous findings that people in general are negative to trade. 2. The general attitudes are more favourable to goods than offshoring and services. The same patterns apply for averages of specific attitudes. 8 For more information on the questions, see the questionnaire in Appendix. 11

12 3. All attitudes are most negative to trade in services, however, there is no significant difference for fast changes and there is usually no significant difference between services and offshoring. 4. People seem more concerned about unfair competition and not fast changes, compared to unfair wages of foreign workers. 5. People seem more concerned about unfair competition than about good for foreign jobs for services and offshoring. 6. For services there is higher score for unfair wages than good for foreign jobs. 7. There are similar scores for low consumers prices and good for foreign jobs 3.3 Empirical methodology As the survey has scales we have used a model specifically designed for ordinal variables, i.e. the ordered logit model. 9 There are two strategies to compare coefficients across groups formed by a categorical independent variable. The first strategy is to separate the sample into subgroups, then perform otherwise identical logistic regression for each. Then the p-value for a Wald chi-square test of the significance of the difference between the corresponding coefficients is computed. The second strategy is to create a dummy variable which reflects membership/nonmembership in the group and also to have interaction terms between the indicator dummies and other independent variables, such that the significant interaction are interpreted as indicating significant differences across groups for the corresponding independent variables. 10 We have chosen the latter strategy, i.e., to pool the data sets according to type of trade and to create dummies for attitudes referring to trade in services (Ds) and offshoring (Do) and for the interaction effects of the independent variables. Since the data is pooled across types of trade and each individual is recurring three times in the data, the residuals can be correlated. To control for this, a cluster analysis is implemented. 3.4 Empirical results Descriptive regression analysis 9 We also created a binary variable for a pro-trade general that were used as the dependent variable in a logit regression. The result was not qualitatively different those based on ordered logits. 10 Statnotes: Topics in Multivariate Analysis, by G. David Garson, 12

13 In the next exercise we estimated the impact of the specific attitudes on the general attitude to trade. A positive coefficient means a more pro-trade position. Table 2. General attitudes and specific attitudes with dummy variables for trade in services (Ds) and offshoring (Do) Variable Coefficient Ds (0.072)* Do (0.022)** threat to Swedish jobs and wages (0.000)*** Ds x threat to Swedish jobs and wages (0.493) Do x threat to Swedish jobs and wages (0.077)* unfair wages of foreign workers (0.009)*** Ds x unfair wages of foreign workers (0.738) Do x unfair wages of foreign workers (0.314) low consumer prices (0.000)*** Ds x low consumer prices (0.634) Do x low consumer prices (0.480) fast changes in Swedish labour market (0.042)** Ds x fast changes in Swedish labour market (0.508) Do x fast changes in Swedish labour market (0.056)* good for new EU countries (0.000)*** Ds x good for new EU countries (0.111) Do x good for new EU countries (0.420) Observations 2566 Note: Method of estimation: ologit. Robust p-values in parenthesis. * significant at 10%; ** significant at 5%; *** significant at 1% In table 2, we can observe that if you disagree with the argument that trade competition is unfair, you have a positive attitude to trade in general. The same is true 13

14 for all specific attitudes. Thus, we have halo effects, which mean that if you are positive to trade in general you also have pro-trade specific attitudes. An interesting conclusion from this regression is that although that we control for these common arguments against free trade, there is an extra negative effect to trade with services and offshoring. Thus, both dummy variables are significantly negative. Next, we estimate the impact of a basic set of background variables on the general attitudes to free trade in goods, services and offshoring. In column (1) the demographic variables age, age 2, gender and residence are included in the analysis. In column (2) and (3), two sets of socio-economic variables are added to the specification, namely employment status, which refers to all respondents, and trade union membership, which refers only to the employed. In addition, level of education is included. In the last two columns, general political attitudes are controlled for. 11 Table 3. General attitudes and demographic, socio-economic and political attitude variables (1) (2) (3) (4) (5) Demographic variables Socioeconomic variables Socioeconomic variables Political attitude variables Political attitude variables Ds (0.050)* (0.000)*** (0.000)*** (0.000)*** Do (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.014)** (0.002)*** (0.032)** Age (0.064)* (0.007)*** Ds x Age (0.062)* (0.000)*** Do x Age (0.012)** Male (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** Ds x Male (0.008)*** (0.017)** Do x Male (0.083)* (0.038)** City (0.018)** (0.081)* Do x City (0.070)* Education (0.000)*** (0.023)** (0.001)*** (0.005)*** Do x Education (0.008)*** (0.010)*** 11 It should be noted that we use stepwise backward selection to drop insignificant variables. Otherwise we would loose too many observations due to missing values. 14

