Principles of Equity
Abstract and Keywords
This chapter elaborates and defends three basic principles of structural equity. A first requires that “losers” be compensated, in light of a proposed general conception of when a person or social class is harmed by trade. The second and third principles concern how the gains of trade are distributed, across and within societies. For reasons of “priority for the worse off,” departures from equality of gain are justifiable when unequal gains flow to developing countries. The chapter also challenges appeals to utilitarianism, economic liberty, legitimate expectations, equality of opportunity, fair-risk imposition, and “cosmopolitan” conceptions of fairness.
Keywords: harm, unemployment, compensation, transitional protections, social insurance, economic liberty, legitimate expectations, strict equality, priority for the worse off, risk imposition, risk assumption, reciprocity of risk, equality of opportunity, cosmopolitanism
We now defend three basic principles of structural equity. Each principle governs a different general socioeconomic tendency.1
The first principle concerns the socioeconomic harms of trade, such as unemployment, wage suppression, and income volatility that diminishes lifetime savings. According to
Collective Due Care: trading nations are to protect people against the harms of trade (either by temporary trade barriers or “safeguards,” etc., or, under free trade, by direct compensation or social insurance schemes). Specifically, no person’s life prospects are to be worse than they would have been had his or her society been a closed society.
The second principle concerns the national income gains of trade and how they are distributed among countries.
International Relative Gains: gains to each trading society, adjusted according to their respective national endowments (e.g., population size, resource base, level of development), are to be distributed equally, unless unequal gains flow (e.g., via special trade privileges) to poor countries.
The third principle concerns how shares of national income are distributed domestically.
Domestic Relative Gains: gains to a given trading society are to be distributed equally among its affected members, unless special reasons justify inequality of gain as acceptable to each (as, (p. 204 ) e.g., when inequality in rewards incentivizes productive activity in a way that maximizes prospects for the worst off over time).
Taking for granted the moral/interpretive claims defended in earlier chapters, our present task is pure moral argument. Each principle, we argue, is a principle that no one can reasonably complain of, as compared to a familiar range of alternative principles for the same specified regulative roles. We focus on principles that are less egalitarian than our three principles, but also consider more egalitarian “cosmopolitan” principles in closing.
1. The Unfairness of Harm
The global economy does significant harm. That is to say, whatever its benefits in the long run, people often suffer serious specific forms of socioeconomic injury, over some period of time, as a result of being exposed to global economic forces. For example, many developing-country farmers are further impoverished for their exposure to lavish rich-country agribusiness subsidies. Some are made worse off by a historical baseline: they now fare worse than at earlier times, perhaps having been cast into destitution from an earlier stage of life lived at subsistence levels, with little reasonable hope of compensating gains within their lifetime. (Think of Mexican corn farmers thrown into destitution after NAFTA flooded Mexico with highly subsidized U.S. corn.)2 Others fare worse in subjunctive-historical terms: many who remain at the same level of subsistence would have been better off had their society instead been closed to trade at some earlier stage of their lives. The choice to free trade worsens their condition; they do not see the standard of living they would have enjoyed had domestic markets been open to them but closed to the outside. Moreover, the parties harmed (in either historical or subjective-historical terms) often have scarce opportunities to avoid injury. They may fare only slightly better, for example, when forced to move to the city, where unemployment may be high. And such cases are hardly rare. In developing countries that lack strong infrastructure (p. 205 ) and social insurance institutions, resources—whether labor or land—are often not readily redeployed.3
Although it is especially problematic that such displaced workers are often desperately poor, the harms of trade often befall advanced-country workers as well. Low-skilled, uneducated workers (and especially women) are highly susceptible to repeated and persistent unemployment as trade reallocates resources to higher-skilled, export-oriented industries. High-skilled work is also increasingly affected as firms “outsource” or “offshore” jobs to foreign firms or subsidiaries.4 Even when the total number of jobs in the economy remains roughly constant, as it does in normal times according to economic theory, this does not imply that displaced workers are readily retrained and reemployed in the industry to which their jobs have moved. Willing workers often face a difficult and perhaps extended period without stable income, along with income volatility that hinders long-term savings and prospects for eventual retirement. They may thus fare worse than at earlier stages of their lives, or simply fail to see gains they would have reaped under greater market protection. By one estimate, displaced U.S. workers see a permanent loss of between 8 percent and 25 percent of pre-displacement income, even when continuously employed (with bouts of unemployment bringing additional losses).5 Wages can stagnate for very long periods of a worker’s able-bodied years. In the United States during 1980–2009, for example, huge net income gains, which accrue in part to trade, have been distributed away from the bottom and lower-middle of the income distribution, despite a modest but functioning social safety net.6
The harms of trade seem to raise a significant issue of fairness, in developing and advanced countries alike. As we emphasized in Chapter 2.6, even the standard economic argument for free trade (p. 206 ) seems to implicitly assume that it would be unfair not to compensate “losers” with some share of the “winners’” gains. But how should we account for this thought? The equal gains benchmark defended in Chapter 6 presumes against harmful policies that would lead to inequality in endowment-adjusted national gain. But this is at most part of the story: the benchmark concerns national income and so says nothing about the harms that might befall “losers” within trading societies. Strictly speaking, a member of a trading society cannot gain or lose in national income. And in any case, whether or to what extent any member will share in a national income improvement is a separate question: as our examples suggest, many may mainly see worsened prospects, over considerable periods of time, even when their societies gain from integration overall.
If constructive argument were narrowly limited to the good a practice is intended to create (in this case, national income augmentation), we would have to appeal to an external principle to capture the unfairness of harm. Our characterization of the “internal” is more inclusive. While the central, organizing aim of the practice fixes the primary “currency” of distribution, further consequences can be admitted as relevant for argument about what socioeconomic outcomes are fair. Specifically, we may assess any socioeconomic outcomes of a practice in terms of what those affected could reasonably accept or reject, and so justify a regulative principle for trade practice without assuming any further principles, external or otherwise. Among potential objections to the practice are considerations of harm that lead to a principle such as our principle of (Collective) Due Care. Thus trade practice can be unfair, in fully internal terms, when it creates the good of national income augmentation at the expense of those made worse off.
Consider the suggested argument in greater detail. To begin, suppose certain workers will suffer protracted unemployment, in a weakened import-sensitive industry, merely for the sake of giving a comparably sized gain to other workers, for instance, a comparable job in an enhanced export-industry. Assume that the parties are (p. 207 ) otherwise similarly situated, that there are no further relevant benefits or costs to society, and that the imposition is entirely avoidable (by trade barriers or, under free trade, compensatory arrangements). The disadvantaged parties can in this case reasonably object that they are made worse off. For it is hard to see how those potentially benefited would have a comparatively powerful objection to protecting the losers from a worsened condition. If trade is freed and losers are compensated, they may still benefit, even if compensation cuts into their gains. And even if the harm is simply prevented, by retaining or imposing a trade barrier, they may be no worse off than before; they simply are not afforded a benefit. Other things being equal, the objection “I am made worse off” is more powerful than “I could have been better off,” in which case either market protection or compensation of the loser carries the day. In other words, special presumptive weight is to be accorded to ways someone’s condition is worsened, relative to what it was at some previous time (i.e., by a historical baseline of comparison), or what it would have been had the policy change in question not occurred (by a subjunctive-historical baseline). At least when other things are equal, worsenings are not on the same footing as mere opportunity costs, or ways one could have done better although one’s condition is not worsened in either of the above ways.
This presumption against worsening also seems to retain its force even when other things aren’t equal, say, because potential benefits and burdens aren’t of comparable significance. It seems unfair to worsen someone’s condition by $1,000 simply to give someone else $1,500 (assuming this is a moderately greater and so not strictly comparable gain). This may be fine when the beneficiary would see a dramatically larger gain, when the harmed person is very well-off, or when the would-be beneficiary is very poor. But some such weighty considerations seem required. We return to such special cases momentarily.
These are indeed special cases; the general trade situation does not involve comparable benefits and harms, but in a way that reinforces rather than overturns presumption against harm. The harm to displaced workers is usually much greater than the benefits for any other particular affected parties. Low-skilled workers tend to bear severe employment hardships, whether protracted unemployment or permanent income loss while fully employed. Newly employed workers in export-industries see real but smaller employment gains, while each consumer, taken by him or herself, (p. 208 ) sees only a slow and modest rise in standard of living over time. Although the displaced worker will also benefit as a consumer from cheaper goods and services, this will hardly make up for a life of unsteady employment or stagnating wages, especially when it diminishes income and savings over a lifetime.
Now, none of this is to deny the significance of freed trade to would-be beneficiaries. If compensation can and will be arranged, then losers cannot reasonably object to free trade (at least on grounds of harm; relative gains might remain a concern—of which more later). It won’t be reasonable to insist on protection merely to avoid a specific compensable injury such the loss of a particular job. Why should others be asked to forgo the benefits of free trade if no one is ultimately made worse off? Accordingly, when losers can reasonably complain of having their condition worsened, the objection will be that they are made worse off over the course of their whole lives for their society’s exposure to the global marketplace. Specific forms of injury are presumptively unfair, but the unfairness can be rectified when suitable compensatory benefits are provided (at earlier or later stages of life).
