Tensions between Trade and
Domestic Social Arrangements
International trade creates arbitrage in the markets for goods, services,
labor, and capital. The tendency for prices to converge as a result is the
source of the gains from trade. But trade often exerts pressure toward
another kind of arbitrage as well: arbitrage in national norms and social
institutions. This does not happen directly, through trade in these ''norms''
or ''institutions,'' as with goods and services, but indirectly, by raising
the social cost of maintaining divergent social arrangements. This is a key
source of tension in globalization.
I begin with an extended example, that of child labor in international
trade. I will use this example as a springboard for some generalizations
about how trade connectsor disconnects, as the case may bewith
domestic social norms and institutions. Child labor happens to be a conve-
nient example for this purpose, but of course it is also an important case
in its own right.
Laying Out the Issues: The Example of
Consider the case of XYZ Corp., a hypothetical American mid-sized firm
that manufactures shoes in Pleasantville, Ohio. Under increasing pressure
from encroaching imports and with profit margins squeezed tight, the
firm decides to lay off 300 of its workers in Pleasantville and to subcontract
the more labor-intensive parts of its operation to a local firm in Honduras.
Outsourcing reduces XYZ Corp.'s costs substantially, and profit margins
recover. The laid-off workers in Pleasantville eventually find jobs else-
Institute for International Economics | http://www.iie.com
30 HAS GLOBALIZATION GONE TOO FAR?
where. But many have to move to other towns, and most have to take
By the standards of international trade theory, this is a success story.
International trade allows specialization according to comparative advan-
tage, and the result is a larger economic pie for both the United States
and Honduras. Trade economists would be quick to point out that the
process is u