I just saw this response from Joel Trachtman to my column "Too Late To Compensate Free Trade's Losers." Trachtman argues that "the fundamental problem of winners and losers will not be solved by these changes."
I do not disagree. But the fundamental political problem with trade is not there are winners and losers -- the domestic market generates much greater job churn and dislocation than trade does. It is that it generates unfair redistribution, or at least redistribution that can be legitimately perceived as unfair, when goods cross jurisdictional boundaries.
As I explain here:
It’s important to distinguish between two versions of an argument as to why trade may be problematic from a social or political perspective.
Some suggest trade is problematic because it redistributes income. The basis for that claim is true, but trivial. Pretty much everything else that happens in a market economy somehow redistributes income. Technology and market competition are the sources of endless churns in an economy. Moreover, plenty of other things, including skill-biased innovation and minimum-wage laws, have vastly greater effects on income distribution than trade.
So it makes very little sense to set international trade apart and decouple it from other domains or approaches for dealing with inequality in labor markets at large (progressive tax systems, active labor market policies, employment-friendly macro policies, etc.). Imports from Germany may adversely affect domestic companies that are displaced, but there’s no reason to treat the people who lose out any differently from workers who are adversely affected by, say, technological innovation. There is a coherent justification for compensating the losers of free trade for reasons of solidarity and equity, but the justification would apply in the case of innovation. Consequently, the preferred remedies should be the same as well.
That brings us to a different social and political objection to trade — that trade violates norms embodied in our institutional arrangements. The suggestion here is that trade may undercut the social bargains struck within a nation and embedded in its laws and regulations. [In this case] compensating the losers would be beside the point, because what is at stake is the surreptitious modification of the rules of the game — the undermining of domestic social bargains through the back door. Trade is not merely a market relationship, but an intervention into domestic institutions and an instrument for reconfiguring them to the detriment of certain groups. It would be entirely legitimate to respond to such an injury by directly curtailing the trade flows that have the alleged effect. After all, this is no different from keeping out imports that violate, say, domestic health and safety regulations, which most countries already do.
As Pierre Rosanvallon puts it, inequality is felt most acutely when citizens believe that the rules apply differently to different people.” It is not inequality per se that people mind; it is unfairness.
This also relates to a question I get very often. If trade is apparently a small component of the overall impact on labor markets, why focus at all on globalization or devise special remedies for globalization. The answer is that it is not the overall quantitative impact that often matters; it is the normative filter through which those impacts are viewed.
Thanks, Dani, for this response. I see now that your main point was not about compensation at all, but about insulation from certain types of competition. You distinguish trade winners and losers from others on the basis of the normative or political attractiveness of allowing people to “lose” due to what you, provocatively, call “social dumping.” Of course, one person’s social dumping is another’s legitimate diversity of social contract. When you say that some trade “violates norms embodied in our institutional arrangements,” you seem to be suggesting that, for trade to take place, others must accept our institutional arrangements. My first question is the empirical one: does trade from low regulation countries cause reduction of our regulation? I have not looked at the regulatory competition literature for years, but last time I looked there was little evidence of a race to the bottom in labor rights or environmental protection. If that is still true, what is the problem with social dumping? In other words, is it true, as you suggest, that domestic social bargains are being undermined “through the back door?”
Second, I am unsure why political will should not be deployed to protect the social bargains directly, rather than to try to do so indirectly through trade barriers, and with inevitable substantial errors if our experience with dumping, subsidies, and safeguards is any guide.
But the main question, which would be important to answer even if there is a significant race to the bottom, is whether insulation from competition is the right response at all to institutional diversity. Within the U.S. federal system, we in theory and practice address interstate diversity that has excessive externalities not by blocking interstate commerce, but by legislating at the federal level. Of course, the international system has markedly less legislative capacity than most countries, but in important areas it has had some success. And it is a system that, with all its limits and opportunities for exercise of power does not in theory insist on imposing our institutional arrangements on others. Best, Joel
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