We thus have an initial argument for our principle of Due Care. The losers from freed trade can reasonably reject any principle weaker than Due Care, which does not demand either market protection or compensation over time. Their complaint against being harmed, we have in effect argued, carries the day. The potentially advantaged parties could reasonably complain of being asked to forgo the benefits of freed trade if no one is made worse off. But they cannot reasonably insist on such benefits at the expense of those made worse off.
2. Who are the “Losers”?
This initial argument is forceful but incomplete. Not everyone who suffers a loss as a result of trade would seem to have a claim of fairness to compensation. Should we also compensate the oligarch whose monopoly is undermined by foreign competition, or the rich owner, manager, or shareholder in a threatened import-oriented industry who may lose out from freer trade but remain rich and secure? Pareto efficiency requires that such people be paid off. As a claim of fairness, however, this seems wrong. Less well-off members of society can reasonably object to having lesser gains from trade (p. 209 ) simply so that the privileged can be made whole. Because they are already very well-off, ways their condition is worsened (they take a “haircut”) are less significant for them than the opportunity cost to less well-off fellow citizens, especially to the least well-off, who could be compensated for losses or see still greater gains.
We may account for this as follows. In general, the relatively privileged tend to be not only rich but net beneficiaries of life in an open society. Losses to them may thus leave them unharmed overall. There may of course be exceptional cases in which the privileged are made worse off overall. These can be handled, as just suggested, by supplementary considerations of fairness for extenuating circumstances (under a “special justification” clause implicit in Due Care): the privileged will in any case lack a reasonable objection to being disadvantaged if this provides significant benefits to people who are less well-off, especially given the substantial opportunities for adaptation afforded by their greater wealth. Abolition of the infamous British Corn Laws made wealthy landowners worse off, and they loudly complained, but this was not especially reasonable. They remained in a position of safety and comfort, while poor workers ate cheaper bread.7
But who, then, are “losers” of the right sort, and on what grounds? We will suggest three relevant grounds: harm to lifetime prospects, acceptable risk, and burden sharing. The first two are expressed by Due Care, suitably elaborated. The third and perhaps the most important, which we take up separately later, is expressed by the principle of Domestic Relative Gains.
According to Due Care, the trade relationship is structurally equitable only when no person’s life prospects are worse than they would have been had his or her society been closed to trade.8 (p. 210 ) We assume it will rarely be coherent (or relevant, if coherent) to ask how a person would have fared in the absence of any society whatsoever. Yet in real-world cases the comparable question about a person’s society is all too apt. As suggested, people suffer severe and prolonged disadvantages. Although these might in theory be compensated by benefits at other periods of life, the case must be made that this will actually come about. According to Due Care, manifest forms of injury must be directly compensated (to a best approximation), unless the preponderance of evidence suggests that sufficient benefits have been or will be reaped at some other time of life. If we don’t arrange direct compensation for the impoverished developing-country farmer, or the advanced-country worker who sees unemployment or stagnating wages over many decades, there must be good evidence that other arrangements will somehow ensure compensatory benefits over the course of their lives.
This is potentially consistent with the familiar argument that the global economy is rarely if ever harmful in the bigger scheme of things, because serious specific injuries are automatically compensated over the long haul. Ultimately, it is sometimes suggested, cumulative gains buoy the general prospects of most every society and class over enough time.9 As we will understand Due Care, however, this argument is more difficult to sustain than usually assumed.
We agree that policy matters do often require a more general perspective. Although we have so far spoken of disruption in the lives of specific individuals, we take such examples to be relevant insofar as they track (1) representative groups or social classes, rather than specific individuals, and (2) the longer-term, lifetime prospects of those people, rather than shorter-term harm that may befall them, which may in fact be compensated at other (p. 211 ) times. Even so, however, the suggestion of automatic compensation, over the longer haul, only shows that it may be possible to adopt a generalized perspective from which everyone benefits. It does not show that this is the appropriate generalized perspective from a fairness point of view. The pertinent question is whether some more specific perspective might support a morally relevant notion of harm. And there is such a perspective: even if we allow compensation over a person’s life, the supposedly compensating benefits must come over the course of his or her life, and so not before the person is born, or after he or she dies. Accordingly, at least one relevant benchmark is as follows: given a manifest specific injury, in some particular context, we compare the person’s condition with how well his or her life would have gone had his or her society (perhaps gradually) chosen autarky roughly around his or her birthday. (We avoid “non-identity problem” worries insofar as we focus on a given person’s social class, whether or not it is the numerically same individual. The person’s birthday corresponds to his or her generation’s entry into the world.)
So, for example, take a person (or social class) whose condition is materially worsened partly as a result of global economic forces (e.g., the Mexican corn farmer impoverished by NAFTA). We may in theory reach any of three conclusions about how this person fares overall:
1. The injured person’s life prospects would have been better under autarky, in which case he or she is made worse off, overall, for life in an open society.
In this case, the incurred material injury is not duly compensated, and special arrangements are required by Due Care. Alternatively, it may instead be true that
2. The injured person would have fared similarly, in which case he or she is no worse off; or
3. The injured person would have been worse off under autarky, in which case he or she has benefited, overall, from life in an open society.
(p. 212 ) Now, such grand counterfactuals of course create enormous epistemological difficulties. Setting those aside for the moment, it seems an open possibility in theory that some people (some social classes) fare worse than they would have had their society been closed to trade over the course of their lives. It would surely be rash to insist that no one or hardly anyone would have fared better had their country of lifetime residence never exposed them to the vicissitudes of the global economy and instead remained autarkic starting early in their lifetime. Such judgments of overall harm are no less suspect, in theory, than the judgment being assumed when people manifestly harmed by a specific disruptive policy change are said to nevertheless be a net beneficiary from life in an open society. The judgments in both cases are of the same general kind.
Application in practice does matter, however, so the epistemological difficulties are not to be ignored. But the suggested “long view” falls short on epistemological grounds as well. As we have just elaborated Due Care, when someone suffers a specific injury as a result of exposure to the global economy, as people routinely do, the specific harm is justified only when the preponderance of evidence would support (2) or (3); we need pretty good reason to think the incurred injury is in fact being compensated for at some other stage of life. But it won’t do, then, to point to gains a country has reaped in the distant past, before the person in question was born, let alone to vaguely presume general benefit or hold solemn faith in free markets. The honest truth is that we will often be at best uncertain whether a good case for (2) or (3) can be made, in which case we cannot justifiably conclude, or even safely presume, that the manifest specific injuries are in fact being indirectly compensated for. Uncertainty means that more direct and more certain compensation is necessary. For when people are manifestly injured by the global economy, their potentially reasonable objection won’t be answered by saying: “although we admit compensation is necessary in theory, we can’t confidently establish whether you are being indirectly compensated for your injury. So you are on your own.” The burden of justification runs the other way around: Due Care requires either market protection or a social insurance scheme, unless compensation is not conjectured but shown. That is not to say that the preponderance of reasons won’t weigh in favor of (2) or (3) in many cases. The point is that the case must be made for different representative groups and cannot be generally presumed.
(p. 213 ) 3. Social Insurance as a Condition of Fair Trade
When the required case cannot be made, Due Care offers a solution consistent with free trade: simply adopt a compensatory social safety net. In developed countries, feasible arrangements might include direct payments and/or social insurance facilities, in the form of unemployment and wage insurance, pensions, education subsidies, job training and placement, employment-stimulating public investment, and so on. In developing countries, institutional schemes are more difficult to establish and maintain, especially in informal sectors, but appropriate measures nevertheless include public investment, government purchase of goods and services, temporary revenue-generating trade barriers, infant industry protection, and any feasible ways of supporting people directly (e.g., paying families for each day their child attends school).
Of course, developing countries often cannot pay for robust measures by themselves, whether from their own gains of trade or otherwise (especially since tariffs are often a chief source of public revenue). A crucial implication of Due Care, however, is that the responsibility to fund and establish compensatory measures does not stop at a given country’s borders.10 As argued in Chapter 3.5, the international practice of market reliance generates collective responsibilities, for all trading countries. So when a country cannot afford the necessary compensatory schemes, this does not show that the schemes are prohibitively expensive; it only shows that trading partners are obligated to shift the cooperative surplus so that the shared market reliance practice leaves no one worse off.11 Insofar as countries will be unreliable in unilaterally providing the (p. 214 ) necessary support, structural equity in trade supports the establishment of relatively autonomous international institutions for the maintenance of domestic social safety nets (as enforced, if need be, within the WTO). If GATT duly provided policy space for each country to bolster social insurance schemes in the face of increasing openness and external risks,12 fairness also requires that countries both poor and rich stably develop or retain the means for doing so (e.g., through development assistance or special loan facilities). (The appropriate slogan is then not “trade not aid” or “trade as aid” but rather “aid as fair trade.”)
When such compensatory schemes are not feasible, free trade will not be fair. Appropriate trade barriers will be justified as a “next-best” solution. Such barriers will presumably often be temporary (e.g., developing countries should rely on tariff revenue only until they have established an adequate alternative tax base). But some barriers may well be permanent fixtures, even in developed economies. As Dani Rodrik explains, “in an economy like the United States, where average tariffs are below 5 percent, a move to complete free trade would reshuffle more than $50 of income among different groups for each dollar of efficiency or ‘net’ gain created! … It’s as if we give $51 to Adam, only to leave David $50 poorer.”13 In these cases, compensation cannot be paid from the gains of trade but require the general public purse or international support. When trade is already relatively free, fully free and fair trade may or may not be worthwhile.
