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PAGE ONE Economics


Does International Trade Create
Winners and Losers?
Scott A. Wolla, Ph.D., Senior Economic Education Specialist
Anna Esenther, Economic Education Intern

Domestic: Inside a particular country.
Economies of scale: Factors that cause a
producer’s average cost per unit to fall as
output rises.
Exports: Goods or services that are produced
domestically but sold abroad.
Imports: Goods or services that are produced
abroad but sold domestically.
Productivity: The ratio of output per worker
per unit of time.
Services: Actions that can satisfy people’s
Standard of living: A measure of the goods
and services available to each person in
a country; a measure of economic well-­
being. Also known as per capita real GDP
(gross domestic product).

“It is the maxim of every prudent master of a family, never to attempt to
make at home what it will cost him more to make than to buy. What is
prudence in the conduct of every private family, can scarce be folly in
that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them
with some part of the produce of our own industry.”
—Adam Smith, The Wealth of Nations

Is trade good for Americans? People seem largely divided on the issue. A
2017 poll found that only 52 percent of Americans feel that trade agreements between the United States and other countries are good for the
United States.1 However, unlike the general population, economists are
overwhelmingly supportive of trade. A 2014 poll found that 93 percent
of economists agree that past major trade deals have benefited most
Americans.2 Given the consensus among economists, why is international
trade, and the free-trade agreements that make it possible, so controversial?
Many people suspect that international trade operates as a zero-sum game.
That is, they think it is like a sporting event—a competition with rules that
ends with a winner and a loser. Specifically, people sometimes think that
if our trading partners are gaining through international trade, the United
States must be losing. In this view, exported goods represent a “win” for
the economy and imported goods represent a “loss” for the economy.
This idea is nothing new; it dominated economic and political thought
from the sixteenth to eighteenth centuries. Known then as mercantilism,
it led to government policies that encouraged exports and discouraged
imports. One of Adam Smith’s purposes in writing The Wealth of Nations
(which helped establish economics as a distinct academic discipline) was
to dispel the zero-sum game myth behind mercantilism.

The Costs and Benefits of Trade
In spite of people’s apprehension about trade, both imports and exports
are at all-time highs (see the figure). As such, it’s important to understand
why economists believe trade is good. Think back to the thriving trade in
your elementary school cafeteria. Perhaps a friend across the table offered
November 2017	

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Federal Reserve Bank of St. Louis |


Imports and Exports on the Rise

SOURCE: FRED®, Federal Reserve Bank of St. Louis;, accessed
September 9, 2017.

to trade her bag of grapes for your stack of crackers. You
considered the costs and benefits of the transaction: The
cost of the trade was the stack of crackers you would give
up, and the benefit of the trade was the bag of grapes you
would gain. Of course, you traded only if the perceived
benefits (grapes gained) outweighed the perceived costs
(crackers lost). And your friend agreed only if the perceived
benefits (crackers gained) outweighed the perceived
costs (grapes lost). Here is the economic lesson: For trade
to occur, it must make both parties better off. This is a
positive-sum game, not a zero-sum game, because both
sides gain. However, this does not mean that everyone is
better off. The costs and benefits of trade extend beyond
the actual buyer and seller in the transaction. And, once
third parties are included, it is clear that trade can create
winners and losers.

The “Winners”
Just as the cafeteria trade demonstrated, both buyers
and sellers benefit from trading. With international trade,
the winners include consumers (buyers) and domestic
companies that export goods (sellers). First, let’s discuss
the benefits to buyers. Consumers see the benefits of
trade in terms of variety and price. International trade
ensures that consumers have access to a larger variety of
goods and services. Think about some of the imported
goods and brands that you buy on a regular basis. If
imports were not available, your options would be more

limited than they are now. In addition, many people buy
imported goods and services when the prices of those
imports are lower than the prices of domestic goods and
services. This often occurs when producers in foreign
countries can produce these goods and services at a lower
cost than domestic producers. These lower costs often
translate into lower prices, which benefit consumers by
stretching their purchasing power. In addition, the competition provided by imported goods provides incentives
for domestic producers to keep improving the quality of
their goods while keeping prices low.
Domestic sellers also benefit from trade. Domestic companies that export have the world as their marketplace,
not just the domestic economy. Producing for this larger
market gives them the opportunity to grow and produce
on a larger scale. These economies of scale enable them
to take advantage of efficiencies and produce goods at
a lower average cost. The lower production costs help
make the companies more competitive and can result in
lower prices for consumers.
Benefits of trade extend beyond the immediate buyers
and sellers. Countries that engage in international trade
benefit from economic growth and a rising standard of
living. This occurs in two ways. First, trade gives countries
access to physical capital (technology, tools, and equipment) that they might not produce domestically. This
physical capital often results in increased productivity,

PAGE ONE Economics®
which is a key driver of economic growth and a rising
standard of living within a country.3 Second, access to
global markets also increases export opportunities for
developing economies. For example, China has become
a manufacturing powerhouse4 and India has become a
leader in exporting services.5 Both countries have experienced growth and development that might not have
happened without access to global markets. Economists
suggest that trade provides an avenue for the poorest
nations to escape poverty. Recent research suggests that
the removal of trade barriers could close the income
gap between rich and poor countries by 50 percent.6

The “Losers”
At its core, international trade is similar to the cafeteria
exchange—both buyers and sellers trade because both
benefit from the transactions. Third parties, however,
need to be taken into account because some are worse
off from international trade. The most obvious third-party
losers are companies that sell products that cannot compete in a global marketplace. These companies must find
ways to make their products competitive or produce
other products, or they risk going out of business. When
businesses shut down, people lose jobs. This is painful
for workers because many of them must learn new job
skills to find new employment.

