The Political Economy of Trade: A Preliminary View
Trade often produces losers as well as winners. This insight is crucial to understanding the
considerations that actually determine trade policy in the modern world economy. Our specific
factors model informs us that those who stand to lose most from trade are the immobile
factors in the import-competing sector. In the real world, this includes not only the owners of
capital, but also a portion of the labor force in those importing-competing sectors. Some of
those workers have a hard time transitioning from the import-competing sectors (where trade
induces reductions in employment) to export sectors (where trade induces increases in
employment). Some suffer unemployment spells as a result. In the United States, workers in
the import-competing sectors earn wages that are substantially below the average wage. (For
example, the average wage in the apparel sector in 2009 was 36 percent below the average
wage across all manufacturing sectors.) One result of this disparity in wages is widespread
sympathy for the plight of those workers and, consequently, for restrictions on apparel
imports. The gains that more affluent consumers would realize if more imports were allowed
and the associated increases in employment in the export sectors (which hire, on average,
relatively higher-skilled workers) do not matter as much.
6The argument that trade is beneficial because it enlarges an economy’s choices is much more general than this
specific example. For a thorough discussion, see Paul Samuelson, “The Gains from International Trade Once
Again,” Economic Journal 72 (1962), pp. 820–829.
66 PART ONE International Trade Theory
Does this mean that trade should be allowed only if it doesn’t hurt lower-income people?
Few international economists would agree. In spite of the real importance of income distribution,
most economists remain strongly in favor of more or less free trade. There are three
main reasons why economists do not generally stress the income distribution effects of trade:
1. Income distribution effects are not specific to international trade. Every change in a nation’s
economy, including technological progress, shifting consumer preferences,
exhaustion of old resources and discovery of new ones, and so on, affects income distribution.
Why should an apparel worker, who suffers an unemployment spell due to increased
import competition, be treated differently from an unemployed printing machine
operator (whose newspaper employer shuts down due to competition from Internet news
providers) or an unemployed construction worker laid off due to a housing slump?
2. It is always better to allow trade and compensate those who are hurt by it than to prohibit
the trade. All modern industrial countries provide some sort of “safety net” of
income support programs (such as unemployment benefits and subsidized retraining
and relocation programs) that can cushion the losses of groups hurt by trade.
Economists would argue that if this cushion is felt to be inadequate, more support
rather than less trade is the answer. (This support can also be extended to all those in
need, instead of indirectly assisting only those workers affected by trade.)
3. Those who stand to lose from increased trade are typically better organized than those
who stand to gain (because the former are more concentrated within regions and
industries). This imbalance creates a bias in the political process that requires a counterweight,
especially given the aggregate gains from trade. Many trade restrictions
tend to favor the most organized groups, which are often not the most in need of
income support (in many cases, quite the contrary).
Most economists, while acknowledging the effects of international trade on income distribution,
believe that it is more important to stress the overall potential gains from trade than the
possible losses to some groups in a country. Economists do not, however, often have the deciding
voice in economic policy, especially when conflicting interests are at stake. Any realistic understanding
of how trade policy is determined must look at the actual motivations of that policy.
Case Study
Trade and Unemployment
Opening to trade shifts jobs from import-competing sectors to export sectors. As we have
discussed, this process is not instantaneous and imposes some very real costs: Some workers
in the import-competing sectors become unemployed and have difficulty finding new
jobs in the growing export sectors. We have argued in this chapter that the best policy
response to this serious concern is to provide an adequate safety net to unemployed workers,
without discriminating based on the economic force that induced their involuntary
unemployment (whether due to trade or, say, technological change). Here, we quantify the
extent of unemployment that can be traced back to trade. Plant closures due to import
competition or overseas plant relocations are highly publicized, but they account for a very
small proportion of involuntary worker displacements. The U.S. Bureau of Labor Statistics
reports that from 1996 to 2008, those closures accounted for only 2.5 percent of total involuntary
displacements. Many of the same factors that we mentioned as also affecting income
distribution, such as technological change, shifts in consumer tastes, etc., play a larger role.
Figure 4-12 shows that, over the last 50 years in the United States, there is no obvious
correlation between the unemployment rate and imports (relative to U.S. GDP).
CHAPTER 4 Specific Factors and Income Distribution 67
On the other hand, the figure clearly shows how unemployment is a macroeconomic
phenomenon that responds to overall economic conditions: Unemployment peaks during
the highlighted recession years. Thus, economists recommend the use of macroeconomic
policy, rather than trade policy, to address concerns regarding unemployment.