This highlights the importance of determining what level of social protection is required for fairness. If only modest levels of social insurance are needed for fairness, fully free trade will be easier to justify. This is arguably the real force of the epistemic difficulty of establishing who has been harmed and by how much: if that is uncertain, it is hard to say what level of compensation is necessary. Two further considerations do suggest, however, that fair levels of social support will not be modest.
First, Due Care carries a risk premium. Someone who wins $1,000 by betting his house in roulette is not clearly made better off for the gamble; the gain may not be enough to justify the high risk of very significant loss. Likewise, a social insurance scheme (p. 215 ) will not prevent net loss to a person unless the level of benefit is sufficient to justify exposure to significant risks of disruption, instability, and impoverishment. One will not “break even” unless one sees a good measure of gain.
Second, and to anticipate somewhat, our second proposed principle, Domestic Relative Gains, presumptively supports social protection at high levels. Background differences in wealth make a large difference to one’s vulnerability to foreign market forces. The affluent will have a much easier time managing disruptions (in employment or savings) than those in the middle and especially the lower classes. If the less well-off bear the burden of a society’s overall enrichment, it is not fair for the affluent to enjoy all or most of the gains. That the least well-off so often chiefly bear the burden of societal benefit from trade gives them an especially weighty claim to greater shares. So, for example, because income volatility is more likely to diminish the displaced, low-skilled worker’s ability to save and ultimately retire, wage insurance, beyond mere unemployment insurance, is arguably only fair. (One is then guaranteed one’s previous wage level, in one’s next job, as opposed to mere post-employment pay for a period of time.) In this way, fair social insurance schemes will be generous beyond the requirements of Due Care, even with its suggested risk premium. And for all of our focus on harm, we need not suppose that it is the central or most significant fairness issue: it is the beginning, not the end, of fairness. Even if we found few actual cases in which an idea of “harm” is appropriate, we’d still have to reckon with the way the burdens of social cooperation are being distributed within society. We return to this later in the chapter.
4. Aggregation, Fair and Unfair
We should pause to discuss a familiar alternative principle to Due Care. It is less demanding, in the sense that it would allow trade to irreparably harm workers, whole countries, or even whole regions of the world. According to
(p. 216 ) According to utilitarianism, compensation of losers might well be necessary in practice, but only insofar as this turns out to be a necessary means of promoting the welfare of people taken as an aggregate. It is not required as a matter of principle.
utilitarianism: the practice of trade is structurally equitable when, and only when, it is arranged so as to maximize global welfare overall.
Yet compensation for serious harm does seem a matter of principle: those who suffer specific injury can at least reasonably insist on substantial mitigation, if not full compensation, even if aggregate welfare is diminished, and especially when this merely cuts into consumers’ levels of gain. It is not fair for workers to suffer severe unemployment burdens simply for the sake of small benefits to millions of consumers which add up to a net welfare improvement. Compare the potential countervailing objections. The severe unemployment burden gives the displaced worker a powerful complaint against utilitarianism as a regulative principle for international trade practice, and in favor of a principle such as Due Care. But any given consumer, taken separately, will have relatively slight grounds for countervailing complaint, since a given consumer merely risks seeing a slower rise in standard of living. Much the same point would hold if the full liberalization of capital turned out to maximize overall welfare despite the occasional country’s losing a decade of two of growth as a result of a financial crisis (as, e.g., in the “lost decades” in Argentina or Japan). Insofar as capital controls would prevent this, they seem only fair, even if net welfare gains are forgone. Likewise, it could in theory turn out that a highly discriminatory system of trade—for example, high barriers against most of the developing world, but free trade with a few populous developing countries such as India and China—maximizes poverty reduction and welfare overall. The excluded part of the developing world could reasonably object to having its condition worsened, especially if the aggregate welfare gain resulted merely because comparatively poor people see tiny improvements in huge numbers.14
(p. 217 ) We have so far ignored pure aggregative reasoning and instead compared the positions of different (representative) people one by one. Although that is in accord with our basic account of structural equity reasoning in Chapter 5.4, it may then seem little surprise that utilitarianism comes out as objectionable. If we have so far cited cases of “unfair aggregation,” the relative strength of utilitarianism is that it easily explains other cases of “fair aggregation,” that is, cases in which the number of beneficiaries does appear to matter from a fairness point of view. Might such cases show that Due Care is on balance unjustified? Recall, for example, our claim that it is perfectly fair for freer trade to worsen the oligarch’s life prospects, by undercutting his monopoly rents for the sake of the public good. We suggested a non-aggregative rationale for this—his plight can be worsened so that less well-off people might gain. But it might also seem to have an aggregative rationale instead: large overall gains, though small to any one but shared by millions, can justify significant losses to an unlucky few. Or to take a still clearer case: when losers cannot be feasibly compensated, and autarky is the only way of leaving no one harmed, we might think trade should be freed anyway, for the public good. But are we not then assuming an aggregative idea of the “public good” which takes into account that fact that so many people are likely to benefit?
We allowed in Chapter 5.4 that pure aggregative reasoning might be appropriate from a fairness point of view when there is an especially compelling case for it. The question, then, is whether we should admit aggregation in a way that grounds an objection to our principle of Due Care. Our answer is that it is at best unclear why we should, and so that we do not have the compelling case required.
The matter is unclear for several reasons. First, harm can be justified in personalistic terms, without purely aggregative reasoning. Even when poor people are harmed by freed trade, this may be justifiable to them if much greater benefits flow to other (p. 218 ) comparably poor people. (Assume for the sake of argument that a compensatory scheme cannot be established.) Earlier we said that one can reasonably complain of being harmed merely to give a comparable benefit to another comparably situated person. But in the present case, the persons are harmed in order to give a much greater benefit—perhaps even escape from poverty—to other persons. In this case, the would-be beneficiaries do seem in a position to mount a reasonable complaint against autarky. (Though when compensation schemes are in fact feasible, those harmed can also reasonably insist on them, as argued earlier.)
Second, harm can be justified in aggregative but personalistic terms. When losses to some are seen as comparable in significance to gains to a larger number of others, the larger number of people “breaks the tie.”15 Although worsenings will not be comparable in significance with mere benefits, per se, the argument can add the further claim that they become comparable under special circumstances, for instance, when the benefit is large and the worsening modest.
Third, we may admit purer cases of aggregation as extenuating circumstances. Our principles concern the fundamental nature of the global economy and its organization over the medium to longer haul. We can conceivably admit more specific, temporary circumstances as extenuating conditions, assuming the relevant “extenuating” versus “normal” circumstances can be plausibly specified (e.g., an urgent national security threat which implicates trade). Utilitarianism presents an attractive alternative to Due Care (or any of our three principles) only when it has divergent implications at our general level of inquiry that seem to tell against our more egalitarian ideas of fairness. But it is hard to see what these implications might be. If anything, utilitarians will tend to downplay such divergence over the longer haul on general empirical grounds. It will be said that protective barriers against a whole continent will not tend to maximally reduce poverty; that the frequency of severe financial crises will hobble an aggregative cost-benefit argument in favor of aggressive capital liberalization; and that growth (and welfare) will tend to be optimized by strong social safety nets (if only for reasons of “diminishing marginal utility”).
The key question, then, is our original one: whether losers should also be compensated as a matter of principle. Here utilitarianism (p. 219 ) diverges from Due Care, but to its peril. As suggested, we would not think free trade could be justified as fair if it irreparably harmed social classes, whole countries, or whole regions of the world. And this just shows that, insofar as we nevertheless find ourselves assuming that free trade is justified “for the good of all,” utilitarianism is not our assumed ground.
5. Domestic Relative Gains
We have so far suggested that structural equity requires “compensating the losers” for several reasons: reasons of harm to lifetime prospects, of acceptable risk, and of burden sharing. We saw that the Domestic Relative Gains principle stands behind the idea of fair burden sharing. It does so, we are suggesting, as an internal principle of fairness in trade. Again, considerations of harm count as internal concerns although they are only indirectly related to trade practice’s aim of augmenting national income. In much the same way, our conception of internal argument allows us to consider how or whether national income is itself shared among the members of a trading society. The distribution of national gains must be reasonably acceptable to them if international trade practice is to be fair.
Domestic Relative Gains is more demanding than Pareto efficiency. As discussed in Chapter 2.6, Pareto efficiency is indifferent to distribution: so long as no one is made worse off as a result of trade, a few people may take the lion’s share of the national gains. Domestic Relative Gains explains how this might be unfair with a presumption of equality of gain. Assuming each society has received its fair share of national gains, Domestic Relative Gains insists that inequality of gain among a society’s members is unfair, barring reasons that this should be acceptable to them all.
Why this presumption? If everyone is made substantially better off, who could reasonably complain? Our answer is the domestic analogue of the equal gains benchmark in Chapter 6. The domestic gains of trade reflect the fruit of domestic social cooperation and so cannot be said to be owned by anyone independently of what distribution is fair. Moreover, from a domestic point of view, the gains of trade chiefly result from a national-level choice of policy. The goal is macro-level change in the allocation of productive (p. 220 ) resources, for the sake of macro-level (average or aggregate) gains across an economy. People contribute by doing what they would do anyway, except insofar as freer trade creates new incentives, which leads market actors to refine what they produce and sell, perhaps buying and selling with different people and on different terms than before. In each case, they by and large promote their personal prospects. Under conditions of substantial integration, and aside from those who suffer special hardships, no general class of market actors makes any special contribution to the gains of trade for society overall, at least none that gives them any proprietary claim to the gains they see, beyond what they would receive in a fair system of cooperation. If this is right, equality of gain is the fair default. Everyone who has had a hand in the socially created augmentation of wealth has the same presumptive claim to greater rather than lesser shares. Unless further reasons for a difference in treatment can be given, equality is the only distribution that recognizes every such participant’s full claim; inequality in gains would unfairly discriminate between the different claimants.
