UNC’s Karl Smith has posted an argument for protectionist policies (pdf) and invites us to tear it apart. In brief, he reiterates the well-known point that risk-averse agents will forego gambles with positive expected payoff if the gains are sufficiently small. He then applies this behavior to trade:

If the distribution of the gains and losses to trade are uncertain then this imposes a cost on the agents. If the net total gains from trade do not exceed the losses from uncertainty everyone can be worse off.

The document is titled “Losses from Trade,” but if you read the six pages offered by Smith, you’ll realize that this paper is not about trade. His “objections” and “conclusions” sections (the last two pages) don’t even discuss international trade! Smith’s argument applies to all aspects of life – risk aversion simiarly implies that stasis may be preferable to technological advances or institutional shifts that cause small net gains with distributional uncertainty. This line of reasoning is valid as a general argument against dynamism, not trade in particular.

Nonetheless, let’s consider the application. Is trade that uncertain? As Dean Baker has complained, we know that typical US trade liberalization will tend to displace workers in labor-intensive manufacturing, while protecting radiologists and other white collar workers. Globally, French farmers oppose Doha, West African cotton growers favor it, and American doctors have nothing to worry about. The political economy story to investigate is how one interest group defeats another.

Perhaps trade liberalization implies more uncertainty generally. Is there a link to labor market churn? The (Ricardian) gains from trade are a result of reallocating resources across productive opportunities, but such sectoral shifts may be predictable. Do we have reason to believe (from theory or empirics) that lower trade barriers increase the separation rate for all workers?

And does protection imply greater certainty? Perhaps, but I’d have to reflect upon that topic for a while before feeling confident about my answer.

Nonetheless, suppose for now that the government has the ability to preserve the status quo. Risk aversion only rules out trade liberalization that produces small net gains. The implication would then be that we ought to have large spurts of bundled liberalization (WTO rounds, anyone?).

In sum, Dr. Smith has highlighted a potentially promising area of research, but I don’t find his initial sketch very compelling. I’d need to see compelling empirical evidence on the relationships between trade and uncertainty before thinking we needed new theory to explain them.