Compensating the Losers from Trade

I am always happy to see my copy of the National Interest come in the mail. In the latest issue, there is a debate that will surely excite trade specialists between two highly respected economists Joseph Stiglitz and Gary Hufbauer. Stiglitz, an advisor to our program at the Carnegie Council, makes a point that is often forgotten in the trade policy world. There is a bargain implied in trade theory: Since free trade creates some winners and some losers, for free trade policies to be fair and politically sustainable, the winners should compensate the losers. Here is Stiglitz in the National Interest:

More generally, standard economic theory does not say that everyone will be better-off as a result of trade liberalization, only that the winners could compensate the losers. They could take a portion of their gains, give it to the losers and everyone could be better-off. But, of course, the winners, which in much of America are the very well-off, haven’t compensated the losers; indeed, some have been arguing that to compete in the new world of globalization requires cutbacks in government spending, including programs for the poor. The losers then lose doubly.

Stiglitz actually goes on to write that free trade can in some cases make everyone worse off--contrary to trade theory. Free trade can expose people and companies to greater risk, for example.

Policy Innovations has just published Part Two of a trade policy roundtable in which specialists Susan Aaronson, Sherman Katz, Frank Lavin, and Thea Lee debate the future of U.S. commercial policy. Check it out here.