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Psychology and opposition to free trade

SIMON KEMP

World Trade Review / Volume 6 / Issue 01 / March 2007, pp 25 - 44

DOI: 10.1017/S1474745606003089, Published online: 16 February 2007

Link to this article: http://journals.cambridge.org/abstract_S1474745606003089

How to cite this article:

SIMON KEMP (2007). Psychology and opposition to free trade. World Trade Review, 6, pp 25-44
doi:10.1017/S1474745606003089

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 World Trade Review (2007), 6 : 1, 2544 Printed in the United Kingdom
f Simon Kemp doi:10.1017/S1474745606003089

Psychology and opposition to free trade

SIMON KEMP*
University of Canterbury

Abstract : This paper reviews psychological reasons why the enthusiasm of the
general public for free international trade might be less than that of the
economist. Six specic reasons are advanced : (1) lay views of utility emphasize
employment over consumption; (2) status quo bias results from loss aversion;
(3) people think altruistically but parochially; (4) people often consider fairness in
bargaining situations; (5) people may hold inappropriate xed pie beliefs ; and
(6) people may misunderstand Ricardos principle of comparative advantage. The
reasons vary in their apparent rationality and appear to operate in concert rather
than independently.

1. Introduction
Ever since Adam Smiths attack on the mercantilist system in The Wealth of
Nations, economists have generally favoured free trade. Moreover, many econ-
omists hold that the benets of free trade derive not only from improved access to
foreign markets but also from the increased availability of a wide range of im-
ported goods in the home market (Corden, 1974 ; Bhagwati, 1991 ; Irwin, 2005).1
The existence of such a professional consensus is supported by survey data.
Alston et al. (1992) reported the results of a large questionnaire survey of US
economists. Over 71 % of them generally agreed that taris and import quotas
usually reduce general economic welfare , a further 21 % agreed with provisos ,
and less than 7 % generally disagreed . Frey et al. (1984) found 57 % of an in-
ternational sample of economists generally agreeing, and just over 10 % generally

* Address for correspondence : Simon Kemp, Department of Psychology, University of Canterbury,

Christchurch, New Zealand. Fax: +64 3 364 2181. Email: Simon.Kemp@canterbury.ac.nz
I am very happy to acknowledge helpful suggestions and encouragement from Paul Brown, Linda
Cameron, Ananish Chaudhuri, Marion Jansen, Patrick Low, Philip Meguire, John Tisdell and Steven
Tucker. Three anonymous reviewers and the editor, Douglas Irwin, also oered constructive and very
helpful feedback. Finally, I am particularly grateful for the frequent and stimulating interactions I have
had with Jonathan Baron on the topic.
1 Roberts (2001: 106) remarks: Even those [economists] who make theoretical arguments against
free trade are loath to advocate taris and quotas in practice. So at the next cocktail party when someone
tells a joke about the one-armed economist being unemployed because he cant say on the other hand, or
how if you laid all the economists end to end, they still wouldnt reach a conclusions, dont encourage
them with the false laughter such dull-wittedness provokes. Smile a knowing smile and tell them you have
heard otherwise on the question of international trade.

25

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 26 SIMON KEMP

disagreeing with a similar question. (The lower percentage of agreement might

reect either the dierent samples, or the omission of usually from Frey et al.s
question.)
Such professional enthusiasm broadly conicts with the views of many people.
Gomes (2003) has charted a long history of resistance to free trade, and this re-
sistance continues today. Krueger (2004 : 490) comments that protectionists enjoy
remarkable success around the world . Consider, for example, recent popular
protests against the further liberalization of trade suggested by the World Trade
Organization, widespread hostility within both the USA and the European Union
to the lowering of tari and non-tari barriers, and much discussion of the evils of
the global economy (e.g. Mander and Goldsmith, 1996).
Social surveys show that such resistance has a rm foundation in the opinions of
ordinary people in developed economies. The 1992 US National Election Survey
found 67 % of the respondents favoured placing new limits on foreign imports
(Scheve and Slaughter, 2001), and a similar survey carried out in 1996 found
52 % agreeing with the same proposal (Hainmueller and Hiscox, 2006). Thus, a
majority of both US samples preferred increased protectionism to either increased
liberalization or maintenance of the status quo. The 1995 International Social
Survey Program surveyed 23 countries and 55 % of all the respondents agreed or
strongly agreed that their country should limit the import of foreign products to
protect its national economy , while 22 % disagreed or strongly disagreed. In only
two countries (Japan and the Netherlands) were there more pro-trade (disagree)
than anti-trade respondents (Mayda and Rodrik, 2005).
Economists have long been aware that their views are not always shared by the
wider community, but tend to attribute this to economic interests. They recognize
that, while free trade may benet the wider community, it is not usually in the
interests of everyone. Those within a community who produce goods that compete
with imports are likely to be worse o as a result of such trade (Feenstra, 2004).
Such producers are likely to be a minority within their community. Why then,
within democratic communities, do their views sometimes prevail ? Answers to this
question have been given by students of political processes (e.g. Mayer, 1984 ;
Olson, 1982 ; Rowley, 2001). For example, dairy producers might persuade a
larger political grouping to block the importation of cheaper or better dairy
products in return for the dairy producers support for issues of greater concern to
the larger group.
This article focuses on something that economists tend to overlook the
psychological reasons why the views of ordinary people, who are neither econ-
omists nor particularly threatened producers, might be hostile to free trade. This
does not mean that other reasons are unimportant, but the non-psychological
reasons for hostility to free trade are well known. For example, one current source
of opposition to trade liberalization is peoples fear that the environment is en-
dangered by freeing up trade (e.g. Mander and Goldsmith, 1996). Environmental
damage would obviously be an important non-psychological reason, and current

