Does free trade benefit everyone?
This claim is advanced so often, and so casually, that one might suppose that it is a basic result in economic theory, a sort of Newton's Law for the international economy.
Although there are certainly lots of people who would like you to believe it, economic theory says otherwise.
"International trade necessarily lowers the real wage of the scarce factor expressed in terms of any good."
This is the take-home message of one of the most heavily cited papers in the theory of international trade -- Wolfgang Stolper and Paul Samuelson's "Protection and Real Wages." (The Review of Economic Studies, Vol. 9, No. 1 (November, 1941), pp. 58-73.)
The practical significance of their conclusion depends on whether you live in a relatively capital-abundant or capital-scarce economy. If capital is scarce, then labor is "relatively abundant," and capital is the "scarce factor" in Stolper and Samuelson's sense of the term. If capital is relatively abundant, then labor is the "scarce factor".
The United States, western Europe and Japan are capital-abundant economies where labor is the Stolper-Samuelson "scarce factor". This means quite simply that labor in these economies experiences a reduction in real wages when trade barriers are reduced or removed. AFL-CIO and other labor organizations are not being stupid or "economically illiterate" when they object to trade barrier reductions that provide no explicit benefits for labor. Why should they consent to policies that leave themselves worse off, especially when a vast majority of the U.S. population gets its income from its labor, and not from their stock and bond portfolios or the rent checks that they cash each month?
Are there significant simplifications in the Stolper-Samuelson theory? Yes. Has economic theory advanced so much since 1941 that the Stolper-Samuelson argument is now either shown to be false or rendered irrelevant? No. While economic theory has come a long way since 1941, the paper continues to be cited in work being produced in 2007. The story now is much more complicated than in 1941, but the basic logic of their argument still stands.
Are there advantages to lowering trade barriers? Yes, of course there are. But that does not mean that everything is rosy for everyone when trade barriers are lowered, or that it is simply a matter of being "patient" while the benefits of freer trade diffuse throughout the economy.