Compensation and its Limits: Can Trade’s Losers be Made Whole?

Abstract

ABSTRACT Free trade and global economic integration has been under pressure from populist political movements across the globe. Many of the critiques of trade relate to the losses, both economic and non-economic, that trade’s losers suffer. Many economists and trade lawyers consider the case for free trade to be unassailable and rely on the compensation principle to argue that trade is welfare maximizing if trade’s losers could be compensated such that each is as least as well off as they were before. As a corollary, they will argue that the losers of trade should be compensated for their losses through, for example, direct payments, wage insurance, job retraining, or other supports. It is further assumed that such compensation will boost support for liberal trade policy. This article argues, however, that compensation is conceptually and practically limited in its ability to in fact make trade’s losers whole and is a poor tool to build support for free trade and address the plight of trade’s losers. Instead, it is suggested that broadly targeted non-trade specific programs are preferable, as well as perhaps a reconsideration of the purpose of safeguard measures such that they may be explicitly applied in order to mitigate political opposition to trade rather than only when industries are under threat.