If equality of distribution is the fairness default, when, if at all, are departures from equality acceptable? Domestic Relative Gains admits of different versions, depending on our answer. One answer is “never,” a principle of
A different answer admits inequality as acceptable for dynamic reasons (e.g., because greater rewards incentivize productive effort and risk-taking, etc.). Following Rawls, we might so favor a
strict equality (applied domestically): the national income gains of trade are to be distributed equally among the members of each trading society. (The “gains of trade” here are each country’s fair share of gains as compared to trading countries, as specified below.)
This interpretation of Domestic Relative Gains follows straightforwardly from Rawls’s own difference principle when the gains of trade counted among the “primary social goods” of income and wealth.
difference principle: each trading country is to distribute its fair share of the national income gains of trade equally among its members, unless inequality of gain is to the greatest possible benefit to the society’s least advantaged.
(p. 221 ) The choice between these principles raises familiar questions of domestic distributive justice that we will not pursue. The present claim is that Domestic Relative Gains must be specified in some such way, for the gains of trade, whether or not further principles have any broader application. Thus, even if there are no general requirements of domestic distributive justice, fairness in trade itself generates principled requirements of internal egalitarian distribution of some such kind.
More important for our purposes, domestic distribution of the gains of trade bears on what is fair in the international system, since a country’s inegalitarian policies can affect the relative gains of other countries and their members. For example, we will argue that developing countries can fairly expect special privileges in the trading system (e.g., freedom from intellectual property, services, investment, or competition rules) on grounds of poverty, even at significant cost to rich countries. But this argument will be considerably weakened if the affluent in those developing countries gain to a degree that is not necessary to maximize prospects for their society’s less well-off members. (The practical relevance of this concern is unclear, however: in fact, the very rich in developing countries represent a tiny fraction of the population.) Even if we suppose that everyone in a developing country is made better off, the level of relative gain will matter. Rich countries can reasonably expect limitations on inequality of gain, so that gains flow as much as possible to relatively poor people. It won’t be fair to ask rich countries, including their own worst-off, to pay for unnecessary gains to relatively rich people.
6. International Relative Gains
How then are gains across trading societies to be assessed? According to our third principle, International Relative Gains, the default is equality of gain, as according to the equal gains benchmark defended in Chapter 6. The gains of trade are socially created, by the joint practice of market reliance. Because each trading country has a morally relevant interest in greater rather than lesser national income gains, equal treatment requires equal distribution of gains, unless we can specify a relevant difference among participant countries.
(p. 222 ) International Relative Gains admits two such relevant differences, two possible grounds for inequality of gain. First, gains are to be adjusted according to relevant endowments such as a country’s population size, natural resource base, level of development, and any other factor not created by the trade relation that predictably changes how much a country gains from global market integration. Second, inequality of gain is fair if greater benefits flow to people who are worse off in absolute terms (for instance, because developing countries are granted special trade privileges, offered technological and infrastructural assistance, or are released from specific intellectual property, services, investment, or competition rules).
As for the first ground for inequality, we can see the intuitive idea by comparing a large and small country. It would not seem fair to simply sum up the total gain from trade and divide it equally. This would overlook the significant role of prior endowments, which often dramatically shape how much a country will gain from the trade relationship. In domestic society, by contrast, beneficial personal endowments are by and large a product of the very system of cooperation whose justification is in question. In our politically decentralized and partially integrated world, there is a meaningful difference between what the trade relation creates and the social cooperation that is there anyway.
Endowments will not necessarily make a difference because they somehow generate independent entitlements. Indeed, we can assume there are no such entitlements, beyond what is independently fair among participants in the practice of trade. Rather, endowment sensitivity simply reflects the limited aim of trade practice, namely, to improve upon endowments roughly as given (through specialization and exchange), rather than to redistribute the benefits of those endowments as such. We might still advocate the redistribution of the benefits that flow from differential endowment, for reasons other than internal structural equity. But this is a separate moral issue. Trade itself is legitimate and fair so long as the practice of market reliance is mutually beneficial and the improvements it creates are distributed in a way that is reasonably acceptable to all.
The idea behind our second ground for inequality of gain is that rich and poor countries are not symmetrically situated in at least one crucial respect: they have (often vast) differences in wealth. In that case, while rich countries do have a legitimate interest in ever (p. 223 ) greater wealth (to support further consumption, public goods, or the arts, and so on), it is less significant than the interests of developing countries in benefiting large numbers of poor or very poor people. It is only fair for rich countries to benefit from trade, but also only fair for developing countries to see greater gains.
To see why this might be so, consider a suggestive analogy. Imagine two friends who regularly dine together and who make a practice of taking turns paying the check. Assuming they are of roughly equal wealth and that they eat and drink at roughly the same expense, taking turns seems perfectly fair. But now vary the case so that one friend is rich, while the other is relatively poor. Holding all else equal, it would then seem only fair for the richer friend to pick up the check more than every other time. (How often might depend on the size of the difference in wealth.) But the goal needn’t be the equalization of overall benefit by compensating for a special burden (the poorer diner “pays” more each time given his smaller overall budget). It seems fair for the rich diner to pick up the check even after overall benefits are equalized, simply because she can easily afford it. Nor need this be a consideration of humanity (the extra payments might better reduce poverty if they were given to the beggar outside the door), and in any case the poorer friend needn’t be especially poor; it is enough that the size of the gap between the two is sufficiently great.
International Relative Gains similarly reflects a limited form of “priority for the worse off”: the benefits of trade matter more, from a fairness point of view, the worse off the beneficiaries are in absolute terms.16 Here the relevance of poverty is limited to the trade relationship, seen as an international practice. Nothing follows for market transactions or business relationships per se.17 The present principle applies only among trading countries, taking no account of poverty (absolute or relative) outside of the trade relationship. Even among trading countries, it applies only to the opportunities for benefit that economic integration creates, taking no account of (p. 224 ) other potential ways poor people might be benefited. In the trading system, poverty is a relevant fairness consideration because it modifies the prior and independent claim that trading countries have to enjoy the fruit of their shared practice. It can matter in this way without assuming either general prioritarianism or humanitarian concerns.
An alternative to International Relative Gains would be a principle of
strict equality (applied internationally): trading countries are to divide (endowment-adjusted) gains equally.
This principle is less demanding than International Relative Gains, in the sense that rich countries will not be required to make special arrangements needed to give poor countries unequal benefits (even if special privileges are still required for humanitarian or other moral reasons). But this seems too permissive for the trade context. While there is no fairness in asking someone to pick up the whole dinner tab simply because he is rich, the global market reliance practice bears little resemblance to one-off interaction or exchange. In the case of the regular diners above, it is fair for the rich dining partner to pay, because their ongoing social practice changes the fairness equation. That is, even if bartered exchanges in a state of nature were subject to a rough equality norm, the situation changes when exchanges are embedded within a cooperative practice of market reliance that extends indefinitely into the future and substantially shapes people’s whole life prospects, especially the world’s poor. Under these conditions, the relatively advantaged cannot reasonably insist upon equality of gain in the goods created by the shared relationship, for an equal share of the gains of trade will mean very different things to advanced and developing countries. Indeed, developing countries can reasonably object to any principle that treats benefits to rich and poor in comparable terms and so can reasonably expect to be allowed to use trade to advance their development goals, even or especially when unequal gains flow their way.
On the other hand, if equality of gain seems too permissive, strict priority for the worst off can seem too stringent, at least as far as international commerce is concerned. It would not seem fair for rich countries to adopt prohibitive trade barriers against Asia and Latin America in order to divert trade flows to less well-off (p. 225 ) African countries (quite aside from the fact of Africa’s significantly smaller population). Nor will mere fairness require the degree of self-sacrifice associated with potentially demanding humanitarian obligations. The whole purpose and point of international trade is mutual benefit. Internal structural equity does require, then, that all countries benefit from trade. Economic integration must be significantly worthwhile, over time, even for advanced countries (“over time” because significant temporary disadvantages may still be required, because compensated in future benefits).
The required “priority” for the less well-off may be seen as a standing privilege of special benefit. At least as far as trade policy is concerned, developing countries can reasonably insist on being free to use global economic integration in any way that would advance their development goals. This may cut significantly into advanced-country levels of benefit, so long as global economic integration remains significantly worthwhile, overall and over time. Although rich-world individuals are often made worse off, this only implies that “losers” must be compensated. And because rich countries can almost always afford such measures (provided appropriate taxation), they do not justify a cost to developing countries in forgone opportunities for development. Nor is there any real risk at the country level that advanced economies will see little or no gain from trade under feasible domestic or international policy scenarios, especially over the medium to longer term.18 Over the longer haul, degree of benefit is the only realistic concern.
