Free trade has taken a serious beating in this election cycle, as real estate mogul Donald Trump dominated the news coverage while disparaging the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP). Sen. Bernie Sanders (I-VT) augmented Trump’s criticisms of free trade by using his own Marxist rhetoric to rail against NAFTA and free trade. Former Secretary of State Hillary Clinton has even called for appointing a trade prosecutor to enforce trade agreements after constantly flip-flopping on the issue in Trumpian fashion.
Since there will not be a presidential campaign arguing the case for free trade, here are seven facts you need to know about the issue to guide you through the muck of the protectionist rhetoric.
1. The benefits of free trade are enormously vital. Finance columnist Angie Mohr defines free trade in the Houston Chronicle as “the reduction or removal of commercial barriers between countries” which “allows a freer flow of labor and goods between member countries in a trade pact.”
The economic statistics prove that free trade is globally beneficial. According to the Foundation of Economic Education:
- 96 percent of economists surveyed in an IGM believe that “freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.”
- According to the Petersen Institute for International Economics, adopting freer trade policies resulted in an increase of almost $1 trillion in income throughout the country, or a $10,000 increase for each household a year, since World War II.
- Obama’s Council of Economic advisers determined that middle-income consumers saw a purchasing power increase of 29 percent as a result of free trade, as well as “environmental protection, gender equality, and global poverty reduction.”
The reason is the simple fact that free trade results in greater economic efficiency: more competition from foreign nations results in cheaper goods and services and a wider variety of options for the consumer to choose from. As Milton and Rose Friedman wrote in their 1997 essay The Case for Free Trade, “We eat bananas from Central America, wear Italian shoes, drive German automobiles, and enjoy programs we see on our Japanese TV sets.” Most Americans benefit from free trade without realizing it.
Additionally, free trade utilizes the principle of comparative advantage, allows countries to focus on their inherent advantages with particular goods–such as being naturally rich in oil, sugar or coffee beans– and increases economic efficiency since they’re able to produce these goods at a lower cost and then export them to other countries. Hence, U.S. consumers are able to enjoy a banana at a lower price since it came from a Latin American country where it’s cheaper to produce bananas. The Latin American country benefits from the goods to sold to the U.S. Everybody wins!
Free trade is also one of the essential components to lifting developing countries out poverty. As Mohr writes, free trade results in a reduction of child workers due to increased access to technology and increased access to foreign capital and markets. Naturally, this helps ameliorate poverty and results in higher life expectancy due to the higher access to jobs, wealth and technology that comes with free trade.
The “free” in free trade cannot be understated, as free trade is a necessary building block to freedom.
“Instead of making grants to foreign governments in the name of economic aid–thereby promoting socialism–while at the same time imposing restrictions on the products they produce–thereby hindering free enterprise–we could assume a consistent and principled stance,” the Friedmans wrote. “We could say to the rest of the world: We believe in freedom and intend to practice it. We cannot force you to be free. But we can offer full cooperation on equal terms to all. Our market is open to you without tariffs or other restrictions. Sell here what you can and wish to. Buy whatever you can and wish to. In that way cooperation among individuals can be worldwide and free.”
2. The notion that free trade results in lost jobs is a complete non-sequitur. This is the common critique from protectionists, that free trade results in jobs being shipped overseas or jobs being lost due to competition from foreign companies. Consequently, politicians like Trump, Sanders, Clinton and even Barack Obama in 2008 pander to the “rust belt” by railing against free trade agreements like NAFTA as the reason for their lost jobs.
Blaming a foreign country and free trade agreements are easy scapegoats for politicians, writes economist Thomas Sowell, since “people in Japan or India can’t vote in American elections.” Anyone who is economically literate understands that the process of creative destruction entails jobs always being lost, whether it’s the result of competition at home or abroad or some sort of new technological advancement that drives an entire industry out of business. Lost jobs become a problem when new jobs aren’t popping in their place.
The reason for the loss of jobs in the rust belt is actually to the expansion of government and unions, according to Sowell:
Like the United Automobile Workers union in its heyday, unions in the steel industry and other industries piled on costs, not only in wage rates having little relationship to supply and demand, but in all sorts of red tape work rules that added costs.
State and local governments in what later became the rust belt also thought that they too could treat the industries under their jurisdiction as prey rather than assets, and siphon off more of the wealth created by those industries into state and local treasuries with ever higher taxes — again, without considering repercussions.
In the short run, you can get away with all sorts of things. But, in the long run, the chickens come home to roost. The rust belt is where those rising costs have come home to roost.
Massive amounts of regulation are also a problem as well. If Trump, Sanders, et al. truly cared about the American worker, they would free the workers from the stranglehold of government and unions.