Net Benefits of Trade
Economists find that—after taking both the winners and
losers into account—trade has net benefits for society.
In other words, the benefits outweigh the costs. This does
not seem obvious to many people because the costs are
often more visible than the benefits. For example, it is
relatively easy to identify businesses or industries that
have shut down because of trade. Likewise, it is relatively
easy to identify people who have lost jobs in those industries. Perhaps you know someone who has lost a job in
this way. However, it is more difficult for consumers to
identify how much cheaper their car, clothing, and food
are because of international trade. In addition, the lower
prices paid by consumers and businesses mean they have
more money to spend on other goods and services. As a
result, there are businesses that have experienced more
growth as a result of that spending, which would not
have happened without trade. But, again, those gains
can be difficult to identify.

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Types of Trade Barriers
Trade barriers, as the name might imply, are policies designed
to make it more difficult to conduct international trade. These
are often referred to as protectionist policies because they are
intended to protect workers in industries that are threatened by
imported goods.
Tariff refers to a tax imposed by a nation on an imported good.
This tax increases the price of the imported good and can give
the competing domestic good a relative price advantage.
Import quota refers to a limit imposed by a nation on the quantity
(or total value) of a good that may be imported during a given
period of time. Because this quota limits the number of imported
goods, it reduces the potential damage to threatened domestic
Export subsidy refers to a government payment to a domestic
producer that reduces production costs, which enables domestic
producers to charge a lower price (and sell more exports) in world
Voluntary export restriction refers to self-imposed limitations
on the number of products shipped to a particular country. Nations
voluntarily impose these limits on themselves to reduce the
chances of other countries setting up trade barriers that might
be more damaging.

Policy Solutions
Those who suspect that trade might be hurting the economy sometimes propose “protectionist” measures, which
are policies designed to protect workers from foreign
competition (see the boxed insert). While these measures
might save some jobs and industries, when trade volume
is reduced, so are the benefits of trade. Economists often
suggest policies that preserve the benefits of trade while
addressing the costs, by compensating those who lose
from trade. For example, many economists suggest that
international trade should be left largely unregulated
but that government should subsidize job-skills training
programs for workers who have lost their jobs because of
trade. The Trade Adjustment Assistance Program administered by the U.S. Department of Labor operates on this
idea.7 In this way, the benefits of trade are preserved, but
policy addresses the needs of those negatively affected
by trade.

People trade because it will make them better off. This
is true in school cafeterias as well as in the global marketplace. Trade enables countries to experience economic

PAGE ONE Economics®
growth and a rising standard of living by increasing
access to physical capital and export markets. However,
not everyone is better off as a result of international trade.
Some domestic businesses and industries fail in the face
of foreign competition, which results in job losses for
workers. Economists suggest, however, that policy solutions that impose trade barriers are harmful to the economy. Rather, they propose policies such as those that
provide job training programs to assist those displaced
by trade. n

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Jones, Bradley. “Support for Free Trade Agreements Rebounds Modestly, But
Wide Partisan Differences Remain.” Pew Research Center, April 25, 2017;

Responses are weighted by each expert’s confidence. See IGM Forum. “FastTrack Authority.” November 11, 2014;

Santacreu, Ana Maria. “Convergence in Productivity, R&D Intensity, and
Technology Adoption.” Federal Reserve Bank of St. Louis Economic Synopses,
2017, No. 11;

Wen, Yi and Fortier, George E. “The Visible Hand: The Role of Government in
China’s Long-Awaited Industrial Revolution.” Federal Reserve Bank of St. Louis
Review, Third Quarter 2016, 98(3), pp. 189-226;

Kapur, Devesh and Ramamurti, Ravi. “India’s Emerging Competitive Advantage
in Services.” Academy of Management Perspectives, May 2001, 15(2), pp. 20-32.

Mutreja, Piyusha; Ravikumar, B. and Sposi, Michael J. “Capital Goods Trade and
Economic Development.” Working Paper No. 2014-012, Federal Reserve Bank of
St. Louis, February 2016;

U.S. Department of Labor Employment and Training Administration. “Trade
Adjustment Assistance Program for Workers Program, Fiscal Year 2016.”, accessed
September 9, 2017.

Please visit our website and archives for more information and resources.
© 2017, Federal Reserve Bank of St. Louis. Views expressed do not necessarily reflect official positions of the Federal Reserve System.

PAGE ONE Economics®

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Name___________________________________ Period_______
Federal Reserve Bank of St. Louis Page One Economics ®:
“Does International Trade Create Winners and Losers?”

After reading the article, complete the following:
1.	 Explain why international trade is not a zero-sum game.

2.	 International trade does not necessarily make everyone better off—there are winners and losers.

a.	 Who are “winners” from international trade?

	 b.	 How can the benefits of international trade extend beyond the buyers and sellers in trade transactions and 	
		 benefit a whole country?


c.	 Who are “losers” from international trade?

3.	 Why is it easier to identify the costs than the benefits of international trade?

4.	 Trade barriers are often suggested as a method of protecting workers from foreign competition.

a.	 Why do economists generally advise against using trade barriers?


b.	 What is one way the government helps those who are harmed by international trade?

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