We might develop the suggested privilege of special development benefit as follows. To say that developing countries should not have this special privilege would be to say that, in some important range of cases, development goals should, in fairness, be compromised or postponed for the sake of some further economic benefit to developed countries. But there does not seem to be an important class of cases of this kind. We have already ruled out cases in which advanced and developing countries stand to reap roughly the same level of benefit from different sets of rules or policies. Because members of developing countries will tend to (p. 226 ) fare badly in absolute terms, a given level of benefit to them will matter more than it would for absolutely better-off rich worlders. But if that justifies unequal benefit, the point will also hold when policies can shift unequal benefits even further in the direction of developing countries. So long as people in developing countries are significantly worse off in absolute terms, the benefits to them matter more from a fairness point of view. They would matter more, indeed, even than greater benefits to absolutely better-off people.
Though the moral issue here is not merely humanitarian, it is sensitive to the absolute state of a person’s total condition. As the relatively badly off representative person’s condition improves, his or her claim to the smaller level of benefit gradually diminishes (i.e., as according to a graduated scale of urgency rather than terminating at some threshold level). At some (rough) point, then, the greater benefit may fairly flow to the absolutely better-off parties. We may conjecture that this situation arises only after developing countries have developed. That is, a plausible conception of what countries are properly classified as “developing,” and what then qualifies as a “development goal,” will identify features of a country’s condition that preserve their prioritarian claims over time.19
7. Further Principles for Trade Outcomes
We have now presented the central rationales for our three principles. We have noted some less demanding principles, but others remain.
A difference principle, applied at the international level, would be less demanding than our principle of International Relative Gains. A difference principle would allow inequality of gain even in a world without absolute poverty; it need only maximize prospects for the least well-off trading partner. International Relative Gains, by contrast, would not allow the relative advantage, without a poverty or development rationale.
(p. 227 ) Despite this abstract contrast, it is not clear that a difference principle presents a real alternative to International Relative Gains, at least not when it is seen as a regulative principle for trade practice and is grounded in its standard incentives-based rationale. That rationale finds no general footing in global economic life as we know it. Rawls’s difference principle is apt within a domestic economy because tax and other institutions shape choices of work over leisure, risk over caution. Unequal rewards can thus be potentially justified by the resulting dynamic gains, appropriately distributed. In international trade relations, by contrast, the main rationales for the gains of trade—again, specialization in the overall division of labor, economies of scale, and the spread of technology and ideas—require no appeal to the dynamic consequences of offering greater rewards to individuals or firms. Nor are prospects of unequal reward supposed to somehow incentivize government policy action: the gains of freer trade for each are reason enough.
A true alternative to International Relative Gains would be the Nash bargaining solution, seen as a criterion of fair division. Assuming we can work out an appropriate social welfare function for each trading country (and assuming, perhaps, that Due Care and Domestic Relative Gains are assumed to be satisfied), according to
Unlike utilitarianism, this would not call for aggregation which allows for some countries to be made worse off. Nor would it necessarily require equality of gain: inequality might be fair depending on the social welfare functions of different trading countries. Yet, seen as a conception of fairness, the Nash solution goes wrong in key cases. When a poor country sees a large welfare gain with even a small share of the division, while a rich country requires a large share for a modest welfare improvement, the Nash solution will give the rich country the lion’s share.20 But surely the poor (p. 228 ) country can reasonably expect at least half of the product of the shared activity, as under International Relative Gains. While it might be rational for a poor country to give up the lion’s share in trade negotiations, rich countries surely could not fairly insist on this. The Nash solution thus seems better suited (as Nash himself understood it) as a proposal of rational bargaining theory, and not as criterion of equitable division.21
the Nash solution: the gains of trade are to be divided so as to maximize the product of the welfare improvement for each trading society.
We may also object to the assumed welfarism. As we argued in Chapter 6.8, a country’s basic presumptive claim to equal gain is not based in welfare in the first instance, but rather in joint creation of certain economic goods through the trade relationship. We have admitted an aspect of welfare as a further relevant consideration, in the sense that background conditions of poverty properly shape how much countries should benefit. But treating poverty as a morally relevant aspect of welfare does not necessarily generalize to anything we might want to call “welfare.” The background welfare levels of fabulously prosperous people do not have any similarly general significance for what is fair. If a country has expensive tastes, and so gets less welfare from a given bundle of economic goods than countries more easily satisfied, the welfare inequality is not unfair, but tough luck.
8. Equality of Opportunity
If our principles concern the outcomes of trade, a different class of fairness principles focuses on opportunities instead. On what may be called an
In the most restrictive version, the relevant agents are countries, while the “substantial range” of economic opportunities is limited (p. 229 ) to the absence of formal discrimination in established international rules (as, e.g., according to the “most-favored nation” rule, which generally forbids tariff discrimination). According to a less restrictive version, attention is also paid to opportunities for each country’s respective citizens or firms, as treated by other market actors or by domestic or foreign government policies that structure market relations (e.g., the rule of national treatment, which forbids trading partners from discriminating between foreign and domestic firms). Finally, beyond such “formal” versions, opportunity principles can be applied more “substantively” to the background conditions (e.g., technological or infrastructural development, institutional flexibility) needed for legal or market opportunities to be effectively used. The common feature of all such views is that some such opportunity set is the sole basis for assessment of fair treatment; there is no basis in fairness for regulation of the global economy’s outcomes. On all such views, opportunities for choice, not actual benefit, are all anyone can reasonably expect.
opportunity principle, the practice of trade is fair when, and only when, each relevant agent is afforded a substantial range of economic opportunities, consistent with equality opportunity for all.
Purely “formal” conceptions of opportunity are open to powerful objections in light of the more substantive demands of “fair opportunity.” Consider, for example, a system of “static” comparative advantage, in which countries specialize according to their purely “natural” differences in endowment. Assuming a lack of formal discrimination in trade policy among all countries (perhaps as required by non-discrimination norms), such a system might initially seem to treat all countries in the same way: any differences in gain, it may be said, are attributable to nature rather than to the system of trade. Yet if the system in effect discourages societies from actively changing their relative position in the emergent division of labor (e.g., through public investment and far-sighted industrial policy), asking them to leave specialization entirely up to the market, this will predictably create substantially unfair inequalities of opportunity. Although any number of countries could initially have created economies of scale in skill-intensive, higher-return industries, once a sub-group “gets there first” the others may become frozen out for a long time. Developing countries that initially specialize in primary products, for example, then suffer a relative lack of opportunity due to largely arbitrary ways the international division of labor is refined. Unless substantial remedial opportunities are created, perhaps by actively facilitating policy flexibility and industrial experimentation, the disadvantaged countries are not (p. 230 ) being treated “in the same way,” not by nature, but by the system itself.22
There is, however, a more basic problem with opportunity views, whether formal or substantive: they do not account for unfairness in the harms of trade.23 A practice aimed at creating certain benefits could be fair without compensating those who will be foreseeably harmed, but only if the parties likely to be harmed have an adequate opportunity to avoid injury. But people rarely have adequate opportunities to avoid the harms of trade, and so they can reasonably complain when compensatory arrangements are not made. As we have emphasized, few can be reasonably expected to leave their country (to where? another trading society?). And it is not as though the people most vulnerable to global market forces are simply not doing enough to gain from market relations; developing-country farmers, for instance, are often doing as well as they possibly can for themselves given their limited options. Like domestic institutions, but unlike a club, university, or game, the international system of trade is not “voluntary” (i.e., reasonably avoidable) in a sense that could appropriately support an opportunity principle.
One might suggest that any country can always avoid exposing its people to outside market forces by simply erecting trade barriers, in which case the country alone bears responsibility for compensating its losers when it chooses free trade instead. So long as relevant opportunities for integration are provided, the idea goes, the international system is not unfair, whatever its outcomes. Although governments certainly do bear responsibility for their choice of trade policy, it does not follow, however, that other governments (taken individually or collectively) are not liable as well. Much as with individual citizens, the international system is not “voluntary” in the sense that a choice to participate legitimates any outcomes that result, because each country has an adequate opportunity of non-participation. Again, no country can afford not (p. 231 ) to join the trading system, and member countries benefit from greater specialization when other countries sign up. Nor can countries already in the system, and subject to its market reliance expectations, be reasonably asked to leave; the cost of leaving will be too high, whether in terms of future gains forgone or uncompensated costs of past integration.
Moreover, specific choices will legitimate specific outcomes only when clear lines of responsibility can be drawn, and these are just not to be found given substantial economic integration. Especially at our general level of inquiry, but also in many routine matters of trade or financial policy, outcomes arise due to systemic tendencies and the policy choices of many different governments. If people are harmed because their countries abide by internationally established expectations of freed trade, in goods, services, or capital, and the country is a participant in the practice in good standing, then all the countries involved remain liable for the outcome. The burdens of liability must be fairly shared, and a country may, in certain cases, appropriately bear greater burdens in light of some past choices. But such considerations of “desert” are rarely the whole story and indeed often greatly exaggerated in the heat of political argument (e.g., Germany exaggerates Greece’s culture of leisure in resisting a “bailout,” while underestimating its own gains from the euro).24 And in any case it is a mistake to think one can finally “place blame” when any policy choice in a global economy is made in light of a thousand other policy choices already decided. As a general and basic matter, all trading countries are together collectively responsible to see to it that compensatory arrangements are set up in each trading country. And, again, insofar as countries tend to be unreliable in providing the necessary support when left to their own devices, structural equity in trade requires the establishment of international institutions that reliably support domestic social safety nets.