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 Psychology and opposition to free trade 27

discussion of the issue (e.g., Irwin, 2005 : ch. 2) focuses on the relationship
between environmental damage and trade, and under what circumstances freeing
up trade might harm or preserve the environment. Another important concern is
that globalization might lead to the swamping of minority cultures (e.g. Broude,
2005).
To date, much psychological research into economic decision-making has con-
sidered conditions where market forces apply, and there has been less interest in
applying psychology to economic decisions made by governments. Yet psychology
may be more rather than less useful in understanding such decisions.
Consider, rst, decision processes that are subject to some kind of bias. As
McCaery and Baron (forthcoming: 2) point out : In private markets, arbitrage
mechanisms, which allow some to prot from the biases of others, with overall
prices showing little eect, can be expected to reduce the eects of bias _ In the
public sector, however, the absence of any simple, general arbitrage mechanism,
such as the market itself _ gives reason to believe that the adverse eects of
cognitive biases can persist for long periods of time. Government controls on
trade reduce the eect of arbitrage mechanisms, and, in turn, lower the chances of
reducing any eects of cognitive biases or misperceptions.
Even if a decision process is not subject to cognitive biases, there is an important
role for psychology in helping to determine the utility produced by government
decisions. A reasonable, if imperfect, measure of the value of market-supplied
goods and services is given by peoples purchase behaviour, but this measure is not
readily applicable to goods and services supplied by governments. Similarly,
government control of trade changes, and in some cases eliminates, the market,
and behavioural measures of the value of imported products may thus be either
distorted or unavailable. If a government decides to ban the importation of ba-
nanas, then the obvious behavioural measure of their utility people buying and
eating them will no longer work very eectively.
Finally, the general activity of trading is an extremely widespread human be-
haviour. Ridley (1997) argues that trade may be as old as our species. Horan et al.
(2005) suggest that the trading propensity of our early ancestors may have given
them a decisive evolutionary edge over Neanderthals. Trivers (1971) reasoned that
trade might have its origins in reciprocal altruism. Given this long and extensive
context, we would expect a human propensity to develop beliefs, attitudes, and
customs about exchange. In particular, we would expect people to be concerned
with fair exchange, and with the fair distribution of resources produced by col-
lective but specialized activity. Indeed, this is what we see.
For example, people will often reject outcomes that would benet them if they
perceive another party will derive a greater, unfair benet. In ultimatum games,
two players are oered a resource provided they can agree on its distribution.
Player A is rst given the choice of how the resource should be divided, and player
B can then only accept or reject the suggested division. If B accepts, the resource is
divided according to As suggestion ; if B declines, neither A nor B gets anything.

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 28 SIMON KEMP

The game theoretic solution suggests B should accept any positive oer, and thus
that A should oer as little as possible. In practice, no culture has yet been found in
which many players follow the game theoretic solution. B players frequently reject
the oer of small proportions of the resource, and A players often oer half of it
(e.g. Guth et al., 1982 ; Guth and Tietz, 1990 ; Henrich et al., 2005).
As a second example, there has also been considerable research into the way that
children believe resources should be distributed, and a number of experiments
have investigated whether and in what circumstances children choose to distribute
goods equally, according to the input involved in producing them, or according to
other criteria (e.g. McGillicuddy-DeLisi et al., 1994).
Overall, it would be utterly unsurprising to nd such beliefs, attitudes, and
customs operating in the wider if more impersonal arena of international trade.
Indeed, there has been at least one previous suggestion that fairness might be
a crucial factor in peoples views on trade (Davidson et al., 2006). Hence, the
following section presents six psychological factors that might be inuential on
peoples attitude to international trade.

2. Psychological factors in trade values

2.1 Production versus consumption in human utility
Taken broadly, utility in economics is mostly considered to derive from con-
sumption. Adam Smith (1776/1904, Vol. 2 : 159) put it directly : Consumption is
the sole end and purpose of all production ; and the interest of the producer ought
to be attended to, only so far as it may be necessary for promoting that of the
consumer. When David Ricardo (1817/1971 : ch. 7), in demonstrating the prin-
ciple of comparative advantage, discussed English and Portuguese specialization in
the production of cloth and wine, he presumed that people derived most utility
from maximizing their consumption of the two commodities.
Similarly, recent expositions of the arguments for free trade concentrate on the
expansion of the production possibility frontier and hence consumption possi-
bilities. Economic models dene utility in terms of consumption and show how
peoples utility is aected by changes in income that in turn depend on changes in
trade patterns (e.g. Dixit and Norman, 1986 ; Krebs et al., 2005). In general, much
of the argument for free trade in economics rests on utility gains from improved
consumption possibilities.
By contrast, many objections to trade liberalization stress the reduction in utility
from the loss of employment or, more rarely, deteriorating work conditions.
Restrictions on trade are often advocated by workers, for example, US steel
workers or European farmers, who are likely to be aected. It has been widely
recognized by both psychologists and economists ever since pioneering research
during the Great Depression (Eisenberg and Lazarsfeld, 1938 ; Jahoha et al., 1971)
that employment has value over and above the purchasing power provided by the
income people earn.

