In Defense of Free Trade

The history of free trade in the United States is a strange one. Throughout the country’s existence, public opinion of free trade has swung dramatically as the tides of political support waxed and waned. Tariffs were once a fundamental part of the Republican Party platform, but during the Reagan and Clinton administrations, the Republican party swung in favor of free trade. Likewise, the Democrats under FDR were free trade advocates who sought to mitigate the disastrous Smoot-Hawley Tariff Act (parts of which still have forbearance on U.S. trade policy today). Under President Clinton, Democrat stances on free trade were mixed. Today, the political pendulum for both parties has swung firmly in opposition to free trade. Nevertheless, it remains almost universally accepted that free trade is fundamentally important to increasing the quality of life for the American people. These trends, a tidal wave of populist resistance simultaneous to near universal acceptance that free trade is economically integral, are antagonistic and irreconcilable. One threatens American prosperity, while the other embodies the promise of it.

International trade is critical for the continued economic health of the United States; however, current political discussion on trade is fueled by a growing trend towards protectionism. According to a study conducted by economists at the University of California Los Angeles and Columbia University, closing the United States to trade would lead to a decrease in the purchasing power of median income earners by 29% and of the poorest income earners by 62%[1]. These numbers suggest that protectionist policies have an extremely negative impact on the wellbeing of households in the United States. Moreover, the benefits of free trade are immense. NAFTA, the United States’ biggest free trade agreement (FTA), is the world’s largest free trade zone totaling around $17 trillion in the value of goods and services, with trade among NAFTA countries totaling $1.0 trillion in 2007. Since enacting NAFTA, U.S. exports to Canada grew by 62% and to Mexico by 106% compared to a 36% growth in exports to the rest of the world[2]. According to the U.S. Department of Commerce, without NAFTA, U.S. businesses have a significant competitive disadvantage against European competitors[3].

One of the foremost arguments against FTAs is their effect on employment, with many politicians claiming that FTAs decrease domestic employment; however, the Chamber of Commerce conducted a study in 2010 and determined that FTAs lead to the creation of 5.4 million jobs and increased U.S. economic output by more than $300 billion[4]. Job creation even occurred in manufacturing, with NAFTA leading to the creation of more than 800,000 manufacturing jobs in the first four years after it was enacted[5]. These studies and the observable results of FTAs suggest two things: 1) opposition to FTAs is due mainly to political discourse as opposed to actual economic evidence, and 2) the creation of responsible FTAs would lead to enormous benefits for both households and businesses in the United States. Inherently, protectionism is destructive. Moreover, the fruits of free trade are restorative. One study involved a thorough empirical analysis on the impact of FTAs globally. The results suggested that FTAs increase trade between partner countries by 86% after 15 years on average[6]. The U.S., however, currently participates in only 21 of the 398 international FTAs. Comparatively, Switzerland has 28 separate FTAs with 66 different countries.[7]

Despite the overwhelming positive benefits of free trade, derived by numerous independent organizations and verified in countless studies, the United States has had a mixed history with free trade. After the American Revolution, both the Federalists under Hamilton and the Democratic-Republicans under Jefferson were somewhat protectionist, although Hamilton advocated a more pragmatic version of trade policy than Jefferson. Conversely, when Jefferson was elected President, he conducted “one of the most unusual policy experiments in the history of U.S. trade policy” by essentially ending international trade in the U.S[8]. The Jeffersonian embargo had a static welfare cost of 5% of the GDP at the time, meaning the embargo cut the potential GDP by 5%[9]. This was also the only point in U.S. history that can be considered near complete autarky, or complete economic self-reliance. Throughout the Civil War and post-Civil War period, the manufacturing sector generally advocated for tariffs; however, a case study on an “infant industry” in the manufacturing sector, tinplate manufacturing, suggests that protectionism had a mixed impact on manufacturing: it harmed manufacturers who required the importation of natural resources, but somewhat helped other manufacturers[10].

Despite the manufacturing sector being among the staunchest advocates for protectionism throughout the eighteenth and nineteenth centuries, the trade liberalization that occurred post-World War II led to the United States becoming a manufacturing powerhouse. The infamous Smoot-Hawley tariffs of 1930, designed to “protect northern manufacturing” was widely deemed a disaster[11]. This clearly undermines the argument that protectionism has always promoted American manufacturing.

Today, the pendulum of trade policy has swung away from the trade liberalization that has the sole potential to lift between 108 million[12] and 540 million[13] out of poverty within the next 10 – 15 years as a consequence of simply pursuing free trade policies. Progressive politicians such as Senator Bernie Sanders advocate for protectionism on the grounds that trade liberalization cuts jobs. In a statement on the TPP published by Senator Sanders, he completely erroneously claimed that “as a result of NAFTA, the U.S. lost nearly 700,000 jobs” (emphasis added)[14]. This blatantly contradicts the number published by the U.S. Department of Commerce, the organization whose purpose is to collect and report on these statistics, and whose published numbers are analyzed by hundreds of independent economists and organizations. Likewise, President-elect Donald Trump advocates a return to protectionist policy by vowing to “tell NAFTA partners that we intend to immediately renegotiate the terms of that agreement to get a better deal for our workers”[15]. To support this statistic, his website cites a Politifact source that discusses a statement about the closure of manufacturing facilities. Interestingly, Politifact rated the claim that free trade agreements were responsible for the closure of those facilities only as “half-true,” and Politifact does not explore the claim that technological development and a transition to a service economy is in large part responsible for decreased manufacturing jobs[16]. In general, Trump’s policy appears to emphasize nationalism through autarky and xenophobia over strong evidence against free trade[17].