Still, because changes in trade regimes—as opposed to other forces affecting the
income distribution—are driven by policy decisions, there is also substantial pressure to
bundle those decisions with special programs that benefit those who are adversely
affected by trade. The U.S. Trade Adjustment Assistance program provides extended
unemployment coverage (for an additional year) to workers who are displaced by a plant
closure due to import competition or an overseas relocation to a country receiving
preferential access to the United States. While this program is important, to the extent
that it can influence political decisions regarding trade, it unfairly discriminates against
workers who are displaced due to economic forces other than trade.7
0
2
4
6
8
10
12
14
16
18
20
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Imports
(percent of GDP)
Unemployment
(percent of workforce)
Figure 4-12
Unemployment and Import Penetration in the U.S.
The highlighted years are recession years, as determined by the National Bureau of Economic Research.
Source: US Bureau of Economic Analysis for imports and US Bureau of Labor Studies for unemployment.
7See Lori G. Kletzer, “Trade-related Job Loss and Wage Insurance: A Synthetic Review,” Review of
International Economics 12 (November 2004), pp. 724–748; and Grant D. Aldonas, Robert Z. Lawrence, and
Matthew J. Slaughter, Succeeding in the Global Economy: A New Policy Agenda for the American Worker
(Washington, D.C.: Financial Services Forum, 2007) for additional details on the U.S. TAA program and proposals
to extend the same type of insurance coverage to all workers.
68 PART ONE International Trade Theory
Income Distribution and Trade Politics
It is easy to see why groups that lose from trade lobby their governments to restrict
trade and protect their incomes. You might expect that those who gain from trade
would lobby as strongly as those who lose from it, but this is rarely the case. In the
United States and most other countries, those who want trade limited are more effective
politically than those who want it extended. Typically, those who gain from trade in
any particular product are a much less concentrated, informed, and organized group
than those who lose.
A good example of this contrast between the two sides is the U.S. sugar industry. The
United States has limited imports of sugar for many years; over the past 25 years, the average
price of sugar in the U.S. market has been more than twice the average price on the
world market. Most estimates put the cost to U.S. consumers of this import limitation at
about $2 billion a year (according to the U.S. General Accounting Office)—that is, about
$7 a year for every man, woman, and child. The gains to producers are much smaller,
probably less than half as large.8
If producers and consumers were equally able to get their interests represented, this
policy would never have been enacted. In absolute terms, however, each consumer suffers
very little. Seven dollars a year is not much; furthermore, most of the cost is hidden,
because most sugar is consumed as an ingredient in other foods rather than purchased
directly. As a result, most consumers are unaware that the import quota even exists, let
alone that it reduces their standard of living. Even if they were aware, $7 is not a large
enough sum to provoke people into organizing protests and writing letters to their congressional
representatives.
The situation of the sugar producers (those who would lose from increased trade) is
quite different. The higher profits from the import quota are highly concentrated in a small
number of producers. (Seventeen sugar cane farms generate more than half of the profits
for the whole sugar cane industry.) Those producers are organized in trade associations
that actively lobby on their members’ behalf, and make large campaign contributions.
(The sugar cane and sugar beet political action committees contributed $3.3 million in the
2006 election cycle.)
As one would expect, most of the gains from the sugar import restrictions go to that
small group of sugar cane farm owners and not to their employees. Of course, the trade
restrictions do prevent job losses for those workers; but the consumer cost per job
saved amounts to $826,000 per year, nearly 30 times the average pay of those workers.
In addition, the sugar import restrictions also reduce employment in other sectors that
rely on large quantities of sugar in their production processes. In response to the high
sugar prices in the United States, for example, candy-making firms have shifted their
production sites to Canada, where sugar prices are substantially lower. (There are no
sugar farmers in Canada, and hence no political pressure for restrictions on sugar
imports.)
As we will see in Chapters 9 through 12, the politics of import restriction in the sugar
industry is an extreme example of a kind of political process that is common in international
trade. That world trade in general became steadily freer from 1945 to 1980 depended, as we
will see in Chapter 10, on a special set of circumstances that controlled what is probably an
inherent political bias against international trade.