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 Psychology and opposition to free trade 29

Recent quantitative evidence on the eects of unemployment comes from large-

scale studies (e.g. Frey and Stutzer, 2000 ; Lucas et al., 2004 ; Winkelmann and
Winkelmann, 1998) in which unemployment has been shown by regression
analyses to produce substantial adverse eects on well-being, even when the eects
of income have been statistically accounted for. Lucas et al.s (2004) longitudinal
study of a large German sample showed that these eects could persist for years,
and do not always vanish when people re-enter the workforce (suggesting that
long-lasting disutility also results from being forced to change ones job or occu-
pation).
Research into happiness and well-being shows that peoples happiness is heavily
inuenced by their work satisfaction but little by their income (e.g. Diener et al.,
1999). Peoples work is believed to provide a structure to their lives, an outlet
for their creativity, a source of social contacts, and a sense of identity (e.g. Darity
et al., 1999). A striking demonstration of this phenomenon in recent years is in
the continuation of work in some East European concerns even when the workers
have eectively not been paid at all (Bojilova, 2006).
In sum, people derive benets from their work which go beyond income or the
consumption obtainable from this income, and which are not easily compensated
for by income changes and adjustments. Thus, there is some distance between the
ndings of research into unemployment and the viewpoint taken by much econ-
omic theory.
Of course, economists are concerned with unemployment and the non-income
benets of work, as well as with the eects of changing trade policy on them. Both
economists in general and those who advocate free trade (e.g. Irwin, 2005) have
long been aware both that unemployment is a real and serious problem for those
aected and that it can follow trade liberalization. An important line of research
has been into the actual changes in employment following trade liberalization,
with the results suggesting that employment losses from this cause, although
sometimes real and enduring (e.g. Kletzer, 1998), are not invariable and often less
than the losses from economic recession or the introduction of new technology
(e.g. Papageorgiou et al., 1990 ; Treer, 2001). There has been a good deal of
attention paid to the issue of how the losers from trade changes might be com-
pensated for their loss (e.g. Dixit and Norman, 1986 ; M. Kemp and Wan, 1986).
There have also been economic models that predict unemployment eects
from trade changes (e.g. Jansen and Turrini, 2004). However, many of these
models do not address changes to utility over and above income eects on con-
sumption, and in this respect they do not take account of broader research into the
utility of work.

2.2 Status quo bias, predicting future utility and loss aversion
This section deals principally with two somewhat dierent phenomena: the di-
culty people appear to have in predicting utility, and loss aversion. The two are
among the host of more-or-less interrelated phenomena that have been recently

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 30 SIMON KEMP

studied by psychological decision-making theorists and behavioural economists.

Both suggest a status quo bias in the way people conceive the gains and losses from
trade.
Recent years have seen an inux into economics of psychological thinking and
results based on psychological experimentation. The work of Kahneman and
Tversky (e.g. 1982, 2000) has been particularly inuential, and both psychologists
and economists have now carried out a great deal of empirical work that has
focussed on the decision-making capabilities and performance of individual
people. For example, there have been a large number of experiments showing that
people may make inconsistent decisions depending on the wording used to inform
them of the conditions of the experiment. (e.g. Tversky and Kahneman, 1981 ; for
a recent review, see Kahneman and Tversky, 2000). The eects of these wording
changes are often described as framing eects. Such eects surface in real-world
situations, as well as in the laboratory. For example, there is good evidence from
the USA that people are most likely to sign up for whatever pension plan is framed
as the default option (Madrian and Shea, 2001).
Framing eects probably do have an important inuence on the way people
think of trade (e.g. Davidson et al., 2006). Hiscox (in press) asked US respondents
whether they favoured or opposed increasing trade with other nations.
Signicantly more respondents were opposed to trade if they were rst informed
about the possibility of job losses than if they were given no information or if they
were informed about the possibility of lowered prices. Furthermore, the inuence
of the framing was increased for less-educated respondents.
In general, framing eects could bias people either towards or against any par-
ticular trade policy, depending on the frame provided. More specic biases are
indicated by research on utility prediction and loss aversion.
In the previous section, we considered the utility people gain from employment
as opposed to consumption. However, when people make judgements about a
future trade (or any other) policy, often they must judge on the basis of predicted
future utility changes rather than any changes they have actually experienced. This
raises the question of how good people are at predicting the utility they gain from
future situations and activities.
The research done to date indicates that people are generally poor at predicting
their future utility and enjoyment, even when the activity, for example, listening to
music or eating their favourite ice cream, is quite familiar to them (Kahneman and
Snell, 1992). An endowment eect, in which people will demand more to give up
some good than they would spend to acquire it, has commonly been studied by
behavioural decision theorists and economists (e.g. Kahneman et al., 1991). In one
variation of the endowment eect experiments, Loewenstein and Adler (1995)
showed subjects a mug (coee mugs have been a frequently used good in endow-
ment eect research) and asked them to imagine they would be given the mug and
what they would be prepared to sell if for. Subsequently, they were actually given
the mug and a real opportunity to sell it. The prices asked then rose signicantly,

