The Problem With Free Trade: There Are Always Losers

If you join a poker game and can’t identify the “mark,” then chances are, you’re it! The “mark” is the person at the game who is less experienced, or perhaps is given to reckless betting. By including this player in the game, everyone else has an opportunity to walk away a winner.

But don’t lose sight of the bigger picture. Not everyone is a winner, and typically someone ends up the big loser!

The same principle works when countries get together for free or open trade. Everyone talks about how great it will be, how much their economies will grow, about efficiencies and new opportunities. But they almost never talk about the people who will lose.

Believe me, there are always losers.

Adam Smith’s famous book The Wealth of Nations laid out the case for free trade. If one nation is really good at making shoes, and another is really good at making cloth, then when they exchange goods the shoemakers can focus on what they do well and so can the weavers.

In this exchange, the cobbler nation shouldn’t make cloth and the weaving nation shouldn’t make shoes. By specializing on what they do best, each nation can better hone its skills while enjoying a bigger market for its product as well as have access to better goods from abroad. Everyone wins, right?

Wrong. Everyone benefits, but some still lose.

Specialization is at the heart of free trade. Companies that are really good at something should do more of that, using their abilities and resources to be as productive as possible. If they don’t have to work on a bunch of other things at which they lack expertise, then companies can boost their efficiency.

At the same time, consumers in each country benefit from greater selection and, presumably, lower prices. Ideally specialization allows companies and countries to lower costs of production, thereby offering clients better goods and better deals.

So countries win, companies win, and consumers win. But then there is the pesky case of displaced workers.