Wealth: Free Trade Creates it, Governments Distribute it

A recent article from the Centre for Economic Policy Research’s Vox site is a useful overview of where the discussion needs to shift when we talk about those who lose out from globalization.

Concerns about free trade and new trade deals have some merit. There is ample evidence showing that globalisation has increased inequality in both developed and developing countries. Moreover, the impact on labour markets after trade liberalisation may have been costlier and slower than previously thought.

To reduce these negative labour market effects, we need to identify the losers and work out effective policy responses. Clearly, more work is to be done on this front. Recent research shows that targeted labour market policies are more effective than general ones. A well-designed policy response is likely to involve elements of active labour market policies such as retraining programs and moving subsidies, which compensate for the switching costs and facilitate the migration of workers away from depressed regions.

There it is. Workers in some industries — especially older low-skilled workers — can lose out due to open trade and globalization. Domestic governments have a responsibility to craft effective public policy responses to ameliorate the conditions of those that globalization leaves behind.

Trade creates prosperity and makes countries much richer. So the core element of an effective policy response will be redistributive. Free market fundamentalists will just need to accept this. But crucially, and the block quote alludes to this, the specific programs that governments adopt need to be smart and data-driven. Low-skill workers need to skill up and government needs to make training and education accessible and affordable. And a harsh reality that old-fashioned social democrats (who romanticize the bustling rust belt cities of a long bygone era, which is probably not even entirely justified) need to accept is that internal mobility is here to stay. There are some regions that macro-wealth producing market forces will render economically unsustainable andd people are going to have to move. The challenge governments need to live up to is fair facilitation of these new processes.

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