15 Do x Entreprenuer (0.020)** Employed/ parental leave (0.001)*** (0.000)*** Ds x Employed/ parental leave (0.001)*** Retired (0.008)*** (0.000)*** Ds x Retired (0.017)** Unemployed (0.000)*** (0.001)*** Ds x Unemployed (0.006)*** Do x Unemployed (0.017)** (0.016)** LO (0.000)*** (0.002)*** TCO (0.002)*** Right wing (0.000)*** (0.000)*** Do x Right wing (0.011)** Positive EU (0.000)*** (0.002)*** Do x positive EU (0.039)** (0.000)*** Observations Note: Method of estimation: ologit with stepwise backward selection. Robust p-values in parenthesis. The dependent variable is general attitude to trade and is ranked from 1 to 5. Dummy variables Ds and Do for trade in services and offshoring. Age is denoted in birth year, control group for Male is Woman, City refers to respondents with residence in the centre and suburban of cities. Control group are residents in small towns and countryside. Employment status is defined as Unemployed which refers to unemployed, sick listed and retired younger than 60 years, Entrepreneurs, Retired which refers to retired older than 60 years, Employed which refers to employed or respondents on parental leave. Control group are Students. Education is denoted in Swedish levels of schooling, i.e. 1. grundskola, 2. gymnasieskola, 3. eftergymn/ej avslutad högskola, 4. universitet/högskola or 5. doktor. Right wing refers to respondents that sympathise with moderaterna, folkpartiet, centerpartiet or kristdemokraterna. Control group is socialdemokraterna, vänsterpartiet, miljöpartiet, other party or do not vote/know. Control group for trade union membership is no membership. * significant at 10%; ** significant at 5%; *** significant at 1% The findings from this demographic models are 1. Men are more positive to trade than women. However, they are more negative to trade in services. 15

16 2. Age matters in some specifications. However the effect is non-linear and very close to zero. 3. The longer education the more positive attitude to trade. There could be two reasonable explanations for this. First, people with high education could have a better understanding of the gains of trade (also for other people) and second, this group gains more from trade. Our results give some support for both hypothesis. 4. In the cases were the variable residence is significant, it appears as if city people are more pro-trade than country people. 5. Individuals with right-wing political preferences are more positive than people with left-wing preferences. 6. Individuals with a positive attitude to the EU are more pro-trade and they are also more positive to offshoring in particular. 7. LO members are more negative to trade. If we use a dummy for trade union membership in general, we find that this variable is significantly negative in general and towards trade in services in particular. 8. The results regarding employment status show that students and entrepreneurs are more positive than employed, on parental leave, unemployed, sick-listed and pensioners. Employed and people on parental leave are more positive than the pensioners and the unemployed, that are the most negative. 9. Not many interaction effects are significant in the full specifications. Unemployed are less negative to trade in services and offshoring than to trade in goods (although more negative than students) and younger, right wing voters and EU positive respondents are more positive to offshoring. 10. The results from the analysis are as expected and in line with the findings of Mayda and Rodrik (2005). The most important observation is that two dummy variables for trade in services and offshoring are significantly negative. The conclusion is that although we control for background variables, there is still an extra negative effect on trade with services and offshoring. Turning to a closer look at the specific attitudes, we estimate the correlation between these common arguments and background characteristics of the respondents. Table 4. Specific attitudes and demographic, socio-economic and political attitude variables (1) (2) (3) (4) (5) Competition Wages Prices Changes Welfare Ds (0.012)** (0.099)* (0.000)*** (0.000)*** 16

