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More on Trade, Competition, and the Baseless Argument for Compensation

Here’s another letter to Ted Stockton:

Mr. Stockton:

Thanks for your follow-up e-mail.

I disagree with your claim that “free trade requires winners to compensate losers.” On my blog I’ve dealt often with this issue.*  Nevertheless, I here repeat two of the many reasons why I disagree with your claim.

First, imports are just one of many different manifestations of economic competition. Were we to condition all manifestations of competition on the requirement that today’s “winners” compensate today’s “losers” – that is, that today’s “winning” competitors or consumers compensate producers who, in the face of competition today, must work harder to earn their incomes, even if doing so means changing the ways that they earn their incomes – then we would require every producer who is obliged by competition to work harder to be compensated for this inconvenience, regardless of the the source of this inconvenience.

Do you think, say, that if you open a new restaurant you are ethically obliged to compensate other restaurant owners for whatever business losses they experience as a result of your competition?  And do you think that if you are not obliged by the state to pay such compensation to your competitors that the state should then impose punitive taxes on all individuals who dine at your restaurant?  If you answer ‘no,’ then the case for requiring today’s “winners” in international trade to compensate today’s “losers” is without merit, for there is nothing at all economically or ethically unique about competition that happens to come from abroad.

Second and more fundamentally: a cost is not necessarily a loss that is required in justice to be compensated.  No firm has a right to any portion of consumers’ incomes or to continuing consumer patronage.  When a domestic producer loses business to foreign rivals, that domestic producer loses no property to which he had a legal or ethical claim.  When this domestic producer chose to open up shop, he knew (or should have known) that he might suffer losses and might even fail.  So when he chose to enter that line of work he chose to incur this cost because he believed that the prospect of earning sufficiently high profits was worthwhile although not guaranteed.  The cost that this producer voluntarily incurs in order to operate or to work in a competitive environment is not a loss for which he is entitled to compensation.  No consumer who switches her allegiance from this producer to one of this producer’s rivals has unjustly harmed this producer.  No entrepreneur or firm that competes successfully against this producer has unjustly harmed this producer. This producer is entitled to no compensation for whatever losses he incurs because of competition.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

* For example, here, here, here, and here.