Question

Traditional trade theories assume that factors of production are freely mobile between industries and geographic regions within the same country. Therefore, workers who are displaced due to foreign competition can switch to other sectors in a different part of the country after a brief transition without any cost. In reality, labor markets tend to be sticky. Workers do not move even when labor market conditions would suggest they should and they are worse off as others who benefit from international trade are better off.

International trade increases total surplus and therefore increases efficiency, but it will be at the cost of equality. What is the role of government in helping people who lose as a result of foreign trade?

Note: The US government has a program called the Trade Adjustment Assistance Program (TAA) to help workers affected by foreign trade during their adjustment period. However, this program is criticized by Banerjee and Duflo, Nobel prize winners in Economics for not being sufficient

Answer 1

International trade is one of the privileges of globalisation for both wealthy and poor nation's. Inorder to utilise the benefit, it is equally important to properly regulate without losing domestic labor. In fact , international trade has increased the standard of living in rich countries and also in low income countries , but not all were beneffitted out of it.

World Bank report shows that about 3.5 million jobs has lost in US between 2008 and 2018 and the trade deficit is higher. It was mainly accounted to manufacturing sector . This trade deficit is the main cause of inequality in US and it is affecting many regions. Some regions are affected by factory closing and lay offs while others are just trying best to survive.This result in low wages and production and thereby increases inequality.

US trade adjustment assistance program is one of the federal measure under Trade Adjustment Authorisation act 2015 to assist the workers who lost jobs as a result of increased imports of the country. Infact, the Nobel laureates were neither against or supported the programme. They actually promulgated a new idea for reducing the inequality. Infact that is the best suitable method for US to restore the labour force. The government should export goods that is more labour intensive than capital intensive as the country has lot of labor force who are skilled and unemployed due to the imports. They also suggest that imports should be more capital intensive since US has less resource in it. If a country promote that type of foreign trade , inequality to a great extend could be reduced.

Government should design people based policies rather than region based policies as relatively low skilled workers are reluctant to move out of their place. Low skilled workers tend not to go back to New sectors due to unemployment as the labour market is very sticky. For this federal investment should be based on people not regions.

For designing this type strong political will is required as they have to back out from the pressure of different stakeholders.