17 Do (0.001)*** (0.043)** (0.000)*** (0.003)*** Age (0.001)*** Ds x Age (0.034)** Do x Age (0.000)*** Male (0.000)*** (0.000)*** (0.004)*** (0.001)*** Ds x Male (0.006)*** (0.004)*** City (0.019)** Ds x City (0.006)*** Do x City (0.091)* Education (0.082)* Do x Education (0.076)* (0.001)*** (0.003)*** LO (0.000)*** (0.036)** (0.008)*** Ds x LO (0.080)* TCO (0.037)** (0.012)** Ds x TCO (0.004)*** (0.035)** Do x SACO (0.064)* Right wing (0.049)** (0.001)*** (0.000)*** (0.000)*** Ds x Right wing (0.065)* Positive EU (0.000)*** (0.004)*** (0.000)*** (0.000)*** Observations Note: Method of estimation: ologit with stepwise backward selection. Robust p-values in parenthesis. The dependent variables are specific attitude to trade, i.e., competition, wages, prices, changes and welfare, and are ranked from 1 to 5. Dummy variables Ds and Do for trade in services and offshoring. Age is denoted in birth year, control group for Male is Woman, City refers to respondents with residence in the centre and suburban of cities. Control group are residents in small towns and countryside. Education is denoted in Swedish levels of schooling, i.e. 1. grundskola, 2. gymnasieskola, 3. eftergymn/ej avslutad högskola, 4. universitet/högskola or 5. doktor. Right wing refers to respondents that sympathise with moderaterna, folkpartiet, centerpartiet or kristdemokraterna. Control group is socialdemokraterna, vänsterpartiet, miljöpartiet, other party or do not vote/know. Control group for trade union membership is no membership. * significant at 10%; ** significant at 5%; *** significant at 1% 17

18 We can observe that 1. Men do not tend to agree with the argument that trade give unfair competition or unfair wages. They are not afraid of fast changes but think that trade lead to lower prices. However, they ignore that more jobs are created in the new EUcountries. Thus, men are more positive to trade than women for all attitudes that involves own gain. This suggests that men are not very altruistic. 2. Men are more negative to trade in services for unfair competition and fast changes. 3. The attitude to good for foreign jobs are more positive for people with high education. For offshoring, people with high education is more positive in terms of unfair wages. People are also more pro-trade in terms of unfair competition and fast changes, which highly educated people in general are not hit by. 4. Individuals with right-wing political preferences are more positive than people with left-wing political preferences for all specific attitudes except for fast changes. They are also more positive regarding unfair competition for trade in services. 5. Individuals with a positive attitude towards the EU are more pro-trade for all attitudes. 6. LO members are more negative in terms of unfair competition, unfair wages and fast changes, but does not value lower prices or more jobs in new EU-countries different than other. 7. TCO members are also worried about fast changes but are less concerned about more jobs in new EU-countries. They are more negative to trade in services for unfair competition and unfair wages. 8. SACO members are more negative to offshoring in terms of fast changes. 9. Finally, the dummy variables for trade in services are significantly negative for all specific attitudes except fast changes. For offshoring the dummy variables are significantly negative for all attitudes except more jobs in new EU-countries. Economic determinants of free trade attitudes: Heckscher-Ohlin model According to the Heckscher-Ohlin model, high-skilled labour will be more positive relative to low-skilled labour to trade with high low-skilled content and vice versa. To test the hypothesis that economic self-interests is important for the attitude to trade, the empirical literature has often used the variable education as a proxy for skill. In the last four specifications of table 3 we have estimated the impact of education together 18

