Lesson 2 of 6 · 11 min
Costs of trade: winners, losers and adjustment
Opening to trade expands export industries and shrinks import-competing ones, so displaced workers and capital bear real adjustment costs even though the economy as a whole gains.
In short
- Opponents of free trade point to job losses in import-competing industries (often in developed countries) and greater income inequality.
- Trade forces resources to be reallocated: export industries expand, import-competing industries contract.
- Less-efficient firms may exit, raising unemployment and requiring retraining of displaced workers.
- In the long run resources are usually re-employed more productively, but some workers with industry-specific skills can be permanently worse off.
- Welfare rises overall because the winners could compensate the losers and still be better off; whether they actually do is a policy question.
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