Can Compensation Save Free Trade?

Abstract

Trade reform creates winners and losers. When the median voter loses from reform, free trade is blocked. Allowing the electorate to vote for compensatory wage or employment subsidies may lead to free trade under these circumstances. However, placing compensation on the agenda may also lead to an outcome where trade is blocked when it would have been supported otherwise. The reason for the latter result is that the transfer entailed under compensation is larger than the gains that the winners obtain from liberalization. Seeing the inevitable outcome of a series of votes, this group turns against liberalization.

Keywords: Trade, adjustment, compensation, median voter, political economy

JEL Classification: F16, D72