How to Even Out the Pains and Gains from International Trade

Michael Waugh

By Michael Waugh and Spencer Lyon

Like automation, trade is a labor saving technology. It benefits many, but hurts those directly exposed to it.

By Michael Waugh and Spencer Lyon

Exposure to trade creates winners and losers. We ask the question: How can society mitigate the losses, yet preserve the gains from trade? We argue that a progressive tax system performs that role and the optimal level of progressivity should increase with increased exposure to trade.
What does trade do? As consumers, trade benefits us through lower prices and increased variety. As we walk the aisle of Walmart or scroll through the pages of Amazon, we experience how international trade makes possible the enjoyment of choice over different goods and services at low prices.
As workers, the picture is far more complicated. For the vast majority of us, we are unaffected. Professors, doctors, dry-cleaners, mechanics—our jobs are not under threat from China or another country. For a subset of us, we directly compete with workers elsewhere. Workers in manufacturing, farming, steel, even medium-skill services (think back office finance or legal jobs), are exposed to international forces. Some benefit by having a position of comparative advantage vis-à-vis international competition; some lose by not having a comparative advantage. This unequal exposure is at the core of the public debate surrounding international trade.

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Michael Waugh is an Associate Professor of Economics.