19 with some demographic, political (in the last two columns) and other socio-economic variables on the probably of being pro-trade. Here, the variable education is often significant and has the expected sign, given that the ratio of high-skilled to low-skilled content import is lower than the Swedish production ratio. We also expected individuals with higher education to be more positive to trade in goods than to trade in services since the skill content is higher for imports of services than for imports of goods. These effects cannot be found in the regressions. Although not significant, the interaction effects of trade in services and offshoring and education appear rather to be positive, which give some support to the hypothesis that highly educated individuals have a better understanding of the gains from trade, also for other people. Economic determinants of free trade attitudes: Specific-factors model Turning to the short-run analysis, assuming individuals on average to be immobile across industries, attitudes towards trade should be determined by their sector of employment. In table 5, we add sector affiliation to the basic set of demographic, socio-economic and political attitude variables. Table 5. Specific factors model (1) (2) Non-traded All sector sectors Ds (0.067)* (0.086)* Do (0.005)*** (0.012)** Agriculture/foresting/fishing (0.113) Manufacturing (0.276) Construction (0.012)** Transport (0.287) Hotel/restaurant (0.401) Retail/wholesale trade (0.055)* Finance (0.787) Public sector (0.529) Health/medical care (0.041)** Education (0.006)*** Non-traded (0.043)** Ds x non-traded

20 (0.308) Do x non-traded (0.206) Demographic and socioeconomic controls Yes Yes Political attitudes control Yes Yes Observations Note: Method of estimation: ologit. Robust p-values in parenthesis. The dependent variables are general attitude to trade and is ranked from 1 to 5. Dummy variables Ds and Do for trade in services and offshoring. Not reported control variables are age (birth year), male (woman), city (countryside), Education (Swedish levels of schooling), Right wing (Left wing or no vote/don t know), Positive attitude towards the EU (negative). * significant at 10%; ** significant at 5%; *** significant at 1% The estimations show that respondents working in construction, retail/wholesale trade, health/medical care and education are more negative to trade. No significant interaction effects for sector of employment and types of trade are found, except for a positive attitude towards offshoring for respondents working in the transport sector (coefficient not reported here). Since we only have aggregated sector levels which make a division of the sectors into comparative-advantage or comparative disadvantage sectors impossible, a direct test of the specific-factor model is unfeasible. However, a crude division of sectors into traded and non-traded sectors can be done. We make a dummy for non-traded sectors, which consist of the respondents working in the service sectors broadly defined, i.e., construction, hotel/restaurant, public sector, health and education sectors. While it is reasonable to expect that respondents working in the non-traded sector would benefit from the lower goods prices but otherwise be unaffected by trade in goods, they could be directly affected by trade in services. With international mobility of workers, the workers in the service sectors are not longer shielded from foreign competition. Thus, we would expect a positive or neutral attitude towards free trade in goods or offshoring but negative attitudes towards trade in services. In column (2), the coefficient for non-traded sectors is significantly negative and the interaction effects are insignificantly positive. This result is also opposed to the results in Mayda (2007), which show that working in a non-traded sector increases the likelihood of being pro-trade. Economic determinants of free trade attitudes: Perceived economic self-interest Malchow-Møller et al (2006) argue that an appropriate test of economic self-interest should condition on people s perceptions of the economic consequences of immigration. A similar line of reasoning can be applied here. The specific attitudes on foreign competition to Swedish workers can be interpreted as the perceived economic consequences on the labour market. In addition to the standard demographic and employment status variables, the variable unfair competition was added, i.e., the non-reversed variable competition. Finally, an interaction dummy for unfair competition and unemployed (i.e., unemployed, sick-listed and pensioners < 60 years) was included in the regression. The interaction coefficient is interpreted as whether a person without employment is more negative to trade given that they perceive competition to be unfair to Swedish workers (and thus decrease the chance of getting a job). Malchow- Møller et al claim that if perceptions vary across individual 20