Winners and Losers from International Trade: What do we know and what are the
implications for policy?
Clarke Ricks School of Business,
Liberty University
BUSI 690: Policy and Strategy in Global Competition
Dr. Hicks
May 7, 2022
Winners and Losers from International Trade: What do we know and what are the
implications for policy?
Economists have long argued, and with good justification, that international trade brings
overall benefits to economies. However, increasing trade is likely to create losers as well as
winners. Indeed, within a broader context of rising inequality in many countries, recent years
have seen growing public concern surrounding the negative consequences of trade and
globalisation for certain sectors of society.[1] Those concerns, in turn, are seen as being partly
responsible for the rise in populism in some developed countries.[2]
Given such developments, and as the UK prepares to leave the EU and have an
independent trade policy, it is important to understand how future trade agreements, or policy
changes, may affect economic outcomes such as prices, productivity and output, and through
these, individuals and regions.
The aim of this Briefing Paper is, therefore, to sketch out how trade changes may result in
‘winners’ and ‘losers’ – be these consumers, workers, regions, or industries. Our focus is
primarily on developed countries, and on within-country impacts rather than cross-country
effects. We first provide a conceptual background which outlines the causal mechanisms which
may lead to winners and losers. We then summarise the empirical evidence on these
mechanisms and discuss potential policy responses.[3]
CONCEPTUAL BACKGROUND
Most economic changes produce winners and losers, and this is also true for changes in
trade. In this section we consider what drives international trade and why trade may have such
distributional consequences.
Opening up to international trade (i.e. trade liberalisation) allows a country, and the
consumers and firms in that country, to buy more goods from more countries. Not only does
the value of imports rise, the increase in trade is typically accompanied by more specialisation.
In 1965, for example, motor vehicles accounted for 1% of total UK goods imports, and by 2018
they accounted for over 11%; similarly, medicines and pharmaceutical products accounted for
less than 0.2% of imports in 1965, and nearly 5% in 2018; and the import share for clothing
grew from less than 1% to over 4%.[4]
Why do we buy these imported goods as opposed to those produced domestically?
(a) these goods may not be available from domestic sources,
(b) they may be cheaper, or
(c) of higher quality, or
(d) they may simply be ‘different’ from those produced domestically.
Consumers and firms who are now able to buy (cheaper) imported goods are obvious
winners from trade: imagine being restricted to drinking only Welsh Claret! But increasing
imports brings competitive pressures which may also result in domestic industries and sectors
declining, and losing out from trade.
Opening up to trade also enables firms to sell to new buyers and markets. Again, not only
does the value of trade rise, but the expansion of exports leads to increased specialisation. For
example, aircraft accounted for around 1% of UK exports in the early 1960s and over 4% in
2018; the share of power generating machinery in exports was around 4% in the earlier period,
rising to over 7% in 2018.[5] The firms which expand their sales from access to new export
markets are therefore also winners, as are their workers.
Generally, more trade is beneficial for the overall economy, but unless there is some
redistribution of the overall gains, there will likely be welfare losses for some.[6] Note that,
typically, the gains are spread across many consumers, whereas the losses are much more
concentrated – be this by worker type, industry or locality. Hence, while there are more
winners than losers, an individual loser typically loses much more than any individual gains and
thus the losers have the greater incentive to oppose the liberalisation.
WHY IS TRADE A ‘GOOD THING’… BUT NOT NECESSARILY FOR ALL?
1. Specialisation: The classic explanation is based on the principle that countries should
specialise in what they are relatively better at, driven by countries being in some way different
from each other. Countries with lots of skilled labour can produce skilled-labour-intensive
goods and services relatively cheaply (aircraft, banking), those with lots of fertile land can
produce agricultural products at lower cost, and those with better technology for producing
industrial pumps, say, will have cheaper pumps.[7]
As trade increases, countries specialise more in those things that they are relatively good
at and this increases the overall value of output and income. But as we have noted, some
sectors will expand while others contract, cutting jobs or even driving some firms out of
business. These changes may also affect wages within a country – if high-skill-intensive sectors
expand, there will be increased demand for highly skilled workers, pushing up their wages.
Conversely, if low-skill-intensive sectors contract, laying off their workers, this puts downward
pressure on low-skill wages. In the short run there may also be increased unemployment
depending on the net effects in any locality.
2. Within industry reallocations: In the preceding explanation, trade and the
distributional impacts of trade, are driven by differences between countries (such as labour,
land, capital or technology). However, trade also occurs even if countries are similar. Indeed,
much of world trade is between similar developed countries (i.e. North-North) rather than
between developed and developing countries (i.e. North-South).
