As an economic historian, I cannot but think back to the origins of the welfare state, which occurred at the end of the first great globalization of 1840-1914. In several recent articles, Michael Huberman has convincingly shown that if anything trade and government intervention were positively related during the late 19th and early 20th centuries. For example, a range of labour market regulations was introduced across Europe, prohibiting night work for women and children, prohibiting child labour below certain ages, and introducing factory inspections. The period also saw the widespread introduction of old age, sickness and unemployment insurance schemes. Crucially, this "labour compact" as Huberman calls it was more advanced in those countries which were more open to trade. There is no evidence of a race to the bottom here: rather, governments in Belgium and elsewhere used the introduction of such reforms to secure the support of workers for free trade.The problem I have with this argument as it's applied today -- that we should secure support from unions for freer trade by giving them domestic concessions -- is that the trade-off may not be worth it anymore. Some level of government intervention is efficient; even Martin Feldstein supports the existence of mandatory Unemployment Insurance. Establishing a UI system in exchange for freer trade is thus a win-win from an efficiency standpoint.
But what if unions demand a massive and ultimately inefficient expansion of the UI system in exchange for supporting marginally more liberalised trade with China? Then the argument becomes quantitative: are the gains from more trade with China greater than the costs of a bloated UI system? It's no longer a win-win. The current version of this argument seems to assume either that the domestic concessions are efficient standing alone, or that their inefficiencies are tiny compared to the efficiency gains from freer trade. That won't always be the case.
The efficiency gains from freer trade are subject to diminishing returns -- as world trade slowly becomes more free, the efficiency gains from further trade liberalisation become progressively smaller. The domestic concessions used to secure support for freer trade are not subject to diminishing returns. Unless politicians progressively scale down the size of these domestic concessions (highly unlikely), then using domestic concessions to secure support for freer trade may well prevent the world from getting to a state of free trade. The inefficiencies of the domestic concessions will eventually outweigh the efficiency gains of further trade liberalisation.
To be clear: I'm not arguing that we're in this position now. Not even close. I'd support significantly more transition assistance for displaced workers, among other reforms. But I'm wary of the argument that the ticket to a state of free trade is domestic concessions.
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