Two Words That Could Shape the Politics of the Trade War: Loss Aversion

From NYtimes.com

To understand the political risks for the Trump administration in starting a trade war, not to mention in undermining Obamacare or celebrating its tax overhaul, it helps to know one powerful human tendency: loss aversion.

That’s when people feel the pain of losing something more intensely than they do the pleasure of an equivalent gain. Losing $20 feels more awful than winning $20 feels great.

Originally described in 1979 in what would become a seminal paper in the field of behavioral economics, loss aversion is a persistent psychological response that researchers have found to affect actions as varied as professional golfers’ putts and taxi drivers’ work patterns.

There’s strong reason to think it applies in the realm of trade politics.

As trade agreements have been adopted over the last three decades, industries that have lost ground have tended to fight harder for protectionist actions than industries with potential gains from trade have fought to reduce them.

Loss aversion can explain the gap, according to papers published in 2004and 2009. You can also find this attitude among individual voters affected by trade, and in the underlying message of President Trump’s 2016 campaign, with its emphasis on lost jobs in industries like steel making. By contrast, he had little to say about the benefits many industries — like aerospace, agriculture and advanced industrial equipment — have received from trade agreements and exports.

Even some workers directly helped by globalization have focused on loss. Consider, for example, a worker in a B.M.W. factory in South Carolina who told The Wall Street Journal in 2016 that she was skeptical of international trade because her uncles had lost their jobs at a cotton mill 30 years earlier.

Now, with his willingness to upend trade relationships that have been decades in the making, Mr. Trump faces the risk that he has spun things around. Suddenly, loss aversion may work in a pro-trade direction.

In a trade war, it is the companies, and workers, that benefit the most from globalization that find their incomes at risk. As China, Canada and the European Union retaliate against American tariffs, the winners from trade are the ones at risk of becoming the losers.

If loss aversion holds, the winners of a trade war — domestic producers of steel and aluminum, for example — could turn out to be as complacent about those gains as globalization’s winners have been for decades.

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