Trade liberalization and FTAs in the United States are largely responsible for the increased prosperity of the twentieth century, and continue to provide a source of purchasing power and economic wellbeing for countries that pursue liberalization policies. Moreover, trade has a bilaterally beneficial impact, with the potential to lift millions out of poverty while increasing the wealth of the United States. A war on trade continues to attempt to erode trade liberalization, but arguments against trade generally rest on political grounds alone, with little economic evidence. Trade is integral to this country and logical from a policy standpoint, and trade liberalization must continue to ensure economic prosperity for Americans in the future. Unless rationality prevails and anti-trade politicians are defeated, the country can only expect to slip irrevocably behind the trend of increasing global prosperity for all.

Works Cited:

[1] Fajgelbaum, Pablo D., and Amit K. Khandelwal. “Measuring the Unequal Gains from Trade.” Quarterly Journal of Economics (2015): 1-50. Accessed 29 Nov. 2016. https://www0.gsb.columbia.edu/faculty/akhandelwal/papers/mugft_FINAL.pdf

[2] “NAFTA Triumphant: Assessing Two Decades of Gains in Trade, Growth, and Jobs,” U.S. Chamber of Commerce, accessed 29 Nov. 2016. https://www.uschamber.com/sites/default/files/legacy/reports/1112_INTL_NAFTA_20Years.pdf

[3] See footnote 2.

[4] “The Open Door of Trade.” U.S. Chamber of Commerce, accessed 29 Nov. 2016. https://www.uschamber.com/sites/default/files/open_door_trade_report.pdf

[5] See footnote 2.

[6] Guglielmo, Maria Caporle, et al. “On the Bilateral Trade Effects of Free Trade Agreements between the EU-15 and the CEEC-4 Countries” (CESIFO Working Paper No. 2419). Munich: 2008. Accessed 29 Nov. 2016. https://ideas.repec.org/p/ces/ceswps/_2419.html#author

[7] “Free Trade Agreements.” State Secretariat for Economic Affairs (SECO), accessed 7 Dec. 2016. https://www.seco.admin.ch/seco/en/home.html

[8] Irwin, Douglas A. “The Welfare Cost of Autarky: Evidence from the Jeffersonian Trade Embargo, 1807-09.” Review of International Economics, 13(4) (2005): 631-645. Accessed 29 Nov. 2016. http://www.dartmouth.edu/~dirwin/docs/Embargo.pdf

[9] See footnote 8, pg. 645.

[10] Irwin, Douglas A. “Historical Aspects of U.S. Trade Policy.” The National Bureau of Economic Research, accessed 29 Nov. 2016. http://www.nber.org/reporter/summer06/irwin.html

[11] Destler, I. M. “America’s Uneasy History with Free Trade.” Harvard Business Review, accessed 29 Nov. 2016. https://hbr.org/2016/04/americas-uneasy-history-with-free-trade

[12] Wesibrot, Mark, et al. “Poor Numbers: The Impact of Trade Liberalization on World Poverty.” Center for Economic and Policy Research (2004): 1-23. Accessed 29 Nov. 2016. http://cepr.net/documents/publications/trade_2004_11.pdf

[13] Cline, William R. “Reducing Poverty.” The Magazine of International Economic Policy (2004): 76-78. Accessed 29 Nov. 2016. http://www.international-economy.com/TIE_Su04_Cline.pdf

[14] Sanders, Bernie. “The Trans-Pacific Trade (TPP) Agreement must be Defeated.” Bernie Sanders United States Senator for Vermont, accessed 29 Nov. 2016. https://www.sanders.senate.gov/download/the-trans-pacific-trade-tpp-agreement-must-be-defeated?inline=file

[15] “Donald J. Trump’s 7 Point Plan to Rebuild the American Economy by Fighting for Free Trade.” Trump-Pence 2016, accessed 29 Nov. 2016. https://www.donaldjtrump.com/policies/trade

[16] Greenberg, Jon. “MSNBC’s Ed Schultz: Trade deals closed 50,000 factories.” PunditFact, accessed 29 Nov. 2016. http://www.politifact.com/punditfact/statements/2015/apr/23/ed-schultz/msnbcs-schultz-trade-deals-closed-50000-factories/

[17] Davenport, David. “Trump and Sanders in Agreement? The Strange Politics of Free Trade.” Forbes, accessed 29 Nov. 2016. http://www.forbes.com/sites/daviddavenport/2016/04/01/trump-and-sanders-in-agreement-the-strange-politics-of-free-trade/#4ad4a02f28bc