8See Chapter 3 of Douglas Irwin, Free Trade under Fire, 3rd edition (Princeton, NJ: Princeto
Trade often produces losers as well as winners. This insight is crucial to understanding the
considerations that actually determine trade policy in the modern world economy. Our specific
factors model informs us that those who stand to lose most from trade are the immobile
factors in the import-competing sector. In the real world, this includes not only the owners of
capital, but also a portion of the labor force in those importing-competing sectors. Some of
those workers have a hard time transitioning from the import-competing sectors (where trade
induces reductions in employment) to export sectors (where trade induces increases in
employment). Some suffer unemployment spells as a result. In the United States, workers in
the import-competing sectors earn wages that are substantially below the average wage. (For
example, the average wage in the apparel sector in 2009 was 36 percent below the average
wage across all manufacturing sectors.) One result of this disparity in wages is widespread
sympathy for the plight of those workers and, consequently, for restrictions on apparel
imports. The gains that more affluent consumers would realize if more imports were allowed
and the associated increases in employment in the export sectors (which hire, on average,
relatively higher-skilled workers) do not matter as much.
6The argument that trade is beneficial because it enlarges an economy’s choices is much more general than this
specific example. For a thorough discussion, see Paul Samuelson, “The Gains from International Trade Once
Again,” Economic Journal 72 (1962), pp. 820–829.
66 PART ONE International Trade Theory
Does this mean that trade should be allowed only if it doesn’t hurt lower-income people?
Few international economists would agree. In spite of the real importance of income distribution,
most economists remain strongly in favor of more or less free trade. There are three
main reasons why economists do not generally stress the income distribution effects of trade:
1. Income distribution effects are not specific to international trade. Every change in a nation’s
economy, including technological progress, shifting consumer preferences,
exhaustion of old resources and discovery of new ones, and so on, affects income distribution.
Why should an apparel worker, who suffers an unemployment spell due to increased
import competition, be treated differently from an unemployed printing machine
operator (whose newspaper employer shuts down due to competition from Internet news
providers) or an unemployed construction worker laid off due to a housing slump?
2. It is always better to allow trade and compensate those who are hurt by it than to prohibit
the trade. All modern industrial countries provide some sort of “safety net” of
income support programs (such as unemployment benefits and subsidized retraining
and relocation programs) that can cushion the losses of groups hurt by trade.
Economists would argue that if this cushion is felt to be inadequate, more support
rather than less trade is the answer. (This support can also be extended to all those in
need, instead of indirectly assisting only those workers affected by trade.)
3. Those who stand to lose from increased trade are typically better organized than those
who stand to gain (because the former are more concentrated within regions and
industries). This imbalance creates a bias in the political process that requires a counterweight,
especially given the aggregate gains from trade. Many trade restrictions
tend to favor the most organized groups, which are often not the most in need of
income support (in many cases, quite the contrary).
Most economists, while acknowledging the effects of international trade on income distribution,
believe that it is more important to stress the overall potential gains from trade than the
possible losses to some groups in a country. Economists do not, however, often have the deciding
voice in economic policy, especially when conflicting interests are at stake. Any realistic understanding
of how trade policy is determined must look at the actual motivations of that policy.
Case Study
Trade and Unemployment
Opening to trade shifts jobs from import-competing sectors to export sectors. As we have
discussed, this process is not instantaneous and imposes some very real costs: Some workers
in the import-competing sectors become unemployed and have difficulty finding new
jobs in the growing export sectors. We have argued in this chapter that the best policy
response to this serious concern is to provide an adequate safety net to unemployed workers,
without discriminating based on the economic force that induced their involuntary
unemployment (whether due to trade or, say, technological change). Here, we quantify the
extent of unemployment that can be traced back to trade. Plant closures due to import
competition or overseas plant relocations are highly publicized, but they account for a very
small proportion of involuntary worker displacements. The U.S. Bureau of Labor Statistics
reports that from 1996 to 2008, those closures accounted for only 2.5 percent of total involuntary
displacements. Many of the same factors that we mentioned as also affecting income
distribution, such as technological change, shifts in consumer tastes, etc., play a larger role.
Figure 4-12 shows that, over the last 50 years in the United States, there is no obvious
correlation between the unemployment rate and imports (relative to U.S. GDP).
CHAPTER 4 Specific Factors and Income Distribution 67
On the other hand, the figure clearly shows how unemployment is a macroeconomic
phenomenon that responds to overall economic conditions: Unemployment peaks during
the highlighted recession years. Thus, economists recommend the use of macroeconomic
policy, rather than trade policy, to address concerns regarding unemployment.