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 Psychology and opposition to free trade 31

indicating that the subjects now valued the mug somewhat more highly than they
imagined they would.
In general, research to date indicates that people tend to ignore or misperceive
the way their tastes and preferences will change in the future (Kahneman, 1994).
Moreover, people often seem to underestimate their future powers of adaptation,
and tend to make judgements that favour maintenance of the status quo.
The straightforward implication for trade policy is that people might under-
estimate their ability to adapt to the changes produced by a more liberal (or more
protectionist) trade regime. However, some caution is needed here. The extent of
adaptation to major life changes varies greatly from individual to individual, and
perhaps from situation to situation. For example, Lucas et al.s (2004) study into
long-term eects of unemployment found great variation in the ability of in-
dividuals to adapt to unemployment.
A status quo bias also results from the phenomenon of loss aversion (Samuelson
and Zeckhauser, 1988). Loss aversion has been frequently studied and it has often
been found that the gain in utility from receiving, say, an extra $100 is not gen-
erally perceived to be as great as the loss in utility from losing $100 (e.g. Tversky
and Kahneman, 1991). The implication is that, while there might be a net nancial
gain from liberalization of trade, there need not be a net utility gain. This is es-
pecially true if, as we saw in the previous section, the utility loss from unemploy-
ment cannot be easily compensated for by making up for the lost income. Even if
there is a net utility gain, it is not clear how this should or could be redistributed
over the various people aected, because, for example, two dierent people who
are made redundant from the same job may suer greatly dierent psychological
consequences.
Fernandez and Rodrik (1991) identied yet another possible source of status
quo bias. They show that the bias can result from uncertainty, and in particular
from uncertainty about who the individual winners and losers from a policy
change might be. At least one economics study, Krebs et al. (2005), has in-
vestigated the theoretical eect of risk aversion on peoples attitudes to
trade policy. The essential result is that risk aversion, coupled with uncertainty
about the eects of trade liberalization, is likely to reduce ones estimates of
future utility.
Tovar (2006) has produced and tested a mathematical model of how loss aver-
sion might produce an anti-trade bias in government policy. A basic insight of her
model is that industries which experience or face losses will be more motivated to
lobby for protection than those who gain from a more open economy, because
losses have a greater impact on utility than gains. The more energetic lobbying
then results in more protectionism.
Loss aversion does not simply imply aversion to free trade. Certainly, the
reasoning above indicates that liberalizing trade may not produce overall gains in
utility that parallel the gains to be made in the provision of goods and services. But
the phenomenon of loss aversion applies to change in either direction. Indeed,

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 32 SIMON KEMP

Figure 1. As the extent of the actual loss increases, the loss of utility does
not increase proportionally

Utility

Losses Gains

A. Large utility loss

from small cost

B. Proportionately
smaller utility loss
from larger cost

there is some reason to expect restriction of trade might be even more vehemently
opposed than liberalization.
One reason for this comes simply from the classic economic argument. Although
utility is not completely derived from the provision and consumption of goods and
services, the relationship is certainly expected to be positive. Ceteris paribus, re-
strictions of trade should produce lower overall utility than its liberalization.
A more complex argument arises from the shape of the utility function. Figure 1
depicts its likely form, as based mostly on the results of experiments where people
have been asked to choose between dierent gambles (e.g. Tversky and
Kahneman, 1991). Note, rst, that the function graphically depicts loss aversion in
that it is more steeply sloping for gains than losses. More subtly, however, the
slope of the function changes as the extent of the loss (or gain) increases. In par-
ticular, the function is more steeply sloping for small losses (and gains) than for
large losses. Now consider a restriction of trade that is carried out to protect
workers and owners of a particular industry. Such changes will produce moderate
nancial gains to the relatively few aected workers and owners, and small
nancial losses to the relatively numerous rest of the community. However,
when we consider utilities, the small nancial losses (to the community) should

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 Psychology and opposition to free trade 33

be magnied to more substantial utility losses, and there is relatively more

magnication for the small losers than for the moderate winners (the workers).
Thus, the model appears to predict, because of the way that the utility
losses change evermore gradually as the nancial loss increases, that the
overall utility losses when trade is restricted should be greater than when it is
liberalized.
Overall, loss aversion suggests people will resist changes in the status quo with
respect to trade regulation. Loss aversion provides an account of why trade liber-
alization should be opposed, but it suggests trade restriction should also be op-
posed. (One additional complication could also be noted. If a workers job in an
existing industry is threatened by new competition from outside under an un-
changing tari and importation regime, is the status quo the retention of his job or
the retention of the existing trade policy ? Clearly, this depends on which might be
framed as the status quo, as well as on who is asked.)
Finally, although the recent empirical research carried out by those interested in
behavioural economics and decision making produces both solid evidence for
status quo bias and, more importantly, insight into the conditions that produce it,
the existence of the bias has long been acknowledged. In the eld of trade,
Cordens (1974 : 5) conservative social welfare function recognized that an in-
crease in income is likely to produce a smaller positive eect on welfare than the
negative eect produced by a similar income decrease. Corden, too, saw this
function as an explanation of reluctance to reduce taris.

