1 how should governments help those hurt by interna

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How should governments help those hurt
by international trade?
By Nina Pavcnik
May 9th, 2018
Before answering how governments should help the losers from
free trade, it is
important to ask whether governments should help losers from
free trade. The
argument for it does not have to invoke morality; it can rely on
economic principles.
Freer trade raises aggregate living standards in a country, but it
generates winners and
losers. Those hurt by international trade will likely oppose
further liberalisation and call
for protectionism, jeopardising the economic benefits of trade to
the society as a whole.
If governments want support for freer trade -- which is
potentially even more important
in today’s world of global supply chains -- they need to help

2. those who are left jobless.
So how should governments best help? The answer is obviously
context-specific,
depending on the country’s level of economic development,
flexibility of its labour
market, and the structure of its public finances. But several
guiding principles are worth
keeping in mind.
First, government policy should support displaced workers, not
jobs. Job churning is an
important component of a healthy economy, reflecting not just
the forces of
international trade but also changing consumer tastes and
technological advances.
Government policy should not discourage these dynamics. At
the same time, this
churning increases economic uncertainty and hardship for
workers and their families,
which needs to be addressed.
Second, government policy should protect displaced workers
regardless of whether
workers are hurt by international trade or by other factors such
as technological change.

3. Why? In practice, it is difficult to identify whether a particular
worker loses a job due to
trade or technology. In fact, the two causes are often
intertwined, at least in high-income
countries such as America.
Third, worker-specific policies should not have built-in
incentives that discourage
employment. Take the case of America. A large share of
transfers to American workers
displaced by Chinese competition came from long-term social-
security disability
insurance, a policy that discourages workers from finding new
jobs. Alternative policy
options, such as wage insurance or the earned income-tax credit,
would not have this
adverse side effect.
Emerging economies too have experimented with a large range
of active labour-market
policies aimed at increasing employment. These range from
vocational training and
2

4. wage subsidies to employers, to interventions that are meant to
facilitate job search,
including job fairs, providing public information about jobs in
places with better
employment opportunities, and transport services.
To be sure, a recent survey finds that the costs of the
programmes that have been tried
so far, especially vocational training and wage subsidies, often
exceed the benefits to
workers. These programmes might not have been effective, in
part, because the targeted
sectors and locations ultimately did not need workers. To that
end, programmes that
offer individuals information about employment opportunities
elsewhere (and covering
transport costs or other reallocation assistance) are potentially
more promising.
Finally, governments should ensure that communities suffering
from substantial job
losses receive funds to provide public goods, especially
education. Educated individuals
tend to cope better with the challenges of globalisation and
technological change.
Research suggests that the costs of international trade are highly

5. concentrated in high-
income and emerging economies alike. In such a setting, it is
important to ensure that
the negative effects of international trade on local labour
markets do not spill over to the
equality of opportunity for children in these communities.
This lesson might be particularly relevant in countries where
schooling is financed
mainly by local tax revenue, which can dry up in places
suffering from extensive job loss.
Consider the example of American communities adversely
affected by the rapid increase
in Chinese imports during the late 1990s and 2000s. The tax
base in these communities
decreased and transfers from state and federal sources did not
reverse this trend,
leading to declines in spending on education.
In this particular case, not only did the children there
potentially have to bear the
consequences of lower family’s income, but they were also
affected by a reduction in
local public goods. The government could have in part
counteracted these declines in

6. spending on education with policies to improve the educational
opportunities of
children there.
These adverse effects on education are more likely to occur in
emerging economies,
where families live closer to subsistence and tax revenue is
scarcer. Consider the case of
India after its 1991 import liberalisation reform. Trade reform
adversely affected the
livelihoods of families in areas more exposed to import
competition, many of whom
already lived at the edges of poverty. As families struggled to
make ends meet, they
pulled children, especially girls, out of school to save on
schooling costs. Targeted
government interventions that reduced the cost of attending
school (such as paying for
lunch) helped counteract these trends.
To be sure, providing social safety nets is undeniably costly.
But we run the risk of
reversing the gains from trade if we don’t address
unemployment concerns seriously.
From The Economist