As consumers, we like to have choice and variety. In addition, if there are economies of
scale in production, then it makes sense for some firms to concentrate on some varieties (e.g.
Ford cars), and for others to concentrate on a different range (e.g. Volkswagen), and these firms
may well be located in different countries. Since some consumers want Fords, and others
Volkswagens, trade will occur.
Opening up to more of this sort of trade also leads to winners and losers at the firm level,
with less efficient firms contracting (or going out of business) and the more efficient expanding
(or entering the industry). Therefore, even if there are no specialisation changes as described in
(1) above, such that the share of an industry in imports or exports remains fairly constant over
time, international trade can still lead to substantial changes within the industry. Substituting
more efficient for less efficient firms increases average productivity and so is good for the
economy as a whole. Consumers and firms buying intermediates benefit by getting products at
lower prices, and their choice may increase as trade adds foreign varieties to the available
range.
3. Productivity and growth: The previous two causal chains implicitly assumed given
levels of technology and given sets of inputs such as land, capital, or labour. They were then
concerned with the best way of organising who produces what, and sells to whom.[8] But over
time there may also be trade-induced improvements in productivity, for example, from
economies of scale or scope, from increases in investment and research and development
stimulated by larger markets, from reductions in inefficiencies due to increased competition, or
from positive spillovers between firms.[9]
Productivity change has complex effects on who gains and loses. There may be consumer
gains through more product varieties, lower prices, or higher quality of goods and services, and
gains from higher wages induced by higher productivity. But technological change may affect
sectors’ competitiveness, and impinge differently on the owners of different inputs. For
example, technological change could be biased against low-skilled labour, and hence reduce
low-skilled wages across all sectors of the economy. Equally, it could increase the demand for
some workers, e.g. computer programmers.
If technological change increases workers’ productivity this should be reflected in higher
wages. However, such a change typically means getting more output for less input, which may,
in turn, imply a need for fewer workers for the same level of output. So, while those working in
such sectors might get higher wages, fewer workers might be demanded, which implies
ambiguous effects for labour as a whole.
4. Agglomeration: As opposed to being evenly spread across a country, economic activity
concentrates geographically. Think of Silicon Valley in California, the concentration of car
production in the Midlands or the North East of the UK, or the agglomeration of financial
services in London. Such agglomeration raises aggregate efficiency, but can also lead to an
uneven regional distribution of economic activity and incomes – a core-periphery pattern. The
greater the mobility of labour and capital, the more likely this may be.[10]
Agglomeration occurs because there may be gains from: (a) being close to good
infrastructure, such as ports or intra-city transport systems that improve firms’ access to
national and international goods and factor markets; (b) being close to other firms in their
industry – as this may generate knowledge spillovers or easier access to inputs; (c) being close
to consumers to minimise the costs of accessing the market and also to improve knowledge
about demand in the market; or (d) being close to conurbations as it gives access to a larger and
possibly better pool of workers.
The breadth of the menu of possible gains from agglomeration generates complex trade-
offs – for example, between being close to other firms or close to consumers – and changes in
international trade policy can affect these in quite surprising ways. Improved port facilities may
increase local production because products are more easily (cheaply) sold abroad, or reduce it
because imports that are substitutes for local production become more easily available. HS2
may help Mancunians sell more services to London, or vice versa. Thus, while agglomeration
and benefits thereof are real enough, the complex trade-offs make it difficult to predict the
effects of any particular policy change.
There are two related issues which are worth underlining. First, the issue of export-led
growth. A notable feature is that many of the preceding sources of gains from trade –
specialisation, scale economies, increased competition, increased variety, spillovers and
agglomeration – operate through facilitating imports. Exports are, of course, the means to
affording increased imports, but the gains arise from increased imports. This does not mean
there are no gains from exporting.
Indeed, some countries, both developed and developing, have pursued export-led
strategies (e.g. Germany and Korea).[11] Having access to larger consumer markets encourages
economies of scale and increases the returns to investment and innovation. Exporting may lead
to productivity growth via technology diffusion and knowledge transfer from customers and
competitors abroad. And being able to sell to several different markets can reduce risk, and
provide a way of extending the life-cycle of a product. A pair of last-year’s sunglasses may no
longer be fashionable in one market, but sell extremely well in another market.
Second, each of the above causal chains can occur over different time horizons and
these time horizons will differ across sectors, industries, regions and people. In the short run,
changes in trade policy can have an immediate impact. For example, the tariffs introduced by
the US and China in the on-going trade war have already impacted on prices, output and
workers in both America and China.[12]