2.3 Altruism and parochialism

It has long been noticed that those who produce goods at a price greater than they
could be imported for tend to oppose the importation of such goods, and they
band together so as to lobby governments and persuade the general public that the
importation should be restricted. There has also been attention paid to the oc-
casional ability of such groups to lobby successfully, even though the benets of
restricting imports may only be enjoyed by a small minority of the electorate (e.g.
Olsen, 1982).
From a psychological point of view, the question is not so much why the
producers or the politicians who represent them behave as they do, but why
the public might be happy to go along with them. Answers to this question
include the frequent cohesion and organization of the producers (Olson, 1982),
the probability that individual consumers suer a small rather than a large
nancial loss from the import restrictions (although, as we have just seen,
research on loss aversion only supports this reasoning for maintenance of
existing trade barriers), and frequent uncertainty about the benets that arise
from lifting them (Fernandez and Rodrik, 1991). Another possibility is that the rest
of the community might be altruistic. The small material or nancial loss
is outweighed by utility derived from the belief that they are helping their
compatriots.

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 34 SIMON KEMP

There is good evidence that altruism is important in peoples stances on political

and economic questions. For example, many voters in a referendum on a river
channelization project in Roanoke, Virginia supported the project even though
they would receive no direct benet from it (Shabman and Stephenson, 1994). A
key determinant of election outcomes appears to be how the nation as a whole is
faring rather than how peoples own individual economic interest might be aec-
ted (Funk and Garcia-Monet, 1997). Rotemberg (2003) has provided an economic
analysis of how altruism might lead to protectionism in both direct and indirect
democracies.
Thus, we would anticipate the ordinary citizens views on trade issues to have an
altruistic component. But who should benet from this altruism ? Consider some-
one who is thinking about the removal of import restrictions on imported clothing.
She has no personal connection with the clothing industry, and would personally
benet from the removal of restrictions. If she decides altruistically, however, she
could consider only the interests of her compatriot clothing workers, who would
be harmed by the change, or she might also consider the interests of clothing
workers in foreign countries, who would benet from it.
This kind of choice was discussed by Olson (1965, 1982) and has been modelled
experimentally in the layered prisoners dilemma (Bornstein and Ben-Yossef,
1994 ; Schwartz-Shea and Simmons, 1990). In this set-up, participants are given the
choice of cooperating or defecting. Cooperation disadvantages the participant
and an out-group but benets members of the in-group ; defecting does the
opposite. The behaviour varies with the parameters of the experiment (for ex-
ample, with regard to whether the participants can discuss the situation), but it is
quite common for participants to choose a course of action which benets the in-
group at the expense both of the participant him- or herself and the wider com-
munity (ingroup+outgroup).
Such behaviour may be termed parochialism (Schwartz-Shea and Simmons,
1991). Baron (2001) investigated whether some parochialism might be the conse-
quence of a self-interest illusion in which people see themselves as beneting
from a sacrice they make for their group, even when in fact they do not. He found
the self-interest illusion increased from a simple individual and one-group situ-
ation to the individual and two-group situation of the layered prisoners dilemma,
and that it decreased when the participants were made to calculate the actual
outcomes mathematically.
Extrapolation to trade suggests people might favour import restrictions that
benet their compatriots, even though these restrictions are neither in the interests
of the individual nor of overall benet to the world. There is some empirical sup-
port for this extrapolation. Baron and Kemp (2004) had respondents complete a
scale measuring their tendency to think of the global versus the nation good (by
including such questions as National governments should put the interests of the
world as a whole ahead of their own national interests ). Attitudes towards the
restriction of imports were also measured. As expected, there was a moderate

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 Psychology and opposition to free trade 35

positive correlation between the tendency to favour the national over the global
good and the tendency to favour import restrictions.
To summarize, individuals often think beyond their own narrow self-interest
when considering government economic policies in areas such as trade. However,
this altruism may extend only to co-nationals, rather than to everyone aected by
these government decisions. The circumstances under which this extension may
occur are not well understood at present.

