Free Trade Makes Sense for Everyone

For the purposes of this paper, I have chosen to write about the issues involved around free trade and globalization as opposed to protectionism. This topic deals with the trade off between polar views of free trade and protectionism. The "free traders", believe by removing the barriers to trade (tariffs and quotas) the United States will reap the benefits that are generated by the "Comparative Advantage" economic model.

On the other side of the coin, there are those that feel a "protectionist" economic policy will save the country from loosing jobs to those countries on which we impose trading tariffs and quotas. While this position does protect some American workers from being replaced by foreign workers, it keeps productivity low, keeps demand for U.S. goods low, keeps other workers from employment, and keeps U.S. consumers from purchasing lower cost goods.

These are the two polar arguments to the free trade issue. The "free traders" argument is based on viable economic theory-as well as data from free trade agreements in place that show all of the benefits achieved-while the "protectionist" argument cannot be shown using any economic model (although they do use an economic argument). Their position is based on a moral argument. However, in this paper I intend to show that not only does the "free trade" position win the argument using economic theory, but it also wins the argument based on the "Utilitarian" moral doctrine.

The Arguments

Let's begin by discussing the "free trade" side of the issue. Free trade is based on the economic theory of comparative advantage. To begin with, free trade allows consumers of two (for arguments sake) trading nations to push the amount of goods available to its citizens beyond what it could if it was confined to production using only its own resources, even if the country has an absolute advantage in production of goods.

This is because each has some comparative advantage. When nations do not trade, their consumption possibilities curve matches that of their production possibilities curve (they cannot consume more than is produced). (Fig.1) However, when they trade, both countries are able to produce items they are more efficient at thereby increasing total production, which increases their individual consumption possibilities curve. (Fig.2) 

Therefore, when the two countries trade consumers of both countries has access to more goods. Furthermore, since the countries are now producing products they are the most efficient at, the price to the consumer is lower because the cost of production is lower.

Now that we have shown that more, and cheaper, products are available for consumption, we can show what that will do in terms of supply and demand. The laws of supply and demand state that the cheaper the product, the more demand there will be for that product. Let us isolate wheat to show what will happen on the U.S. side of the equation in this example. (fig.3) Since we have essentially decreased the cost of production we will create a positive shift in the supply curve thereby decreasing price and increasing demand. The increase in demand will create a need for more jobs.

By looking at these models, we can see that trade increases U.S. production, creates demand for U.S. goods, and increases employment for  U.S. workers (in this example). Now let's view the model in terms of oil. If we trade with Saudi Arabia for oil, the cost of oil production will decrease thereby shifting the supply curve positively as it does for wheat in figure 3. This leads to lower consumer cost for oil, which will allow U.S. citizens to have more income left to purchase other items thereby giving them increased purchasing power, which leads to a higher standard of living. This model has been proven by data stemming from trade agreements from the past century. The protectionist cannot refute that real GDP per capita has risen dramatically, productivity has risen, and the standard of living has risen, all from free trade. 

The protectionist economic argument is that imposing tariffs and quotas will decrease aggregate unemployment. These protectionist policies will shift the demand from imported goods to domestic goods because domestic goods will be cheaper. In turn, domestic goods will be demanded more thereby increasing the need for additional labor, which will reduce unemployment. These new workers will have additional income to spend thereby increasing the demand for goods causing further expansion in industry. However, they leave out all of the negatives that this type of policy would foster. If we impose tariffs and quotas on our trading partners, they in turn will do the same.

This will lead to less demand for domestic goods abroad, which, will lead to lower production, and fewer jobs. Additionally, fewer domestic products will be demanded by our trading partners. This is because those products they have been exporting will be in less demand and workers will be laid off, which will lead to less income thereby decreasing demand for our products.

What ultimately happens is that there is a trade off in employed workers in protected industries while those in non-protected industries (exporters) are loosing their jobs. Furthermore, we have kept U.S. consumers from enjoying goods and services at the best price in order to protect some jobs at the expense of others. In addition, because of the lack of competition, those protected industries have no reason to become more efficient thereby leading to less productivity.

As I stated earlier, since the "protectionist" cannot prove their position with any economic model or data, they have leaned toward moral arguments to shore up their position. According to the Wall Street Journal, "… the Democrats' main economic message for 2004 is that free trade is immoral and unpatriotic"1. This position of course is being taken in order to gain labor votes.

The point here is not to include politics in this debate, but others as well as the democrats have brought up this argument. We can also show this argument holds no merit based on moral theory (unless we subscribe to the egoist point of view, which is not a well-received position). Based on the Utilitarian theory of morality, it states in a simplified fashion, decisions should be based on the most good for the most people.

Using a protectionist policy deprives many more than does using a free trade policy. In "Is Free Trade Moral" the author states,  
…is it moral for a government to deprive Americans of their freedom to enhance their standard of living by buying foreign goods and services? Or is it moral to stop foreign people from working their way out of poverty by closing access to the U.S….It is also hardly moral for the U.S. to foist its own policies on other democracies as a precondition for trade.

Mr. Edwards complains that past trade deals allow companies to profit by "paying people pennies a day to work in disgusting conditions". Even if this is true in some places, the legacy of trade is that it raises living standards over time. In any case, even the world's only superpower doesn't have the right to micromanage the developing world's economic policies, and it would be bitterly resented if it tried. Isn't that "unilateralism"?2