Question

When an economy is open up for more trade are there workers that are affected negatively? If so then what government policies might be enacted? Please explain in detail with any reference or citations. Thanks

Answer 1

While it is commonly accepted that free trade elads to increased welfare for all the countries involved, the distribution of gains within a country are not always equitable. Some benefit while some stand to lose. One such set fo workers is those where a foreign country has a comparative advantage. If a foreign country can produce goods in an industry, say steel, at a much cheaper cost than the domestic country, before there was any trade the domestic country has no option but to support its high-cost steel industry and its workers. But after opening up of trade, the domestic country will find it beneficial to import its steel from the low cost producing country. This will ultimately lead to a decline in the steel industry in the domestic country as it finds it hard to compete with the steel industry in the foreign country. A lot of workers can potentially lose their jobs or see declining wages and purchasing power, thus, they are worse off after the trade.

There are several government policies that aim at protecting these workers. If the industry is strategically important fo the country, there can be several restrictions on import of goods such as import quotas. The government can also raise the tariffs on the import of goods in these industries.