Free Trade: A Blessing or a Curse?


There is no doubt that free trade has the potential to raise living standards substantially [1]. Trade among consenting nations raises GDP in all of them and creates an opportunity for every citizen to acquire a modestly larger slice of the national pie.


Despite the many fruits of trade, there are also dangers. Without necessary policy intervention, trade will almost necessarily harm some individuals and industries. The adverse impacts of trade are highly concentrated among specific workers, groups, and locations.


To make matters worse, trade adjustment programs are too small to be economically consequential, and passive responses to worker displacement impede labor market adjustments. Therefore, it is crucial for policymakers to have multiple levers available to ensure that the gains from trade are more broadly shared.


Trade is a complex and nuanced concept – and so are its costs and benefits. Trade grows the economic pie, but it simultaneously shrinks the claims some citizens can make. It is crucial for economic policy to grapple with how to maximize the shared gains while mitigating and suppressing the concentrated costs that accompany trade integration.


An article that investigates the relationship between an increase in imports from China and the decline of US manufacturing employment implies that a decline of 2 million manufacturing jobs during 1999-2011 was due to imports from China [2]. Policymakers and applied economists should devote renewed focus to managing and mitigating the costs of trade adjustments.

Public policy remedies can minimize the harms of trade uncertainty. Wage insurance is one policy remedy that may prove useful. This would allow workers displaced from career jobs to get back into the labor market.
The simple idea of wage insurance is to ease the economic and phycological pain of transitioning to a new line of work.

If a displaced worker must take a pay cut to find a job, a publicly provided wage insurance policy would meet them halfway. As we have seen in Britain and the U.S, job displacements brought about by trade often yields populist dissatisfaction – so these public policy remedies will help liberal democracies overcome the populist moment.


In the case of Britain, evidence shows that support for the leave option in the Brexit referendum was systematically higher in regions hit harder by economic globalization [3].


To understand Brexit and analogous phenomena like support for radical right parties in Western Europe, or the success of Trump in the 2016 presidential race, it is important to note the central role of “globalization without compensation.”


Although trade liberalization is estimated to have generated net welfare gains in advanced countries, its benefits have been distributed highly unequally, leaving some social groups, and importantly, some geographic areas worse off.


The inability of governments to set up effective compensation policies for the “left behind” of globalization might have led to a crisis of embedded liberalism, breeding isolationism and neonationalism.


It is crucial to underline the regional employment impacts in developed western countries. A commuting zone is a geographic area used in populations and economic analysis.


Rather than being set by official boundaries of state, countries, or metropolitan areas, CZs are instead constructed using data on people’s actual commuting patterns.


Over the period 1990 to 2007, CZs in the U.S that were more exposed to import competition from China experienced substantially greater reductions in manufacturing employment.


While one would expect a modest reduction in wage levels among low-skilled workers nationally, sizable falls are instead found in employment rates within trade-impacted local labor markets.


It is also crucial to note that scholarship looking at Denmark, Norway, and Spain – covering periods from the late 1990s to 2007, find results that are consistent with the U.S evidence, suggesting that that the phenomenon is not exclusive to the U.S.


Trade integration offers profound gains for all nations. Reaping them is a worthy policy goal. An appreciation for the concentrated costs trade adjustments imposes on a subset of citizens should caution policymakers to proceed toward that goal of equitably distributing the fruits of trade. If politicians fail to distribute the gains of trade equally, they should be ready to face populist backlash.


To avoid populist backlash and preserve liberal democracy, policymakers should almost universally embrace rigorous experimentation to learn what works. Policies should not only be well intentioned but also explicitly engineered to be rigorously evaluated as they go into effect.


Sources

[1] Autor, David. "Trade and labor markets: Lessons from China’s rise’." IZA World of Labor 431 (2018): 1-12.


[2] Acemoglu, Daron, David Autor, David Dorn, Gordon H. Hanson, and Brendan Price. "Import competition and the great US employment sag of the 2000s." Journal of Labor Economics 34, no. S1 (2016): S141-S198.


[3] Colantone, Italo, and Piero Stanig. "Global competition and Brexit." American political science review 112, no. 2 (2018): 201-218.