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COMMENT: Compensating free trade’s losers

Even if compensation was a viable approach two decades ago, it no longer serves as a practical response to globalisation’s adverse effects

By Dani Rodrik

It appears that a new consensus has taken hold these days among the world’s business and policy elites about how to address the anti-globalisation backlash that populists such as Donald Trump have so ably exploited. Gone are the confident assertions that globalisation benefits everyone: we must, the elites now concede, accept that globalisation produces both winners and losers. But the correct response is not to halt or reverse globalisation; it is to ensure that the losers are compensated.

The new consensus is stated succinctly by Nouriel Roubini: the backlash against globalisation “can be contained and managed through policies that compensate workers for its collateral damage and costs,” he argues. “Only by enacting such policies will globalisation’s losers begin to think that they may eventually join the ranks of its winners.”

This argument seems to make eminent sense, both economically and politically. Economists have long known that trade liberalisation causes income redistribution and absolute losses for some groups, even as it enlarges a country’s overall economic pie. Therefore, trade deals unambiguously enhance national wellbeing only to the extent that winners compensate losers. Compensation also ensures support for trade openness from broader constituencies and should be good politics.

Prior to the welfare state, the tension between openness and redistribution was resolved either by large-scale emigration of workers or by re-imposing trade protection, especially in agriculture. With the rise of the welfare state, the constraint became less binding, allowing for more trade liberalisation. Today the advanced countries that are the most exposed to the international economy are also those where safety nets and social insurance programs – welfare states – are the most extensive. Research in Europe has shown that losers from globalisation within countries tend to favour more active social programs and labour-market interventions.

If opposition to trade has not become politically salient in Europe today, it is partly because such social protections remain strong there, despite having weakened in recent years. It is not an exaggeration to say that the welfare state and the open economy have been flip sides of the same coin during much of the twentieth century.

Compared to most European countries, the United States was a latecomer to globalisation. Until recently, its large domestic market and relative geographical insulation provided considerable protection from imports, especially from low-wage countries. It also traditionally had a weak welfare state.

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