The Economic Effect by Richard Sessa

Why Free Trade Matters

 Saturday, July 16, 2011

                        It is common to hear political elites, media “analysts,” and even business leaders promote trade tariffs and quotas to help protect American manufacturing companies.        Recently, Donald Trump blamed China for taking valuable US jobs during a time when the unemployment rate is abnormally high. He claimed that if he were elected president, he would impose a trade tariff on all Chinese imports to protect American jobs. However, international free trade is one of the necessary keys to economic prosperity and the creation of wealth. Trade policies designed to protect American jobs or to help promote American national security interests may have good intentions, but they are ultimately deleterious to a smooth economic recovery. 

                     Professional economists may not agree on many ideas or theories, but there are a few key laws in which a wide consensus can be found. One such law is known as “the law of comparative advantage.” In short, free trade helps promote economic growth because nations can specialize in the production of goods and services for which they can produce at a low cost relative to other countries. For example, China is known for having a labor surplus of low-skilled workers which gives their country a comparative advantage in manufacturing when compared to the United States. The US on the other hand, is able to specialize in the production of high tech innovation and highly skilled service industries such as finance, design, and programming. By allowing both nations to specialize in the areas in which they have an advantage, free trade allows more total output as each country does not have to produce every good and service that it needs. Imagine if the United States never imported anything, but rather had to produce everything it needed at home. Clearly, this would be very costly in terms of what we would need to give up (highly skilled jobs) simply to meet the needs of our consumers. 

                  Secondly, policies which seek to protect American workers by shielding them from international competition are ineffectual at achieving their goals. When American consumers purchase goods that are produced overseas they are sending US dollars to other countries. What will these other countries do with these US dollars? Those dollars will ultimately find their way back to the US to purchase US exports or in the form of capital investment. By preventing American consumers from importing goods that they want from other countries, trade policies are hurting US exporters because other nations now have fewer US dollars with which to buy the goods that we produce. This can lead to a reduction in American employment within the export sector. Moreover, US consumers must bear the burden of paying the higher prices charged by US companies that are protected from international competition. 

                 Beyond the fact that anti-trade policies hurt US consumers and exporters, a lack of international trade reduces the incentive for domestic innovation. When American firms are forced to compete with foreign corporations, there is constant pressure for these firms to innovate and reduce costs. If American firms fail to operate efficiently they will be destroyed by international competitors that will offer better products at a lower cost to consumers. In other words, international competition keeps companies from becoming complacent as it is more difficult to dominate a market. In addition, free international trade allows large firms to take advantage of economies of scale. That is, companies such as Boeing are able to produce planes at a lower per unit cost if they are allowed to sell abroad. By allowing international trade, we are also expanding the markets in which our companies can sell their products. For large firms with decreasing long run average cost functions (such as airplane companies) this helps to reduce costs as they increase their output. As Boeing produces more airplanes, the percentage increase in quantity is greater than the percentage increase in total cost. 

              To conclude, while anti-trade policies may visibly save jobs in American companies that would otherwise be lost due to international competition, these policies are not without severe economic costs. It is difficult to pinpoint American jobs that are lost from the fact that other countries are not buying as many American goods, but this does not make the job losses any less important. We must remember that free trade favors wealth creation by allowing countries to specialize and trade to increase total output. Free trade creates more competition to force companies to be more disciplined. And for a more technical reason, it allows firms to be more efficient by reducing average costs for large firms (increasing returns to scale markets). It is an essential element to economic growth, rather than a threat to American jobs. 



About the Author: Richard Sessa holds a Bachelor of Science degree in Economics, Political Science, and a minor in International Affairs. He is currently a Graduate Teaching Assistant for the Department of Economics at the Florida State University.

     

Comments
Anonymous commented on 16-Jul-2011 10:54 AM
So many restrictions tax laws you name it in The United States do you know that right accross the pond here in the Bahamas there is no Income Taxes, Corporate Tax or Capital Gains Tax? It is a little less complicated and thats why the Chinese are building
here like crazy with the help of American debt dollars!

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