2.4 Trade and bargaining

Suppose two countries, A and B, have trade barriers against each other. B is un-
willing to lower its own trade barriers. What should A do ? Economic theory is not
completely clear-cut on this issue, but many economists believe A would gain by
lowering its own trade barriers anyway (e.g. Bhagwati, 2002). Similarly, if B were
to unilaterally increase its trade barriers, economic theorists often suggest that A
would gain little by raising its own in retaliation.
In practice, it seems uncommon (although not unknown) for countries to lower
their trade barriers unilaterally, and it is quite common for countries to retaliate
against the trade restrictions of other countries by imposing their own. Both re-
luctance to liberalize trade unilaterally and retaliation to barriers imposed by an-
other country are understandable in terms of research into how individuals
perceive fairness and how individuals react to apparently unfair treatment.
Earlier, a little of the research on fairness, and in particular research on the
ultimatum game, was outlined. Very briey, this work indicates that people are
often reluctant to accept deals in which it appears that another party gains con-
siderably more than they do. It is completely plausible, especially in light of the
research discussed in Section 2.3, that an individual whether as a trade nego-
tiator or simply a citizen would also be unwilling to accept a trade deal that is
oered their country (or perhaps other group) if another country is perceived to
gain more from the deal. So, for example, suppose an individual perceives her
own country, A, as gaining 2 units of perceived utility from opening its borders to
Bs imports and 4 units of perceived utility from B opening its borders to As
exports. B is perceived to have similar expected gains. Clearly, A would benet
from unilaterally opening its borders regardless of what B does. However, the
ultimatum game results suggest that a citizen of A might be hostile to this action
because B is perceived to unfairly gain more from it. (For further discussion of
the possible impact of considerations of fairness on trade policy, see Davidson
et al., 2006.)
There is some evidence indicating ordinary people do think along these lines.
Baron and Kemp (2004) found peoples willingness to restrict imports from other
countries was heavily dependent on the other countrys behaviour. Indeed, per-
ceived reciprocity in this study produced larger eects on willingness to restrict
than either the nature of the present status quo or whether ones own compatriots
were likely to suer unemployment.

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 36 SIMON KEMP

2.5 Fixed pie beliefs

The xed pie belief occurs when two or more concerned parties believe that a gain
to one must be a loss to the others. There are real-life situations where the belief is
accurate ; most obviously, when an actual pie must be divided between two or
more people. But there are also situations where a gain to one party may be in the
interests of other, apparently opposing parties. For example, a unions desire to
protect workers at an industrial plant from injury may also benet management.
It is well documented that people often do hold and act on inappropriate xed
pie beliefs, especially in negotiation situations (see, e.g., Bazerman et al., 1999,
2001 ; Pinkley et al., 1995). Thus, management might oppose a union proposal
simply because it wrongly believes that what is good for the union must be bad
for them.
Economic theory has, of course, long held that the benets of trade come from
enlargement of the pie. However, it is quite likely that many people do not see it
this way and instead believe that countries that benet from trade only do so by
exploiting other countries, not by beneting them as well. Note here, incidentally,
that, as for bargaining, although it is the individuals views that are important, her
views concern the benet to her country rather than to herself directly.
2.6 Failure to understand comparative advantage
Part of the argument for free trade derives from Ricardos principle of comparative
advantage. Ricardo argued that one need not be the most ecient producer of
any commodity at all in order to have something to oer in the trade process.
His original example (Ricardo, 1817/1971 : 7) considered an economy of two
countries, England and Portugal, both of which can produce two commodities,
cloth, and wine. Ricardo posited that England can produce cloth using 100 units
of labour and wine using 120 units of labour ; Portugal can produce cloth with
90 units of labour and wine with 80 units of labour. Although Portugal can pro-
duce both commodities more eciently than England, the production and con-
sumption of both commodities is maximized if Portugal specializes in wine and
England in cloth. One way of summarizing the principle is to say that the deter-
minant of where the goods should be produced is the ratio of the costs of pro-
duction (comparative advantage) rather than the absolute costs (absolute
advantage).
Ricardos principle is not obvious. Samuelson, in response to the challenge of
nding a theory in the social sciences that was both true and nontrivial, famously
chose this principle, remarking that it is not trivial is attested by the thousands of
important and intelligent men who have never been able to grasp the doctrine for
themselves or to believe it after it was explained to them. (Samuelson, 1972 : 683).
Krugman (1994) gives a number of examples of eminent people apparently mis-
understanding it, and goes on to suggest that resistance arises because it is not
new, because understanding it requires knowledge of a number of other economic
concepts, and because it is grounded in a mathematical model.

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 Psychology and opposition to free trade 37

If important and intelligent men have diculty understanding and applying

the principle, it would not be surprising to nd the average person also had a
limited understanding of it, or to nd those who misunderstand more likely to
advocate restrictions on international trade. Baron and Kemp (2004) administered
various tests of the principle to members of the general public, presenting them
with scenarios such as the following and then asking how production should be
allocated so as to maximize production :
Two branches of a rm, both within one country, make parts for a motorbike.
Branch A can make engines at a cost of $100 each and frames at a cost of $80
each. Branch B can make engines at a cost of $80 [for an easy, $180 for a hard
condition] each and frames at a cost of $100 each _ Think about how you
would allocate work to get the most production.
Peoples answers, especially where they had to consider comparative rather than
absolute advantage, generally did not maximize production, indicating imperfect
understanding of the principle. More importantly, those individuals with lesser
understanding of the principle tended to favour restricting imports.
A corollary to the principle of comparative advantage may also be unappreci-
ated by lay people. Suppose for the moment that in Ricardos example only labour
costs were important in determining the cost of cloth and wine (i.e. the advantages
come about because of diering worker skills). In this case, maximizing
production would come about through wage inequalities : the more ecient
Portuguese workers would be paid more than their English counterparts, driving
production of cloth out of Portugal and into England.
Opposition to trading with poorer countries on the grounds either that their
workers are exploited (because they are less well paid than ones own) or that their
workers have an unfair advantage (because they are willing to work for less than
ones own) also constitutes resistance to applying the principle of comparative
advantage. It is thus an interesting question whether people who oppose trade
because of diering wage levels do so because they misunderstand how the prin-
ciple of comparative advantage might work.