(p. 232 ) To be sure, governments cannot assume full responsibility for the welfare of individuals or other governments. They can at most offer goods or resources that one can choose to use or not to use. This follows from our intended “resourcist” interpretation of our principles: each principle is associated with its specified bundle of goods or resources, or its appropriate “currency” of application. Fairness is not concerned with welfare outcomes per se, even as regards the significance of harm, but rather with morally relevant interests in certain goods or resources, which ground reasonable complaints. The concern is then with “opportunities,” but only in the trivial sense that any good or resource represents an opportunity for use rather than its use itself. Such “resourcism” is not a reason to favor an opportunity conception over our principles.
To the extent that the harms of trade do matter, one might instead adopt a modified opportunity principle. Fairness might be understood in terms of equality of opportunity, with the exception that a special privilege of compensation or assistance is accorded to poor countries.25 And to the extent that the harms of trade to advanced-country workers seem unfair, the demand for compensation might be extended to them as well. It would then matter for fairness that trading countries or their members suffer harm, but not in a way that implies equality of gain as the default distribution. So long as compensation of losers is well supported, and so long as certain relevant opportunities are equal, a fair trading system would be insensitive to what economic outcomes otherwise result.
Even so, in focusing simply on harm, this view still ignores one of the central moral issues in trade: the basic reasonable claim that all trading countries enjoy in virtue of being joint participants in the market reliance practice, namely, a claim to the fruit of the joint venture. That claim is not simply to opportunities to gain, but to the internationally created augmentation of wealth itself. The claim is to actually enjoy the fruit (or at least to have it in one’s hands, with a choice to eat or not).
The point is especially important in the case of developing countries, who are not mere needy supplicants but full participants in the common reliance practice with rightful claims to equal shares. Indeed, the doctrine of comparative advantage entails precisely that all countries—even those with an absolute (p. 233 ) advantage in nothing—can contribute to a mutually beneficial division of labor. Insofar as no country has proprietary claim to the intended (endowment-adjusted) gains, each has a presumptive claim to a greater rather than a lesser share of the joint activity. It is thus not the case that conditions of poverty justify a shift from opportunities to outcomes only in exceptional cases. Outcomes are at issue in the first instance: they reflect directly on whether the common market reliance practice treats its participants in an equitable way. The fact that so many contributors are poor is merely a further consideration, which justifies special treatment in the form of greater gains. Insofar as developing countries have themselves historically advocated “special and differential treatment” provisions on something like opportunity-based grounds of status equality, they, too, misrepresent the central socioeconomic fairness issue.26 Developing countries are active contributors to the mutually beneficial relationship. They can rightfully lay claim, not simply to equality of status as reflected in so many opportunities, but to equality of shares.
9. Reciprocity of Risk
A quite different route to an opportunity view appeals to the idea of reciprocity of chances of benefit or risks of harm. The international market reliance practice might still have the aim of creating national income gains, and yet be seen as fair, with no concern for outcomes, so long as the following principle is satisfied:
To elaborate: I impose a non-reciprocal risk upon you when you do not impose the same risk upon me (I build a fusion reactor on (p. 234 ) my side of our property line, or put a loaded gun to your head, or run near you with hot coffee in hand, and you fail to do likewise). The risk is reciprocal, or reciprocally imposed, when we impose similar risks upon one another (e.g., we both drive, taking only some normal range of driving risks, putting each other at similar risk of injury). There is often a point in allowing such risk imposition instead of simply requiring due care. This can be mutually beneficial; we may both stand to benefit from being permitted to engage in some risky activity (as we both stand to gain from driving). As for why this should be fair, it suffices, it may be said, that the imposition is reciprocal.27 Our respective ventures may then come to very different results: if your luck is good, but mine bad, it will be no matter for fairness if we each faced similar risks of injury. Any residual unfairness in the unequal outcome is not the unfairness of unfair treatment, but of a more “cosmic” kind. We may blame the gods, but not one another.
Risk reciprocation: trade practice may permissibly offer all countries the opportunity to augment national income, without regulating outcomes, if and only if trading countries impose similar risks upon one another.
Applying this to the global economy, the idea would be that trade practice can be fully fair insofar as all countries stand to gain from economic integration, where each country faces similar risks of harm to workers, firms, or overall country prospects. Actual benefit or actual harm is then immaterial. No country can lay claim against the others, in the name of unfair treatment, to either compensation for harm or the redistribution of benefits. Beyond domestic risk management, how each country fares is left for the gods to decide.
Current trade practice is clearly a situation of non-reciprocal risk. Developing countries face special vulnerabilities, whether to increased unemployment or to volatility in commodities markets (which may erode the value of exports, dramatically increase the cost of food relative to tight budgets, and cause riots in the streets). On the principle of risk reciprocation, however, this is not to say that advanced countries must limit the risks they impose upon developing countries; development countries can instead increase the risks they impose on advanced countries. What matters is simply similarity of imposition. And indeed advanced countries are already subject to real risks themselves: trade affects employment levels (e.g., in the aftermath of a crisis); rapid developing-country industrialization (e.g., in China or India) can cause especially (p. 235 ) painful disruptions to long-standing forms of industry; and so on. If advanced-country risks are nevertheless of lesser and more manageable significance than the risks faced by developing countries, the fair solution, on the present suggestion, can be for developing countries to ramp up the risks of harm they create for advanced countries, so that the risk imposition approaches similarity. For instance, they might further amass rich country currency reserves, which flood rich countries with capital and increase the risk of a financial crisis, high unemployment, and protracted budgetary woes.
There is perhaps a macabre sort of fairness here. Perhaps such mutuality makes a situation less unfair than it would otherwise be. But risk retaliation is hardly a recipe for a structurally equitable global economy. The proposed principle of risk reciprocation requires only that the risk imposition be “similar.” But the level of risk matters greatly as well: similar risks, under some description, can vary dramatically in significance depending on background factors. Two people might face a “similar” risk of automobile accident under some general description—for example, both have the same probability of similar auto damages—but the risk will have much greater significance for one of them if he or she is unable to pay for repairs. Likewise, even if developing countries could somehow impose similar risks upon advanced countries, the risks would not be morally comparable. Developing countries are at risk for far more profound forms of injury, and it will be incredible to suggest that real injurious outcomes to very poor people are wholly irrelevant as grounds for reasonable complaint.
We could instead read the principle of reciprocal risk in a different way, in terms of the expected overall value for each party taking and accepting exposure to risks.28 Fair treatment is then achieved, not when risk levels are similar but when the parties can each expect roughly the same overall value from being allowed to engage in the risk-imposing behavior, being subject to like risk-taking of others. The special vulnerabilities of developing countries might then be justified given their prospects of gain. A route out of poverty is indeed a monumental advance, and insofar as integration supports this, it might go a long way toward justifying (p. 236 ) much if not all of the risks of harm along the way. Could that amount to a rough equivalence in expected gain with advanced countries? Perhaps a case might be made. Advanced countries stand to gain less, but they also face less risk. In theory, the overall expected value of each country’s opportunities to integrate could work out as roughly the same.
Yet if we are to consider expected value, why not also consider how benefits and harms actually fall out? All risk assessments assume a particular informational situation, at some time. But the practice of mutual market reliance continues over time, as events play out. The veil of the future is crucial when the risks are of irreparable harm; if compensation ex post will be unavailable, precaution rather than risk-taking may be the order of the day (see Chapter 8.6). When the risks are not of irreparable harm, however, and compensation might well be offered, it is hard to see why fair treatment in an ongoing practice should not require the adjustment of economic outcomes as they become known. Trade practice will be fair, over time, only when trading countries and their members actually enjoy the appropriate gains. For having actually incurred risks of harm for the benefit of others, only actual benefit is fair return. It makes little difference if there was, at some earlier time, an epistemic position from which the then-ex ante chances of overall benefit were roughly the same. The actual outcomes, over time, still seem relevant. By asking us to set them aside, the principle of risk reciprocation obscures or ignores an entirely reasonable source of complaint.
Take, for example, a developing country that depends on world commodities markets and suffers extreme boom-to-bust cycles as commodities prices fluctuate. The ensuing hunger, unrest, and budget crisis won’t be justified to its members by pointing out that this is of course how risks work, that the gods do not of course play fair, and that the government at any rate could have hedged its bets with precautionary food inventories or by diversifying more during boom times. The question at issue is not how the gods play but whether trade practice is fair to those involved, on an ongoing basis, even after certain risks have played out. Perhaps the adversely affected developing country is partly to blame. Even so, it will fairly ask other governments for compensatory finance ex post. Indeed, it will fairly ask for precautionary measures that mitigate the outcomes of risk-exposure over time—measures, for example, such as commodities price stabilization funds, loans (p. 237 ) indexed to commodity prices, so that the risks of further price fluctuation are shared, and so on. Such measures seem not only desirable but eminently fair.
