The Political Economy of Trade 10 28 2013 Producers have concentrated interests in protection Receive significant benefits from protection jobs profits Consumers have diffuse interests in free trade lower prices Trade Protection on softwood lumber in 2002 Increased employment in the industry by approximately 226 jobs Increased lumber prices by 297 million but only pennies on each For every job saved consumers spent 1 285078 in higher lumber board foot purchased prices Embedded Liberal Compromise According to the law of comparative advantage gainers gain more than losers lose Former can compensate latter to build coalition in favor of freer trade Embedded liberal compromise allowed compensation through fiscal transfers reflected in greater social spending by the government IN essence as trade openness increased winners capital and human capital compensated the losers unskilled workers Unraveling of the Compromise From 1945 to the mid 1970 s increasing openness was associated with greater public spending in the form of income transfers Since the mid 1970 s increasing openness has been associated with less public spending on income transfers As more middle class voters accumulate capital and human capital the winners from freer trade need the votes of the losers less Less political support for the embedded liberal compromise 10 28 2013 10 28 2013