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The Forgotten Argument for Free Trade

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Like most public policy debates in the United States of the Bush-Clinton era, the debates preceding congressional approval of the North American Free Trade Agreement (NAFTA) consisted mostly of extensive public wrangling over who might gain and who might lose if NAFTA passed.

Self-proclaimed champions for various special-interest groups debated the job-creating versus job-destroying potential of the agreement, the implications of the continuing U.S. export surplus with Mexico for U.S. and Mexican business interests, and the possible results of freer trade for Mexican and U.S. economic development in the future.

Meanwhile, the main argument for free trade got lost in the public arena shuffle. The same is true of the current debate concerning the General Agreement on Tariffs and Trade (GATT). There is as yet no evidence that issues lying deeper than those seemingly related to national advantage or disadvantage will be discussed.

The reason for this may be that the basic argument for free trade identifies no guilty winners or innocent losers in principle and so lacks the political ingredient that modern politicians need for plying their real trade-selling spurious cures for imaginary ailments in the body politic. It also may be that arguments about principles are necessarily a rare breed in a society increasingly committed to the ethics of plunder, rather than to those that enable the creation of wealth.

In any event, in principle, and very briefly put, the main economic argument for the benefits of free trade is that it stimulates persons, cities, regions, and countries to specialize in the commodities in which they are the relatively most efficient producers. It does so by introducing the element of foreign competition into domestic markets, thus forcing existing domestic producers either to match the quality and productive efficiency of foreign producers or to move their assets into other (more productive) areas.

Whether foreign or domestic, competition is always the attempt to lower costs and prices through greater productive efficiency. And greater productive efficiency is rewarded with greater outputs and expanded markets. Under free trade, the domestic population is able to enjoy a higher standard of living by trading part of their now greater domestic production for the different commodities produced elsewhere.

Just as we would each be poorer if we each tried to be completely self-sufficient, so we would be poorer if we put walls around our cities, our states, or all the United States in the attempt to create self-sufficient local, state, or national economies. Self-sufficiency and the standard of living are inversely related in a civilized world. In choosing between a lower and a higher standard of living, why deliberately choose the lower?

Concerning the question of winners and losers, and contrary to what many have said in the free-trade debates, free trade does not necessarily create more jobs. True, this may happen if unemployment exists and industries stimulated by free trade expand. But even if everyone was fully employed to begin with, producers in a country that opens its borders to free trade will be stimulated by import competition to increase the output of those commodities in which they are relatively more efficient, i.e., have lower production costs relative to foreign producers.

This does mean job losses in high-cost industries and job gains in low-cost industries. It also means an increase in the standard of living for the whole population as prices of consumer goods drop. Without government policies that subsidize or encourage unemployment, net job growth must match labor force growth.

The alternative is to protect relatively high-cost industries against import competition to “preserve the jobs” of those who work in them, and thus force consumers to accept a lower general standard of living. This is what some opponents of free trade — notably, labor unions and those who curry their favor — are really asking.

It also certainly is not the purpose of free trade to make possible export surpluses. Common sense should tell everyone that there is no real advantage to sending more products or more value out of a country than are imported into it. The net result for domestic consumers is fewer commodities, i.e., a lower standard of living. After all, exports are what pay for imports.

Under free trade, increased domestic employment in the relatively efficient industries stimulates increased exports and generates the means to purchase the increased imports that contribute to the resultant higher standard of living. An export surplus serves no purpose.

Economic development and growth are greatest when all market participants may freely trade, not just those on different sides of national borders. The reason for this is simple. The free-trade argument is not really an argument concerning trade between people on different sides of borders at all. It applies to all trade. In essence, it says that men who are free to do so will discover their relative production efficiencies and will exploit them to mutual advantage — if they specialize and trade with one another. The resulting higher overall output and living standards cannot be increased by placing barriers between traders; they only can be diminished. And this effect is the same whether the barrier is placed at some political border or takes the form of a purely domestic trade restriction. In this sense, in the absence of free trade for everyone, we are all losers.

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    Sam Bostaph is a professor of economics and chairman of the Department of Economics, University of Dallas, and an academic advisor to The Future of Freedom Foundation.