International trade, it is commonly said, has winners and losers. Consumers in the U.S. gain when they buy wine imported from France while winemakers in California lose. C’est la vie, counsel economists. Nothing should be done about this situation. The reason is that it’s also commonly said – at least among those of us in the economic know – that the winners’ gains from free international trade are easily shown to exceed the losers’ losses, thus making trade efficient. Economists call this outcome “Kaldor-Hicks efficient.” Because the winners’ gains exceed the losers’ losses, the winners could in principle fully compensate the losers, wiping out the losses while still leaving net gains for the winners. Therefore, even without actual compensation of the losers, free trade makes society as a whole better off despite the fact that some individuals suffer net losses.
Crack open any textbook in international trade and you’ll find that the author, when presenting the normative case for free trade, almost certainly offers an argument similar to the one in the previous paragraph.
This argument is sophomoric utilitarianism and, hence, unconvincing. “Why,” a serious trade skeptic asks, “should we tolerate policies that allow some people – even a majority of people – to gain at the expense of other people?” Good question. It’s one the economics-textbook author cannot answer.
Fortunately, the common claim that “trade has winners and losers” is emphatically not correct.
One way to see the flaw in this claim is to recognize that trade is merely one among countless different sources of economic change. There’s nothing unique or special about trading with foreigners that causes some businesses to lose profits and some workers to lose jobs. Every change in economic activity has these effects. If Americans have fewer babies, Americans buy fewer diapers, thus causing profit and job losses among American producers of diapers. If Americans come to enjoy taking more meals at home, they buy fewer restaurant meals, thus causing profit and job losses in American restaurants. Improvements in automotive technology over the years have reduced the demand for neighborhood garage mechanics.
The polio vaccine wiped out lots of jobs in factories making wheelchairs, leg braces, and crutches.
In light of this reality, if someone wants to continue to describe trade as “having winners and losers,” that person – to be consistent – must describe every economic change, such as the introduction of the polio vaccine, as having winners and losers. This description proves that there is nothing unique about international trade.
But there’s a deeper reason why it’s wrong to say that trade has winners and losers – namely, losses differ from costs. There are indeed costs to be borne by participating in commercial society, but these costs are not losses.
Someone who truly loses from trade is someone whose life would be better if she had never been part of a society in which trade occurs. If the worker whose job is destroyed by imports would, in light of this job loss, have had a better life had she lived in a country that had no international trade, this worker might fairly be described as being among trade’s losers. But if this person’s life, even given her loss of a job, is on the whole better than she would have experienced had she lived in a country with no foreign trade, describing her as being among trade’s losers makes no sense. Living in a country whose economy is connected to the global economy ensures that her access to goods and services – and, likely, to another job – is almost certainly much greater than that access would be were her country never to have had commercial contact with foreigners.
It might be true that had the particular imports that destroyed her job never been admitted into the country she would have been better off than she finds herself with the imports allowed in. But if, as is almost certainly the case, her life overall is so enriched by trade that her life, taken as a whole – even taking account of her job loss – is better than it would have been had her country been autarkic, then she is no loser from trade.
One reason why innovative, commercial free markets produce such an abundance of material goods and services for ordinary people is that consumers, not producers, call the shots. A foundational rule of a market economy is that consumption is an end, and production is a means of achieving this end. Anyone who wishes to enjoy the (ample) benefits of a market economy must agree to play by this rule. But playing by this rule has its costs, one of which is the risk that, in your role as producer, you must adjust to the demands of consumers.
The worker in a market economy who loses her job to imports – or to labor-saving technology, or simply to changes in consumer tastes – pays the cost of admission and participation in this economy. Of course, this worker would prefer not to pay this cost. But all benefits in our valley of eternal scarcity come with costs. Payment of this particular cost is no more a loss than is, say, my paying my monthly mortgage bill: I’d prefer to be relieved from the obligation to make this payment. But I’m nevertheless thrilled that I had the opportunity to agree to incur this monthly cost, for otherwise no one would have loaned me money to buy my home.
My monthly mortgage payments aren’t losses; they’re costs incurred for the greater benefit of borrowing money to purchase a home. Likewise, a worker whose particular job is destroy by economic change doesn’t suffer a loss; that worker, instead, pays the cost of participating in an economy that promises a material bounty unmatched by any other kind of economy. This worker, even having lost a good job, remains far better off living in an economy with trade than she would be were her economy cut off from the rest of the world.
Donald Boudreaux is Professor of Economics, George Mason University. He blogs at Café Hayek (www.cafehayek.com).