3. Putting together and assessing the psychological factors

3.1 Combining the factors
The eects of the factors just reviewed on peoples thinking about trade appear to
be cumulative rather than independent. We would also anticipate the psychologi-
cal factors to combine with the non-psychological factors. For example, special
interest groups lobbying for protection of their particular industry are likely to
appeal to the altruism (or parochialism) of their compatriots. Two further ex-
amples illustrate possible combinations of the psychological factors:
Jane may oppose her country importing clothing from a poorer country because
clothing workers in her own may become unemployed. Her opposition would thus

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 38 SIMON KEMP

depend on an altruistic but parochial concern for other people in her own country,
and on her belief that people derive utility from the work they do as well as from
their consumption.
Bruce opposes his country importing from Ruritania because Ruritania places
heavy import restrictions on goods produced in his own country. Bruces oppo-
sition depends on both his perceptions of fairness, and on his applying his judge-
ments of fairness to his country (i.e. parochially). His views may also depend partly
on a xed-pie belief.

3.2 Rationality and irrationality

Section 2.2 briey introduced some of the empirical and theoretical research work
carried out by decision theorists and behavioural economists. The work carried
out by these researchers is too diverse and innovative to categorize simply, but
much has concentrated on decisions that appear not to be rational. So, for ex-
ample, the Asian u experiments show that people make dierent decisions de-
pending on whether the framing of the problem focuses on survivors or victims of
the outbreak of a fatal disease (Tversky and Kahneman, 1981). People appear to
act irrationally in that they decide inconsistently or not in their own best interest.
We can ask whether the six factors outlined above also feature irrational processes.
There is a wealth of evidence indicating that peoples happiness and well-being
strongly relate to work satisfaction. Individual utility functions depend on the
nature of work as well as on the money people earn that they can then use for
consumption. Hence, it must be rational for people to consider eects on their
work as well as on their consumption when they think about trade. At the other
extreme, a misplaced belief that trade gains constitute a xed pie or failure to
understand the principle of comparative advantage can probably be considered
irrational, no matter how common these errors might be.
The other factors are more dicult to categorize. Tversky and Kahneman
(2000 : 157) ask whether loss aversion is irrational, and suggest that at least some
components of it appear to be rational. A value function that is more steeply
sloping on the losses side appropriately reects three basic facts : organisms
habituate to steady states, the marginal response to change is diminishing, and
pain is more urgent than pleasure. The asymmetry of pain and pleasure is
the ultimate justication of loss aversion in choice. Thus, a decision maker
who seeks to maximize the experienced utility of outcomes is well advised to
assign greater weights to negative than positive consequences (Tversky and
Kahneman, 2000 : 157).
On the other hand, an individuals loss aversion is inuenced by how he or she
brackets the experience with others. Thaler (1999) considers the case of people
who might reject a single bet (for example, a 50 % chance or either winning $200
or losing $100) but accept a series of such bets. The diculty for a rational ex-
planation here arises with why an individual with a reasonable total wealth would
reject the single bet. A status quo bias arising from an individuals inability to

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 Psychology and opposition to free trade 39

predict his future tastes also may not be rational, especially if (as in Kahneman
and Snell, 1992) the situation is one in which the individual does appear to have
enough information to predict a taste change.
It is similarly not easy to know whether altruism and parochialism are rationally
considered in the context of trade or not. People are in practice more likely to be
sympathetic to the fate of their countrymen (even if they do not know them per-
sonally) than of those who live in other countries and about whom they are likely
to be less well informed. On the other hand, people who take part in layered
prisoners dilemma games are sometimes subject to a self-interest illusion in which
they see themselves as beneting more from the general good fortune of their own
group than they actually do. When this is brought to their attention, their coop-
eration with the group decreases (Baron, 2001). Furthermore, the apparent
worthiness of the out-group can be aected by discussion (Schwartz-Shea and
Simmon, 1990). Extension of these experimental ndings to trade suggests, for
example, that the relative weight people might give to the welfare of clothing
workers in their own country (and why not in their own city ?) versus those in a
foreign country could be aected by attitudinal manipulations and framings of
dierent sorts. At this point, it becomes more dicult to consider fellow feelings as
strictly rational.
Finally, with respect to bargaining, is it rational to reject a good outcome (the
consequence of ridding oneself of import restrictions) in favour of a better one
(ridding oneself of import restrictions and having other countries do so as well) ?
What should an individual think of this ? Trade negotiations are not a single ulti-
matum game ; it is quite possible that country A might make a larger gain in utility
by holding out until country B reciprocates. Indeed, it is conceivable that A might
gain more utility from trade negotiations with B (and C and D) by not accepting
short-term gains and refusing to accept deals that give other countries more utility
than it receives itself (see Frank, 1988). One consideration in this case may be the
relative power of the countries. Seen from the national point of view, if A is much
smaller and less powerful than B, A might not be able to inuence Bs policy at all
(Rabin, 1997). Of course, whether an individual citizen of A would take this or
similar considerations into account is quite another matter. In short, the question
is not simple to answer.
More could obviously be said about the rationality of the dierent psychological
factors. One might even debate what it means to be rational (e.g. Singer, 1999).
However, it should at least be clear that the psychological factors dier in the
apparent extent of their rationality, and that taking account of psychological fac-
tors in trade is not the same thing as simply considering factors that are completely
irrational.

