Uwe Reinhardt’s post the other day, “How Convincing is the Case for Free Trade?“, helped to kick-start a fair bit of discussion recently about the impact of international trade on the US economy. Mark Thoma and William Polley have shared their thoughts about the importance of compensating the losers from trade, while others (e.g. Tim Worstall) have questioned that need.
I’d like to add 3 points to this discusssion.
1. International trade is not substantially different from trade between two people within the same country. Both types of trade are voluntary agreements between the two parties to the transaction. And both types of trade may negatively impact other people in the economy who had nothing to do with the transaction. The main difference is simply that with international trade, the transaction happens to cross an international boundary.
2. Just because trade leads to an efficient outcome, that doesn’t mean it’s a good outcome. I think that a parable about a punch in the nose helps make that point. But even very bright economists often confuse “efficient” with “good”.
3. I see the problem of adequately compensating the losers from international trade as just a part of the larger question of how we treat people in our society who, through no fault of their own, have fallen on hard times. International trade is just one of the many enormous, inexorable forces that constantly reshape our economy. Technological change, demographic change, or the fluctuations of the macroeconomic business cycle may devastate millions of families each year just as surely as international trade. An important measure (to me) of the type of society we live in is how we treat those individuals who are on the losing end of those impersonal economic forces that, in the long run, often help to make the world a more prosperous place.