[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Thinking Like an Economist
DISTRIBUTION AND TRADE LIBERALIZATION
Trade liberalization may make a country as a whole better off,
but it does not make everyone in the country better off. The
gains to the winners are large enough that, in principle, any
losers could be compensated, to everyone’s benefit. But in
practice, compensation is seldom made. Thus, trade liberalization
often entails trade-offs to balance the gains of one group
in the economy against the losses of another group. The problem
is that often the losers are among the poorest in the country.
For example, trade liberalization threatens to force low-paid
textile workers in United States into unemployment. It is little
comfort for the textile workers in South Carolina to know that
new jobs are being created for aircraft engineers in Seattle or
that all American consumers of textile products are now better
off. In the United States, however, labor markets work reasonably
well, and the laid-off textile worker can eventually get a
new job, though often at markedly reduced wages.
While low-wage textile workers in the United States are
hurt by trade liberalization, low-wage textile workers in developing
economies gain. Trade liberalization increases the
demand for the textiles they produce, and thus increases
the demand for their labor. Unfortunately, matters can be far
bleaker for those in developing countries to whom trade liberalization
brings increased competition. In many developing
countries, unemployment is 15 percent or more, so the loss of
a job is likely to have severe consequences.
In Mexico, since the North American Free Trade Agreement
was enacted wages have soared for those who produce
goods for American car companies or other firms near the
border of Texas. But in the south of Mexico, the poor have
become even poorer. Highly subsidized American corn has
depressed the already low incomes of Mexican farmers. To be
sure, urban workers benefit, since they can buy corn for a
lower price than would otherwise have been possible.
When diverse groups are affected so differently, it is not
clear whether trade liberalization is a good thing in the absence
of policies to address its distributional effects. But such assessments
are not made by economists; in democracies, they
are left to the political processes. Society as a whole does
benefit from trade liberalization, and the role of the economist
is to point out this potential for gain. Economists also
have a role to play in explaining who will be affected, and to
what degree.
Workers often receive some of these extra profits: particularly when the industries are
unionized, they may earn wages far higher than workers of comparable skill employed
elsewhere in the economy. After international trade introduces more competition,
monopoly and oligopoly profits get competed away. Firms are forced to pay competitive
wages—that is, the lowest wage that they can for workers with a given skill.
From the perspective of the overall economy, this competition that erodes market
power and induces greater efficiency and responsiveness to consumers is one of the
major virtues of free trade. From the perspective of those who see their higher wages
and profits vanishing, it is one of free trade’s major vices.
THE INFANT INDUSTRY ARGUMENT
While job loss and decreased wages and profits from international competition provide
much of the political motivation behind protection, economists have asked if
there are any legitimate arguments for protection. That is, are there circumstances
where protection may be in the national interest, and not just in the interests of
those being protected? Two arguments have been put forward.
POLITICAL AND ECONOMIC RATIONALE FOR PROTECTION ∂ 443