Still, because changes in trade regimes—as opposed to other forces affecting the
income distribution—are driven by policy decisions, there is also substantial pressure to
bundle those decisions with special programs that benefit those who are adversely
affected by trade. The U.S. Trade Adjustment Assistance program provides extended
unemployment coverage (for an additional year) to workers who are displaced by a plant
closure due to import competition or an overseas relocation to a country receiving
preferential access to the United States. While this program is important, to the extent
that it can influence political decisions regarding trade, it unfairly discriminates against
workers who are displaced due to economic forces other than trade.7
0
2
4
6
8
10
12
14
16
18
20
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Imports
(percent of GDP)
Unemployment
(percent of workforce)
Figure 4-12
Unemployment and Import Penetration in the U.S.
The highlighted years are recession years, as determined by the National Bureau of Economic Research.
Source: US Bureau of Economic Analysis for imports and US Bureau of Labor Studies for unemployment.
7See Lori G. Kletzer, “Trade-related Job Loss and Wage Insurance: A Synthetic Review,” Review of
International Economics 12 (November 2004), pp. 724–748; and Grant D. Aldonas, Robert Z. Lawrence, and
Matthew J. Slaughter, Succeeding in the Global Economy: A New Policy Agenda for the American Worker
(Washington, D.C.: Financial Services Forum, 2007) for additional details on the U.S. TAA program and proposals
to extend the same type of insurance coverage to all workers.
68 PART ONE International Trade Theory
Income Distribution and Trade Politics
It is easy to see why groups that lose from trade lobby their governments to restrict
trade and protect their incomes. You might expect that those who gain from trade
would lobby as strongly as those who lose from it, but this is rarely the case. In the
United States and most other countries, those who want trade limited are more effective
politically than those who want it extended. Typically, those who gain from trade in
any particular product are a much less concentrated, informed, and organized group
than those who lose.
A good example of this contrast between the two sides is the U.S. sugar industry. The
United States has limited imports of sugar for many years; over the past 25 years, the average
price of sugar in the U.S. market has been more than twice the average price on the
world market. Most estimates put the cost to U.S. consumers of this import limitation at
about $2 billion a year (according to the U.S. General Accounting Office)—that is, about
$7 a year for every man, woman, and child. The gains to producers are much smaller,
probably less than half as large.8
If producers and consumers were equally able to get their interests represented, this
policy would never have been enacted. In absolute terms, however, each consumer suffers
very little. Seven dollars a year is not much; furthermore, most of the cost is hidden,
because most sugar is consumed as an ingredient in other foods rather than purchased
directly. As a result, most consumers are unaware that the import quota even exists, let
alone that it reduces their standard of living. Even if they were aware, $7 is not a large
enough sum to provoke people into organizing protests and writing letters to their congressional
representatives.
The situation of the sugar producers (those who would lose from increased trade) is
quite different. The higher profits from the import quota are highly concentrated in a small
number of producers. (Seventeen sugar cane farms generate more than half of the profits
for the whole sugar cane industry.) Those producers are organized in trade associations
that actively lobby on their members’ behalf, and make large campaign contributions.
(The sugar cane and sugar beet political action committees contributed $3.3 million in the
2006 election cycle.)
As one would expect, most of the gains from the sugar import restrictions go to that
small group of sugar cane farm owners and not to their employees. Of course, the trade
restrictions do prevent job losses for those workers; but the consumer cost per job
saved amounts to $826,000 per year, nearly 30 times the average pay of those workers.
In addition, the sugar import restrictions also reduce employment in other sectors that
rely on large quantities of sugar in their production processes. In response to the high
sugar prices in the United States, for example, candy-making firms have shifted their
production sites to Canada, where sugar prices are substantially lower. (There are no
sugar farmers in Canada, and hence no political pressure for restrictions on sugar
imports.)
As we will see in Chapters 9 through 12, the politics of import restriction in the sugar
industry is an extreme example of a kind of political process that is common in international
trade. That world trade in general became steadily freer from 1945 to 1980 depended, as we
will see in Chapter 10, on a special set of circumstances that controlled what is probably an
inherent political bias against international trade.
8See Chapter 3 of Douglas Irwin, Free Trade under Fire, 3rd edition (Princeton, NJ: Princeto
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