Economics of Free Trade

The literature analysing the economics of free trade is extremely rich with extensive work having been done on the theoretical and empirical effects. Though it creates winners and losers, the broad consensus among members of the economics profession in the U.S. is that free trade is a large and unambiguous net gain for society. In a 2006 survey of American economists (83 responders), "87.5% agree that the U.S. should eliminate remaining tariffs and other barriers to trade" and "90.1% disagree with the suggestion that the U.S. should restrict employers from outsourcing work to foreign countries. Quoting Harvard economics professor N. Gregory Mankiw, "Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards.

Nonetheless, quoting Prof. Peter Soderbaum of Malardalen University, Sweden, "This neoclassical trade theory focuses on one dimension, i.e., the price at which a commodity can be delivered and is extremely narrow in cutting off a large number of other considerations about impacts on employment in different parts of the world, about environmental impacts and on culture." Most free traders would agree that there are winners and losers from free trade, but argue that this is not a reason to argue against free trade, because free trade is supposed to bring overall gain due to idea that the winners have gained enough to make up for the losses of the losers and then some. Chang argues otherwise. The winners do not always make enough to compensate for the losers, as is the case when the economy gets smaller and even if the winners do make enough to compensate for the losers, this compensation is not always from the workings of the market meaning some people are worse off. Adding to his argument is the idea that in order for the losers of free trade competition to be fully compensated, some sort of compensation vehicle such as a welfare program is needed to sustain them until they are able to find a job that is equal to or better than their previous job. If they do not find a job that is equal to or better than the one they had, they are worse off and America is worse off because if this trend continued, trading a better job for a worse job, then America would really be in trouble. The problem is that only economically developed, wealthy countries like the U.S. or Britain have effective welfare mechanisms whereas many developing countries have little to no welfare system to speak of and do not even have the opportunity to create one that functions because of the pace that they are being pushed to conform to a very open free trade system. Two simple ways to understand the benefits of free trade are through David Ricardo's theory of comparative advantage and by analyzing the impact of a tariff or import quota.

An almost identical analysis of this tariff from the perspective of a net producing country yields parallel results. From that country's perspective, the tariff leaves producers worse off and consumers better off, but the net loss to producers is larger than the benefit to consumers (there is no tax revenue in this case because the country being analyzed is not collecting the tariff). Under similar analysis, export tariffs, import quotas, and export quotas all yield nearly identical results.

Sometimes consumers are better off and producers worse off, and sometimes consumers are worse off and producers are better off, but the imposition of trade restrictions causes a net loss to society because the losses from trade restrictions are larger than the gains from trade restrictions. Free trade creates winners and losers, but theory and empirical evidence show that the size of the winnings from free trade are larger than the losses.


Newer Post Older Post Home