Righting Globalization’s Wrongs

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Free trade delivered efficiency gains and lifted hundreds of millions out of poverty after the 1990s, but policymakers underestimated and under-addressed its concentrated regional and distributional costs.
Rising economic nationalism around 2016 (United States’ higher import tariffs, China’s industrial policies, United Kingdom’s exit from the European Union) reflects backlash to these unaddressed dislocations.
Restoring confidence in global integration requires a credible alternative to economic nationalism that directly remedies regional distress caused by globalization.

Key historical policy inflection points called out:
- Formation of the EU in 1992
- North American Free Trade Agreement in 1994
- China’s accession to the WTO in 2001
Three misunderstandings by economists that obscured localized harm:
- Industrial specialization: long-standing geographic concentration of manufacturing exposed industry towns to rising import competition when China’s manufacturing exports expanded in the 1990s.
- Scarring from job loss: manufacturing paid a persistent pay premium, and concentrated factory closures produced aggregated local income shocks that lower spending, housing prices, and local tax bases.
- Lack of geographic mobility: spatial equilibration via migration is slow—interregional migration can take decades and is particularly limited among less-educated and older workers.

Regionally concentrated manufacturing decline produced:
- Large negative local income shocks as displaced workers failed to replace lost earnings.
- Reduced demand for nontraded goods and services, depressed housing markets, and lower local tax revenues.
- Persistent high joblessness and few well-paying jobs for less-educated workers in many former industry towns.

Laissez-faire (let markets adjust)
- Outcome: regions shrink; businesses close; outmigration and retirement gradually reduce regional disparities.
- Drawback: adjustment is likely to be very slow; local economic opportunity is circumscribed during transition (example: transformation of Pittsburgh took more than a full generation).
Means-tested individual programs (social insurance)
- Instruments: unemployment insurance, income support, housing and energy subsidies, subsidized health care.
- Strength: cushions consumption declines and insulates individuals.
- Limitation: does not directly address local labor-market causes or speed regional adjustment.
Trade protection (tariffs)
- Rationale: block imports to restore manufacturing jobs.
- Critique: targets distress indirectly; does not prevent job loss from technological change or AI; recent US tariffs have done little to restore manufacturing employment or earnings growth in regions harmed by the China trade shock.
Place-based policies (targeted local development)
- Objective: subsidize human and physical capital to raise productivity, earnings, and economic structure in distressed regions.
- Theoretical justification: high social returns on investment in communities with elevated joblessness and low wages.
- Practical controversy: concerns over rent capture by special interests and informational challenges in program design.

Less-effective approaches:
- Tax subsidies to attract major investment by large firms—often result in a winner’s curse with high tax expenditure per job created.
More-effective design features:
- Condition subsidies on local distress.
- Monitor compliance with program objectives.
- Design programs for specific contexts via ongoing experimentation.
Examples of effective place-based measures:
- Tax incentives for investing in low-income communities (enterprise zone programs with rigorous selection and auditing).
- Sectoral worker training initiatives (active labor market programs applied in many high- and middle-income countries).

Pittsburgh:
- Once a global center for steel manufacturing through the first half of the 20th century.
- Post-1970 industrial decline due to import competition and technological change produced prolonged joblessness and hardship.
- Transition to health care, life sciences, and robotics succeeded but required more than a full generation; many other former industry towns did not recover similarly.

Of the options considered, place-based policy uniquely targets the outcomes needed to alleviate regional distress:
- Move out-of-work adults into employment.
- Bring well-paying jobs to underserved regions.
- Make regions more attractive for future investment.
To prevent geoeconomic rupture and counter the appeal of economic nationalism, correct past policy mistakes by implementing credible, well-designed place-based programs that directly address localized scarring and adjustment failures.

Source: Righting Globalization’s Wrongs, GORDON HANSON, F&D Magazine, June 2026.

Righting Globalization's Wrongs
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