10. Substantive Libertarianism
An opportunity conception might instead be defended by appeal to the value of liberty. The harms of trade might be defended as an unfortunate but fair result of registering the reasonable demands, of individuals or of countries, to be allowed to make certain economic choices. While we have set aside sweeping external natural rights of non-interference in focusing on internal fairness concerns, one can still so defend libertarianism on more substantive, internal grounds. The opportunity principle stated earlier might thus be supplemented with the following conception of its grounds:
Accordingly, when liberty and other values conflict with an attempt to regulate global economic market outcomes, it follows that fairness can at most require the protection and facilitation of the preconditions for voluntary exchange (whether a commercial exchange among market actors or inter-governmental “policy swap”). The preeminent value of liberty undercuts potential objections of harm.
substantive libertarianism: economic liberty (for the relevant economic agents, whether countries, firms, or individuals) is to be presumptively respected. When liberty and other values conflict, liberty is to be protected, even at great cost to other worthy values. Any limitation on economic liberty is presumptively open to reasonable rejection.
A first question to ask is whether and to what extent liberty actually conflicts with the prevention of harm. Chapter 6.8 suggested that trade law and policy does not bear upon individual economic liberty in any very direct way. Nor can it be plausibly said that any regulation of the harms of trade will threaten basic liberties as usually understood in liberal societies, whether personal liberties (e.g., of speech, conscience, movement, etc.) or the best-established basic liberties of economic life (e.g., choice of occupation, place of work, country of residence, etc.).
(p. 238 ) We do find a potential conflict in familiar territory, in the tax measures likely to be part of any regulation of the harms of trade (e.g., income taxes for domestic safety nets, securities taxes for crisis prevention, or mandatory country dues for an international social insurance support scheme). People or governments so taxed are not “free to spend” or save money they would have had under lesser taxation. The question, then, is whether this reduction in liberty can be said to have paramount importance of the sort needed to justify the presumptive respect for liberty claimed by our principle of substantive libertarianism. Why respect that liberty even at great cost to other important values? What possible complaint upon the part of those faced with prospects of having less money could be so powerful as to overrule the complaints of those who would be left to suffer serious and perhaps irreparable harm?
The answer cannot of course appeal to J. S. Mill’s famous presumption in favor of liberty, which does not apply when the exercise of liberty is likely to harm others.29 Nor can one plausibly limit the harm principle to the harms of particular transactions or policy choices, to the exclusion of harmful systemic patterns that emerge from various transactions or policy choices. In the present context, harmful systemic outcomes cannot be defensibly left for fate to decide and charity to rectify. This would arbitrarily exclude a central feature of trade practice, which is all about emergent socioeconomic patterns. Moreover, any proposed way of regulating the overall structure of trade practice will in effect raise questions of taxation in one form or another. To the extent that some pay less through formal institutions, others “pay” in foreseeable income reduction by other means. The question is not whether people pay but who pays and how much.
The issue, then, is one of relative burden. We compare the burden of being left with less money to save or spend under a given tax scheme with the burden of suffering serious and potentially irreparable harm. The losers who stand to gain from a compensation scheme can’t reasonably complain of being taxed and so less free to spend the amount of money they would otherwise have had; they may or may not be asked to pay a tax and in any case (p. 239 ) stand on balance to gain. A fortiori, the beneficiaries of trade certainly can’t complain, especially not the relatively rich and privileged among them. Compared to those who suffer severe and irreparable harm, the relative burden for them is small. The taxes might even command a large share of their income and yet pale in significance by comparison to the major and irreparable disruptions of work and income suffered by losers. So long as the question is one of fair relative tax burden, it is hard to see how it would rule out regulation of the harms of trade in the proposed sweeping way. Those who may be irreparably harmed clearly have the stronger complaint.
11. Legitimate Expectations
One might therefore argue that the relevant considerations are not those of fair relative tax burden but rather “legitimate expectations”: promised rewards in an established system of reward (e.g., a low top tax rate, or highly profitable investment terms) must be paid, just as promises we make as individuals must be kept, even at significant cost to worthy values. We might put the idea as the
Although this principle does not say that income and capital gains taxes must be set at any particular level, the fact that they are now set at low levels in many countries would compel institutional inertia. Tax rates could not be fairly raised, even when the goal of doing so is to fund social insurance schemes that compensate for the harms of trade. That would be true so long as the trading system is a legitimate system of cooperation, even if it is not fully fair to allow significant harm.
promissory principle: once expectations of reward for labor or investment are established within a legitimate (even if not fully just) system of cooperation, the promised rewards must be granted, even at significant cost to worthy values.
One line of reply is to argue that the harms of trade delegitimize the trading system. They certainly do delegitimize the system in the eyes of many of those who are substantially harmed, and a high standard of legitimacy might support this verdict. If people are to be legitimately asked to support the system despite their relatively disadvantaged position, then it at least needs to arrange (p. 240 ) for them not to be made significantly worse off, at least not without offering a real opportunity of avoiding harm and of benefiting to some degree.
This is to deny that the expectations principle helps the cause of expansive economic liberty. A more basic problem lies with the expectations principle itself. Mere expectations of reward do not have the supposed trumping significance, even in a legitimate system. The appropriate principle is as follows:
Reasonably formed expectations presumably do generate some relevant concerns of fairness in a legitimate system (and little or no claims under illegitimate arrangements). But they will approach the presumptive force of promissory rights only within a scheme of cooperation that is fair overall. Reward levels can be adjusted (by raising taxes, or raising costly environmental or labor standards, subject to appropriate procedural constraints of notice, generality, etc.). Even reasonably formed expectations will lack presumptive force when such measures remedy otherwise more significant and unfair burdens created by the system. So, for example, the Multilateral Agreement on Investment, proposed by the OECD (but later dropped), was misguided in allowing transnational corporations hurt by domestic environmental or labor standards to sue for compensation on grounds of expropriation.30 Firms have no overriding claim of fairness to expected investment returns, provided that the adjustment in level of reward is undertaken for the right reasons, and implemented in the right ways.31
legitimate expectations: once expectations of reward for labor or investment are established within a legitimate system of cooperation, the promised rewards must be granted, even at significant cost to worthy values, insofar as this is consistent with a fair overall scheme of cooperation.
(p. 241 ) In other words, given a background fairness demand, the idea of legitimate expectations does not bear a direct analogy with interpersonal promissory rights and obligations, as the promissory principle suggests. One can indeed be obligated to fulfill expectations one has voluntarily created (e.g., one promised to meet someone at a certain time and place), even at significant cost to worthy values (a fine day at the beach). But in the present context this is not the relevant analogy. The relevant analogy is a case in which someone makes a promise he or she had no right to make in the first place (e.g., to be at a meeting when others already had a claim on the person’s time). If expectations of gain were created by the system (e.g., with low income or capital gains taxes, or very favorable rates of investment return), there is no unfairness in adjusting the level of reward to make the overall system more fair.
12. Internal Cosmopolitanism?
We have now defended our three principles against various principles that make less egalitarian demands. “Cosmopolitan” principles of various sorts might make greater egalitarian demands: they require us to compare prospects not just for countries and classes within countries, but for all the individuals of the world, taken as so many individuals. We would directly compare how a given group of Americans and a given group of Brazilians fare in light of how the common market reliance practice shapes their respective fates.
As suggested in Chapter 4, the issue here is not “cosmopolitanism” in the bare sense that individuals are the ultimate unit of moral concern. We are assuming that much; the question is what form regulative principles should take, given our constructive method of justification. Moreover, by focusing on internal issues, we have already set aside clearly external cosmopolitan principles (e.g., a “luck egalitarian” principle that requires the elimination of all undeserved misfortune). We have also already challenged arguments for a cosmopolitan principle on internal, social interpretive grounds in Chapter 6.8; any such view, we said, amounts to costly revisionism of the practice of international trade. For all we have argued so far, however, one could still offer a cosmopolitan principle and claim that it can be justified within the confines of internal argument. For example, one might defend:
This might be regarded as an internal principle in at least the sense that it assumes the basic international aims and structure of trade practice, and so limits itself to the advantages and disadvantages that trade creates. The question, then, is whether it can be justified on substantive grounds that do not invoke an external principle.
(p. 242 ) internal cosmopolitanism about fairness in trade: the benefits and burdens created by the system of international trade are to be distributed equally (or otherwise acceptably) among all individuals involved in the common international practice.
One possibility would be to argue that unless the proposed principle is respected, the trading system would improperly distribute its advantages and disadvantages on grounds that are arbitrary from a fairness point of view.32 The appeal to what is “arbitrary from a fairness point of view” would not impugn the natural distribution of country endowments, which countries bring to the trade relationship, but only the endowment-adjusted gains that result from international social cooperation. Nor will the argument assume any external principle that precludes the influence of such arbitrary factors (e.g., a luck-egalitarian principle that impugns any influence of undeserved luck per se). Instead, the idea would be that we have an independent sense of what sorts of considerations are relevant or irrelevant within established trade practice, and that anything short of regulation by the proposed cosmopolitan principle allows it to improperly distribute according to some such irrelevant factors. Whether or not luck or misfortune have a role, then, it would matter that distribution is shaped by factors that have no bearing, as relevant considerations, on the justifiability of trade practice, in the same way that it would be objectionably arbitrary to distribute the wealth of a society based on eye color or physical height: such natural factors just don’t bear, one way or the other, on whether the distribution is justified, and so shouldn’t in fact be the systematic basis for distributing cooperatively produced wealth (even if they do in fact shape how people fare, without being a “systematic basis” of (p. 243 ) distribution).33 The claim, then, would have to be that for some such specified reasons, we should ignore the country in which an individual lives and works, and instead directly compare how all individuals fare within the common, worldwide division of labor.
