December, 2020

Globalization and inequality

Does anyone lose from free trade?
  • Donald J. Boudreaux

    Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics
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There is one channel through which international trade is believed to uniquely promote inequality. This channel is trade’s alleged creation of “winners” and “losers.” At the most basic level, the simple fact that trade destroys some particular jobs is proclaimed by nearly everyone to be proof that trade has “losers.” And if those who lose come disproportionately from the lower ranks of the income distribution, then trade is said to fuel inequality. A more sophisticated version of this argument is rooted in the Stolper–Samuelson theorem, which identifies trade’s impact on factor prices as a potential source of greater inequality. Importantly, both versions of the “trade-creates-winners-and-losers” argument can be described, using the language of economics, as argument that trade fails to satisfy the Paretian criterion for efficiency. This chapter argues that neither version of the “trade-creates-winners-and-losers” argument withstands scrutiny. Central to its argument is the demonstration that, when properly analyzed, trade is revealed in fact to satisfy the Paretian criterion for efficiency, and this demonstration undermines the widespread sense that trade promotes inequality in any way that is policy-relevant.