Free Trade: Friend or Foe

Free trade expands the market for US goods and services and increases the quantity, quality, and variety of goods and services available to the American consumers. Certainly some sectors might benefit more from expansion of international trade than others will. However, in an open market environment, comparative advantage should ultimately lead to specialization that will allow multiple players to prosper. When countries with different specialties trade with a minimum of restriction, each one benefits. This essay will discuss how expansion of open market trade will reduce the need for artificial fiscal and monetary policy actions to reap the gains of trade and how globalization promotes increased investments and economic growth
Several gains are achieved from international trade. Trade promotes the efficient allocation of resources to production activities. Climate, availability of natural resources, and education of workers are factors that influence what products or services a country is most aptly able to produce. McEachern notes, for an example, that the US has lower opportunity costs for the production of many technological and industrial capital goods, as well as, several agricultural products. Thus it makes sense to produce more of these goods and to export the excess while importing goods like coffee or crude oil which Venezuela can produce with lower opportunity costs. (McEachern 409). Specialization and trade allow both countries to enjoy lower average costs of the goods it produces while still enjoying a wide variety of available choices.
In the US, the industrial and agricultural industries benefit greatly from international trade because the US production of industrial goods and grain crops exceeds its consumption. Likewise, most any industry globally in which production outweighs the nation’s consumption would benefit from trading. Large US corporations historically benefit from international trade because factors of production such as labor are often less expensive abroad. Opponents of expanded trade often complain that the loss of jobs, especially lower paying, unskilled positions, creates a financial hardship on average American citizens. Granted, some jobs will be lost due to this phenomena; however, this would also allow Americans to focus resources on sectors where we can be most productive. The US has the educational resources and a variety of other capital inputs that ensure expanded trade would result in the creation of better jobs. Also, American’s already high standard of living would be boosted as imports create a variety of less expensive choices that allow citizens to spend less and save more to enjoy the products they want to consume.
Despite these likely benefits, countries often enact legislation or fiscal and monetary policy that stifle the self-correcting forces of competition in a flawed attempt to promote its productivity and market share. Protectionism is an economic policy of restricting the import of certain foreign goods or promoting the export of domestic goods. Some examples of protectionist policies are tariffs, quotas, and export subsidies. Other methods also exist. Tariffs are taxes imposed on foreign goods Tariffs increase the price of both the foreign good and its domestic counterpart. While the higher price will drive increased domestic production, it also cause decreased domestic quantity demanded. (McEachern 411). Import quotas set limits on the quantity of a certain product that can be imported into a country. Export subsidies are incentives paid to exporters to offset the additional cost that foreign protectionism adds to the export of their goods. Generally protectionism results in loss to the consumer. It results in higher prices and less available choice. Also the opportunity costs of continued production of protected products means the economy is not functioning at its highest potential. When the removal of these type of barriers is reciprocal, however, market factors should eventually stabilize the types of losses that tariffs artificially protect against.
A major factor in the minds of Americans who are concerned about the effects of trade expansion is the ongoing trade deficit in the US. Trade balance deficits occur when a country imports more than it exports. Exporting more than one imports result in a trade balance surplus. Large trade deficits imply to them, an unnatural dependence on foreign goods. However, this could also be interpreted as foreign countries increased dependence on American consumption. The scale of American imports speaks to the prosperity of the American people.
“In reality, trade deficits tend to be pro-cyclical, growing when the economy expands and contracting when the economy slows or slips into recession. The trade deficit "improved" during each of the three recessions the nation has suffered in the past quarter century -- in 1981, 1982, 1991, and 2001. With the help of payments from Gulf War allies, the current account actually moved briefly into surplus in 1991”. (Free Trade Bulletin 1).
Most industrial nations import more than they export. Over time, the capital goods we export will help other nations improve their standards of living and create new markets for more American products.
So is the case supporting the Dominican Republic-Central American Free Trade Agreement (CAFTA). It proposes to reduce tariffs and quotas on certain raw materials such as sugar and finished products such as clothing in its most simplistic interpretation. In return, Central American countries will remove tariffs on agricultural products such as beans and grains. CAFTA would reverse certain protectionist interventions that each country had imposed. CAFTA includes a small basket of products that total less than 1% of the US Gross Domestic Product according to the Progressive Policy Institute (Gresser 3). In the long run, CAFTA represents the movement toward the free flow of goods, money, and ideas that can help reduce America’s trade deficit. Included in the agreement are certain labor rights protections that will eventually move the Central American countries closer to US wage parity and worker safety regulation. This could potentially create a new middle class sector of consumers for American goods. In addition, increased overall welfare in the region promotes the stability needed for these governments to address political problems such as drug trafficking and corruption that have plagued the region. The spillover of these problems is felt in the US, so we have a vested interest in all measures that expedite the control or resolution of these issues.
Research suggests that free trade agreements like CAFTA help to offset exchange rate volatility between proximate countries as financial and monetary systems begin to integrate (Lewis 3). The exchange rates between two currencies specifies how much one currency is worth in terms of the other. Historically, prolonged trade deficits have been associated with depreciation of a country’s currency. Excessive importing by the US results in an increased availability of US currency abroad; however, to date, America has never suffered the kind of catastrophic depreciation in foreign exchange rate that some countries have endured. This is mainly because its major trade partners often use the US currency gained from export to re-invest in US financial securities without converting the dollar to their own currency (Lewis 20). Thus recent concern over the dollars depreciation should not prompt protectionist interventions.
“Instead of manipulating the currency, policymakers should keep their eyes on the sound fundamentals that ultimately determine its value. The most important are low inflation, an open and flexible economy, fiscal restraint, and an attractive investment climate, including reasonable regulations and low tax rates.” (Another View 2)
In essence, globalization refers to the worldwide trend toward the freer flow of trade and investment internationally and ultimately the integration of the global economy. Monetary and fiscal policy attempts to influence markets under this emerging environment are often counterproductive. Government efforts to actively but or sell currency could decrease substantially if market forces were allowed to set the price of currency. As McEachern demonstrates, often revenues from tariffs often do not offset the increase in price and opportunity costs to the consumer. So as a fiscal policy, protectionism is flawed.
Because it expands economic freedom and spurs competition, expanded trade raises the productivity and living standards of people in countries that open themselves to the global marketplace. And per Adam Smith’s invisible hand theory, smaller government, increased international welfare, and economic prosperity will be enhanced as artificial trade barriers are removed.
Works Cited
Gresser, Edward. “The Progressive Case for CAFTA.” Progressive Policy Institute Policy Briefs. July 2006. 02 July 2008, .
Griswold, Daniel. “Another View: Dollar's Slide Boosts Exports. Let markets, not politicians, set currency exchange rates.” Online Posting . 15 Nov 2007. USA Today Business Editorials. 03 July 2008

---. “Are Trade Deficits a Drag on U.S. Economic Growth?” Free Trade Bulletin 27 (2007):
1-4.
Lewis, Mervyn K. “International Financial Deregulation, Trade, and Exchange Rates”. Cato Journal 13.2 (2003): 1-33.
McEachern, William A. Economics: A Contemporary Introduction, 7e. Mason: Thompson Southwestern. 2006.