But here we may ask, What considerations of relevance or irrelevance within established trade practice would have that upshot, and why should they rule out our international principles in favor of internal cosmopolitanism? What considerations have this particular kind of force? The answer seems at best obscure. We have already precluded the most natural suggestion, namely, that it is arbitrary to allow trade prospects to depend on country endowments. While country endowments are in one sense no less arbitrary than a person’s eye color or physical height, the claim here, again, cannot simply be that country endowments reflect natural and largely undeserved fortune or misfortune. And in any case, natural endowments clearly do seem at least relevant from the point of view of established trade practice, in the sense that they inform its central understood aim. The aim is precisely for countries to mutually improve upon given assets, in part by taking advantage of “natural” differences in ease of production. The aim is not to redistribute endowments or their benefits per se, and insofar as background endowments shape the augmentation function of trade, they are relevant to its justifiability in internal terms.
A perhaps more promising route is to deny our international characterization of co-production. Insofar as anyone has a special claim to the gains of trade, it may be argued, it is not countries, but the various individuals who in effect work together around the globe. And so to characterize whole societies as the relevant claimants to fair shares in the internal scene, as we have, is to introduce irrelevant considerations that turn mainly on how individuals just happen to be politically partitioned. That sociopolitical fact, it may be said, is arbitrary from an internal fairness point of view.
(p. 244 ) How plausible is this view, understood in light of actual trade practice? The scheme of cooperation that constitutes the global economy must then be understood as itself having a fundamentally “cosmopolitan” structure, with the state system seen a mere superstructure of productive relations. But as suggested in Chapter 1.4 and argued in Chapter 6, this is a fundamental misinterpretation of the global economy as we know it: the worldwide division of labor is fundamentally constituted by an international social relationship, and the gains of trade are only reaped by mutual integration between the overall productive structures of whole societies. Indeed, without major international efforts to construct a global economy in the postwar era, it is hard to say whether or in what sense a global economy would even exist. This line of argument therefore seems either insensitive to social practice or not the fresh sort of internal argument we are looking for.
One might instead deny the relevance of supposed entitlements to the fruit of co-production. All that matters, it may be said, are relative benefits and burdens, gains and losses, to all the various individuals potentially affected. But this unduly narrows the scope of fairness argument (perhaps in much the way a blanket welfarism does). As argued in Chapter 6.7, having a hand in production plausibly does give rise to special claims, even if it is one among many potentially relevant fairness concerns. It would be morally revisionistic and in any case implausible to suppose that our claims or special interests in benefiting from the fruit of our labor have no significance for fairness at all.
No doubt other lines of argument are possible. Since our aim is not to refute cosmopolitanism, we can simply conjecture that the most plausible lines argument will either collapse into an external standard of evaluation or implausibly narrow the range of morally relevant concerns. Cosmopolitanism, we suggest, is best seen as an external rather than an internal principle.
In closing, we might add that an internal cosmopolitan principle would itself bear a significant burden of justification in light of its potential institutional implications as a regulative principle for trade practice. One question we will have to ask, for example, is whether gains to the globally worst off will come only at the expense of the worst off in rich countries, rather than those far better off. It is common to worry that global trade liberalization would imply just this: the poorest of the world would gain, the richest of the world would gain, but the worst off in rich countries (p. 245 ) would lose. Our specifically international principles foreclose that distributive pattern: if the claim of poor country A falls to rich country B, then B would pay from its total income, and not (directly) from gains to its poorest members. Rich countries might both give favorable trade to poor countries and protect their own worst off with social safety nets. But would a global cosmopolitan principle also have this crucial implication? It might, or it might not; the case must be made.34 (p. 246 )
(1) . Because the principles apply to a general tendency, they have an implicit “absent special justification” clause that leaves them open to modification or specification as needed for particular contexts of application. We consider such cases later in the chapter.
(6) . According to Levy and Cochan, manuscript, even as labor productivity increased by 78 percent in the United States between 1980 and 2009, median compensation of thirty-five- to forty-four-year-old male high school graduates (with no college) declined by 10 percent. Median compensation of thirty-five- to forty-four-year-old male college graduates (without graduate degrees) grew by 32 percent, less than half as much as overall productivity growth. Only the median compensation of thirty-five- to forty-four-year-old men with post-graduate training came close to labor productivity growth, increasing by 49 percent. International trade is cited as a contributory factor.
(7) . In more difficult cases, different relatively poor people are harmed under either protection or freed trade. Here special considerations have a similar role: we might, e.g., aggregate over comparable benefits and burdens, or place greater weight on (non-comparable) gains to relatively less well-off people.
(8) . Our model is the normal case in which a person is born into a society where he or she resides for most of his or her life. We can similarly treat cases in which someone immigrates but spends most of his or her life in an adopted society, making suitable adjustments as needed. Cases in which people substantially divide their lifetime between countries, either by moving back and forth or immigrating once, may require special treatment.
(9) . Driskill, manuscript, p. 19, offers the following “veil of ignorance” thought experiment, which he suggests captures the case for free trade as held by many economists. Imagine two economies, one closed and one which trades freely and meets the conditions for Kaldor-Hicks efficiency. Which would one prefer to be born into if one didn’t know when one would be born? The answer, it seems, is that one would prefer the integrated rather than the closed society, since one would presumably be better off even without knowing how wealth is distributed in each case.
(10) . In order to help developing countries manage adjustment costs and support infant industries, Stiglitz and Charlton, 2006 pp. 94–102, suggest a scheme that will streamline the intricate General System of Preferences and promote trade liberalization, especially “South-South” integration between developing countries: all WTO members give free market access in all goods to all developing countries that are smaller than themselves (e.g., Egypt gets free access to the United States but gives free access to Uganda).
(11) . As we emphasize later, countries will not as a matter of general fairness be required to part with more than the surplus, though this might be required for different moral reasons.
(14) . Collier, 2007, recommends similar temporary trade diversion away from fast-rising Asia toward the least-developed countries in Africa and elsewhere, in order to reduce Asia’s first mover advantages into skill-intensive and higher-return industry. He suggests utilitarian reasons, writing: “Privileging the bottom billion against low-income Asia is not just or fair; a more accurate word might be ‘expedient.’ Without such a pump-priming strategy, the bottom billion are probably doomed to wait until Asia becomes rich and is at a substantial wage disadvantage against the bottom billion” (p. 167). One can also read this as an appeal to substantive equality of developmental opportunity, however. Least-developed countries should not be “doomed” for decades simply because Asian countries “got there first” (entering the global economy without similar competitive hurdles), because significant opportunities are not then equal or even close to equal. We return to this later in the chapter.
(16) . We assume what Parfit, 1997, calls the “deontic” rather than “telic” interpretation of prioritarianism, and follow Scanlon, 1998, pp. 226–29, in taking such considerations to apply only within specific types of interaction.
(18) . Although China’s exchange rate peg clearly harms the United States in important respects, the United States is certainly significantly better off for trade in general (and with China in particular).
(19) . In other words, we conjecture that an appropriate gradual scale of urgency will coincide with plausible classifications of which countries count as “developing.”
(21) . The same might be said of Gauthier, 1986, and other bargaining theory proposals that might be adapted as conceptions of fair division, albeit in light of different counterexamples. See Barry, 1989, for general discussion.
(23) . Patterson and Afilalo, 2008, p. 180, suggest the emergence of a substantive norm of “global equality of opportunity,” but also call this the new “basic welfare norm” of the trading system. This suggests that equality of opportunity is an instrumental norm rather than a fairness principle that rejects sensitivity to (in this case welfare) outcomes.
(24) . Could considerations of desert systematically neutralize a country’s claim to endowment adjusted gains? Not plausibly. Countries plainly do not always or nearly always get what they deserve in the global economy because of purely domestic mismanagement or otherwise. This kind of view is not very plausible in the relatively calm harbors of advanced society markets, and simply incredible on the global economy’s high seas. See also Chapter 8 on unruly financial markets.
(26) . See Hudec, 1975, on the history of this dialectic. We agree with Hudec that the stated focus on status equality misrepresents the ultimately instrumental justification for the non-discrimination norm, but disagree with his skepticism about the applicability of fairness within the multilateral system.
(30) . The agreement would have followed NAFTA investment provisions. In 1996, the Ethyl Corporation successfully used NAFTA investor rights against the Canadian government for having banned a gasoline additive that Ethyl produced. Canada settled out of court for many millions of dollars.
(31) . Stiglitz and Charlton, 2006 p. 133, suggest the need for cross-country coordination of concessionary tax rates in order to limit the large fiscal losses developing countries incur as a result of competing within each other to attract investors.
(32) . Garcia, 2003, 2007, defends principles for the WTO, IMF, and World Bank in light of arbitrary sources of inequality, as informed by the basic workings and assumed purposes of these institutions. His argument is at least partly “internal” for being institution-sensitive in those respects.
(33) . See James, 2005a, pp. 287–90, for this interpretation of Rawls’s famous claim that the system of natural liberty allows the improper influence of “factors so arbitrary from a moral point of view.” This reading is consistent with Rawls, 1999, on natural endowments, which is chiefly concerned with the “resource curse.” Rawls does not assume a need to redistribute natural resource endowments or their potential benefits.
(34) . This is not to suggest that we disallow trade-offs between our principles; we are not assuming a lexical ordering. This may bring our view closer to a cosmopolitan position that allows trade-offs. Our point in the text is simply that the acceptability of the principle can’t simply be assumed.