3.3 Psychology and politics

Broadly speaking, there are two dierent ways for lay opinions to aect trade
policy. In the rst place, trade negotiators and politicians are themselves human,

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 40 SIMON KEMP

and often have neither specialized economic training nor a substantial personal
interest in any particular industry. Thus, if there are general psychological reasons
to resist free trade, we would expect decision makers or negotiators to share at
least some of them with ordinary citizens. Note, too, that when ordinary citizens
are questioned about trade in the research reviewed above, they are often eec-
tively asked to put themselves in the place of a decision maker. For example,
Scheve and Slaughter (2001) asked people whether they favoured placing limits on
imports ; Baron and Kemp (2004) asked people to indicate their preferences for
importing goods from a foreign country under dierent conditions.
Secondly, in a democratic society the views of ordinary citizens inuence those
responsible for negotiating (or not negotiating) trade deals, either because the
negotiators are elected and thus constrained by voters, or because the negotiators
are to a greater or less extent controlled by the elected representatives. The extent
of voters inuence in any area of government policy is debatable. For example,
the views of the majority, or those of the median voter (the voter who is right in the
middle on a particular issue), are not decisive in determining the level of provision
of public goods (e.g. Kemp, 2002). The social survey results presented in the in-
troduction indicate that trade policy is no exception and that governments, or at
any rate many western governments in the 1990s, do not follow the generally more
protectionist policy desired by the median voter. Possibly government trade poli-
cies sometimes reect a compromise between those desired by the electorate, and
those advocated by economic experts. As the latter are more likely to improve
general welfare, and the electoral fate of governments seems to be determined
mainly by the overall state of the economy (e.g. Alvarez et al., 2000), this seems a
plausible way for governments to behave. Davidson et al. (2006) suggest that
keeping the public away from trade negotiations serves to advance more liberal
trade policies than would otherwise be achieved. Finally, Hiscoxs (in press)
demonstration that the extent of peoples surveyed opposition to free trade is
subject to framing eects indicates that governments might reasonably expect to
be able to reduce the opposition by appropriate marketing.

4. Conclusions
A full understanding of how psychological factors interact with economic and
political factors to produce peoples attitudes to trade would have important im-
plications. Some factors, for example, the representation in utility functions of
employment values that are not easily compensated for by income, suggest changes
to economic models of the benets of trade. On the more practical side, knowing
more about psychological factors might help counter negative aspects of changes
to trade policy. Greater education of the public, with respect to the xed pie fallacy
or the principle of comparative advantage, might also be suggested.
Our present knowledge of psychological factors in trade is incomplete, perhaps
primitive. Little empirical work has been done, and the previous discussion has

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 Psychology and opposition to free trade 41

often been based on extrapolating principles derived from studying other areas.
For example, it is plausible, but it has not been demonstrated, that many people
believe that one countrys trade benets arise only if other countries lose pro-
portionally.
However, a start has been made, and interesting results have already emerged
from the analysis of surveys containing attitude to trade questions. For example,
people with higher skill and education levels are generally less likely to favour new
trade barriers, at least in more developed economies (Mayda and Rodrik, 2005 ;
Scheve and Slaughter, 2001). This result could be interpreted as a rational response
to the increased likelihood for the lower skilled to lose their jobs to cheap foreign
competition, but it is also possible that higher skilled and educated people are
more pro-trade because of their greater exposure to economic ideas. Hainmueller
and Hiscox (2006) suggest the latter is more likely, because those who have retired
from the work force retain the attitudes appropriate to those with the same skill
and education level who are employed. However, this result could also be ex-
plained by retirees feeling disproportionately altruistic to workers similar to
themselves. Moreover, Baron and Kemp (2004) found understanding of com-
parative advantage to be relatively poor even among the educated.
Further empirical research is needed to establish both the psychological factors
that do aect peoples trade attitudes and their relative importance. The psycho-
logical factors reviewed generally predict that ordinary people might often be less
keen on trade liberalization measures than economists, and it is very unlikely that
this list exhausts the potential factors. When we add non-psychological factors
(e.g. capture of the political decision making by lobby groups, environmental
factors), the brief conclusion must be that the opposition of many people to free
trade is, if anything, over-determined. Which, then, are the crucial factors in this
opposition ? Are these important factors to be countered by education or insti-
tutional change or do they suggest some fundamental rethinking of the optimal
trade policy ? The task of determining the relative importance of the factors is more
dicult because, as we have seen, they often operate together rather than inde-
pendently. Moreover, we should not expect dierent factors necessarily to have
the same importance in rich and poor countries, in large and small countries, or all
communities within the same country. However, the apparent worldwide hard-
ening of opposition to free international trade indicates that nding answers to
these questions is important.

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