On the distribution of the gains from trade

Saying that everyone could be made better off with increased international trade is not the same as people actually being made better off. There are winners and losers from increased international trade, and while I agree that the gains exceed the losses in almost all cases, the gains haven\’t been distributed in a way that leaves everyone, or even most everyone, better off (see, e.g., widening inequality and where the costs of these kinds of adjustments fall). When some people are made better off and others made worse off at the same time, economists cannot say it is unambiguously better or worse. If we are going to make the argument that trade is good because everyone could potentially be made better off, we should do much more than we have to ensure that this potential is realized, i.e. that the gains from trade are distributed widely across the population rather than concentrated among a smaller set of winners.

Mebbe.

But this argument then generally morphs into an insistence that we should not have free trade until that compensatory mechanism is put in place, so that, say, I, who will be gaining from that free trade will be compensating those who will lose from that free trade.

Hmm. But do you see what is implicit in that argument?

That there are gains that I am not getting, gains that are going to some other, as a result of our not currently having free trade.

This is obvious: if free trade benefits me and disbenefits you, then not free trade must disbenefit me and benefit you.

Which leads to the question: are you compensating me for those benefits you are getting and the disbenefits I am getting from the absence of free trade?

Where, in short, is my check from those benefitting from protectionism?

What\’s that?

*crickets*?

Fuck you then matey.

12 comments on “On the distribution of the gains from trade

  1. When compensation is calculated, you start with the status quo, and compensate people who have been or will be made worse off by whatever event has happened (if it’s e.g. an industrial accident) or will happen (if it’s e.g. a new airport). That’s what compensation is: a payment to compensate for a negative change in your circumstances.

    So of course you don’t get a cheque when changes that could benefit you aren’t made – that’s *utterly fucking ridiculous*. It’d be like giving a houseowner a big compo cheque for not opening a railway station at the end of his road, having never promised to…

    On the other hand, it would be fair for the government to compensate you *if it were to put up new trade barriers that made you worse off*.

    Tim adds: So, when tariffs were raised on Chinese shoes (yes, amazingly, living in a hot country, I do rather wear a lot of cheapie flip flops and the like) where was my cheque?

    *crickets*.

    Fuck’em then.

  2. Fair. Then again, the people who lost from globalisation never *actually* got a cheque – just Mark Thoma is saying they should’ve.

    Why not ask him whether he thinks the same should apply to people who lose out from new tarrifs? I reckon he’ll probably agree.

  3. John b, I think that’s just the question Tim asked in his post…

    BTW, how do you know if it was globalisation or some other reason that has made someone worse off?

  4. So international trade has recently been “widening inequality” then. That would explain how the EU & USA have been growing faster than the BRICK countries?

  5. So tell me which deserving groups lose out from freer trade, apart from?
    monopolies
    unionised labour
    cartelists
    farmers
    other subsidy junkies
    politicians
    Call me a hard hearted bastard, but I’m not getting my eyes wet about that lot.

  6. John,
    No. Compensation should be for deviations from the default/natural state. Free trade is the natural/default state. Free trade is just the absense of protectionist laws. Therefore those who lose out from protectionist laws should be compensated. Not those who gain from protectionist laws be compensated for their abolition. They’ve gained quite enough from them already. Paying them compensation would be adding insult to injury.
    (Of course, no one should be compensated, and the laws should just be abolished.)

  7. So tell me which deserving groups lose out from freer trade, apart from [laundry list]?

    For one, it doesn’t matter if they’re deserving. If the government wants to knock down your house to build a bypass, and you’ve been sent to jail forever for murdering and eating babies, then you still deserve, and get, the compensation money (the parents of the babies might then be able to sue you for it, but that’s another story).

    For two, what about unskilled un-unionised labour? People who left school at 14 to get a living wage running a widget machine, and who’re told at 40 that actually they can piss off because the widget company’s relocating to China?

    Yes, of course that’s the most economically efficient way of doing things, but it doesn’t alter the fact that *those individuals* are screwed through no fault of their own.

    Compensation should be for deviations from the default/natural state.

    The default natural state is Hobbesian nasty-brutish-short unpleasantness. A legal system that enforces property rights and punishes violence against individuals is absolutely not the default natural state.

    Indeed, looking at human history over time, in terms of societies that do have legal systems and property rights, protectionism is almost universal, and free trade (although an excellent idea and one which makes us all richer) is extremely rare. So, erm, no.

  8. John b’s theory of who should be compensated seems quite perverse. If a deviation from the status quo requires those who benefit to compensate those who lose from the change, slaves should have been required to compensate their ex-masters in 1861. This seems preposterous.

    Hugo’s theory is closer to the mark, but not quite right either. Who knows what the default/natural state of the world should be? A simpler, more straightforward standard should be that where one party is denied freedom to choose, the party who benefits from restricting another’s freedoms should compensate the loser. If I have been buying eggs at Walmart, but one day choose to buy eggs from Kroger instead, I should not owe Walmart anything for violating the status quo since my action does not deny Walmart or its employees any freedoms they enjoy.

    If I chose to buy a Toyota, I should not owe GM workers anything either. However, if congress passes a law which restricts my ability to buy a Toyota, it seems clear that GM should pay compensation to people who would otherwise have purchased Toyotas – not for altering the status quo, but for denying us liberty to choose in our own best interest.

    Let me also note that unlike John b’s theory of compensation, in my world the slaves owed no compensation, but once freed the masters should have paid something to the former slaves for their withheld freedom and stolen services.

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  12. Tim has an intriguing and appealing position, which could easily be extended to real estate and housing markets, although for some reason, Tim has chosen not to go there.

    As (presumably) a well-housed, upper middle class homeowner, Tim has enjoyed enhanced property values due to protectionist local policies (e.g. restrictive or exclusionary zoning).

    At the same time, propertyless individuals (renters) face government-imposed housing supply restrictions, and thus reduced utility (including less desirable housing locations) and higher prices (rents).

    Clearly, the lack of free trade in real estate and housing has benefitted Tim and disbenefitted propertyless individuals in his community.

    Where is Tim’s check to his neighbors for the benefits he is getting and the disbenefits they are getting from the lack of free trade?

    Just curious.

    Tim adds: Nice try: but the building restrictions around me are all to do with the UN so complain to them. It’s a World Heritage Site…..

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