3. Complaints about “unfair trade practices” are also a non-sequitur. As Daily Wire editor-in-chief Ben Shapiro has explained:
Both Mitt Romney and Donald Trump have complained in the past about China’s “unfair” trade practices, particularly their devaluation of their currency. But devaluing your currency doesn’t give you any advantage, any more than pretending that Yao Ming is 5’9” gives Nate Robinson an advantage over him. Currency is merely an exchange unit. If China inflates its currency, the American dollar is worth more against it; that means we purchase more Chinese goods.
Well, good for us! That makes it cheaper for our consumers, supposedly. But not for long, since currency is a substitute for goods and labor, and government manipulation doesn’t change that. China’s consistent devaluation has led to economic crisis in the country, more poverty among the people who use their currency (namely, Chinese citizens) and multiple stock market collapses in the last year. Right now, the Chinese government is desperately attempting to stop a devaluation spiral. If devaluation were such a threat to the American economy, why wasn’t Weimar a world power when people were shoveling around cash in wheelbarrows?
In other words, those “unfair trade practices” are really unfair to the people of China who are burdened by their irresponsibility of their government, but they do provide a temporary benefit to U.S. consumers.
4. Trade deficits are irrelevant. As Sowell explains, trade deficits or surpluses have zero effect on the economy. The U.S.’s standard of living has skyrocketed in times when the country ran deficits and surpluses. Germany has high unemployment despite running a trade surplus; so does Japan. This is as because, as Shapiro writes, “We buy goods and services from foreigners, and they buy an equal amount of our exports plus our financial assets (aka foreign investment in the United States).” Trade is mutually beneficial, whether there’s a trade surplus or deficit.
Since there will not be a presidential campaign arguing the case for free trade, here are seven facts you need to know about the issue to guide you through the muck of the protectionist rhetoric.
5. Massive tariffs like the ones Trump has proposed and repealing NAFTA would be disastrous. According to the Latin American Studies Association, Mexico is the third largest export market for the U.S., and border states rely on Mexico as the highest market for exports. There are also an estimated 10 million–or four percent of total U.S. jobs–being reliant on trade with Mexico. The U.S. auto industry is also heavily reliant on Mexico’s export market for automobiles and for agriculture and Mexican imports have “offered U.S. production affordable and high-quality inputs” in the U.S. manufacturing industry. Therefore, to repeal NAFTA and put a 35 percent tariff on imports of Mexican automobiles would be an economic calamity for the U.S. given the ensuing trade war that would occur; suddenly Mexican imports that U.S. consumers and companies rely on would become a lot more expensive.
There is precedent that shows that tariffs are disastrous for the economy, as the Hawley-Smoot tariff was one of the catalysts for the Great Depression:
The tariff and retaliations against it destroyed the world trade system and demolished the integrated world financial structure operating under the gold-exchange standard as well. America’s monetary and capital structure from 1921 to 1929 was primarily shaped by six factors: first, a centrally planned monetary system; second, a decade of disguised inflation; third, branch-banking restrictions; fourth, state deposit insurance programs; fifth, agricultural subsidies; and finally, a plethora of taxes and regulations.
Smoot-Hawley placed enormous pressure on the central banking system and capital structure. In addition it caused the dramatic loss of export markets and declining farm income (due to foreign retaliation), rendering much agricultural capital useless. This was responsible for widespread agricultural bank failures, which then led to contagion effects. Due to the uncertainty of trade conditions, each of the ten largest world economies had their secondary financial markets crash. It created international financial chaos leading to foreign debt repayment suspensions. As a result of thousands of bank failures, the U.S. money supply dropped 29 percent from 1929 to 1933.
That’s because a tariff is essentially a tax: the more a product is taxed, the more it costs. Tariffs are economically deadly given how reliant countries have become on trade in a globalized economy.
6. Despite what Trump’s defenders argue, Ronald Reagan was far from a protectionist. Mark Levin, himself an alumnus of the Reagan administration, set the record straight regarding Reagan’s stances and actions on trade in a piece in Conservative Review. While Reagan did at times implement tariffs on certain industries–which is different than slapping them on whole countries as Trump is proposing–he also set in motion the reduction of tariffs globally with the 1986 General Agreements on Tariffs and Trade and vetoed various protectionist bills that Congress sent to his desk. The concept of NAFTA began with Reagan in 1979, and he forcefully advocated for its agreement in 1993. Reagan may not have been perfect on trade, but he had a solid record in defending free trade.
7. The U.S. already has over 12,000 tariffs in place. So why would we need more tariffs?