Debate: Does the U.S. economy benefit from foreign trade?
Issues and Background
THE UNITED STATES HAS LONG RECOGNIZED that open domestic
markets and an open global trading system are superior to trade protection
and isolationism at promoting broad-based growth and prosperity.
Report of the President, 1998, p. 215
Virtually all economists argue that free international trade increases
the total consumption possibilities for all trading partners. A simple
analogy is often suggested between international trade and trade among
individuals in an economy. Suppose that each individual in an economy
tries to produce all of the goods that he or she consumes. Since each
individual is not likely to be very adept at all of the tasks that must
be performed to achieve even a subsistence level of income, an economy
in which no specialization and trade occurs would be an extremely poor
economy. As Adam Smith noted in The
Wealth of Nations, total output increases in an economy as a result
of specialization and division of labor. It is argued that countries gain
in a similar manner as a result of international specialization and division
David Ricardo elaborated on this argument by noting that gains from
international trade will always occur when each country specializes in
the production of those goods and services in which it possesses a comparative
advantage. A comparative advantage exists when the opportunity cost of
producing a good is lower in the domestic economy than in foreign economies.
The gains from trade occur because each country is able to import goods
at a lower opportunity cost than it would face if it produced these goods
domestically. If each good is produced in the country in which the opportunity
cost is lowest, the total output of the world economy is greater.
Furthermore, advocates of free international trade argue that trade
barriers reduce the incentive for firms to engage in innovation. When
faced with more extensive foreign competition, domestic firms may be forced
to produce output more efficiently (i.e., at a lower opportunity
Following Smith and Ricardo, most economists support free international
trade and recognize only a few possible rationales for trade barriers:
- to protect "infant industries" that cannot compete effectively during
their formative period but will acquire a comparative advantage in the
future once a trained labor force and the necessary infrastructure has
- to protect industries that are important for national security reasons
(to prevent political pressure from countries or cartels - such as OPEC
- that might be able to exert control over a critical commodity or resource),
- as a mechanism for correcting for differences in environmental and
labor laws that result in lower production costs in countries with fewer
environmental and safety regulations, and
- as a temporary measure to reduce the adjustment costs associated with
job losses due to the loss of comparative advantage in a particular
While these are the most common reasons that economists may support
some form of trade restriction, there are several other political reasons
for trade barriers:
There is no clear Democratic/Republican or liberal/conservative split on
the issue of free trade. This is partially because both low-income workers
and wealthy owners and managers benefit from trade barriers in their industries.
Perhaps not surprisingly, firms and workers in domestic industries that
would be harmed by free trade tend to support trade restrictions. Firms
and workers in industries in which the U.S. is likely to possess a comparative
advantage tend to support the elimination of trade barriers. Similarly,
congressional representatives from districts that might be expected to experience
initial job losses as a result of the elimination of tariff barriers tend
to support protectionist measures while those with districts that would
gain jobs tend to support free trade.
- While consumers always gain from the reduction of trade barriers,
firms and workers in specific industries are better off when substantial
trade barriers exist. The owners of firms and workers in these industries
receive very large losses if trade barriers are eliminated; each individual
consumer tends to receive relatively small gains from the elimination
of these barriers. If trade barriers are eliminated, the dollar value
of the gains to consumers will always outweigh the dollar value of the
losses to producers and workers. Each individual consumer, though, has
little incentive to lobby for a reduction in specific trade barriers
(nor is even aware of most such trade barriers). Each individual worker
and owner, however, has a substantial incentive to lobby for such trade
restrictions. This "special-interest" effect often results in the passage
of laws resulting in trade barriers.
- There is also a concern that free trade with low-wage economies will
reduce the wage of high-wage U.S. workers. In specific industries, such
an effect is likely. This argument was at the heart of much of the opposition
to NAFTA (since wage rates are generally lower in Mexico).
In recent years, much of the debate in the U.S. has been focused on:
In March 2002, the issue of free trade was brought to the forefront by President Bush's
decision to impose a tariff on imported steel. Under pressure from the WTO, this tariff was withdrawn
in December 2003. The creation of the Dominican Republic–Central American Free Trade Agreement (DR–CAFTA),
and free trade agreements with several other countries in recent years, though, have further
reduced barriers to trade for the U.S.
- the General Agreement on Tariffs and Trade (GATT),
- the North American Free Trade Act (NAFTA),
- the renewal of "fast-track" authority,
- the Dominican Republic–Central American Free Trade Agreement (DR–CAFTA),
- the creation of a Free Trade Area of the Americas,
- the admission of China to the WTO, and
- the admission of Russia to the WTO.
Primary Resources and Data
- United States Trade Representative
The Office of the United States Trade Representative is a Cabinet level
agency that is charged with establishing and administering U.S. trade
policy and negotiating trade agreements. Relevant background material
contained on this web site includes a document
library containing speeches, press releases, congressional
testimony, and reports. (To view these documents, the Adobe Acrobat
viewer plugin is required. You may download this viewer by clicking
- United States International Trade Commission
The United States International Trade Commission is charged with providing
information to Congress and the executive branch on international trade
issues. It also investigates foreign firm's violations of patent, trademark,
and copyright agreements and conducts research on the effect of global
trends on specific U.S. industries.
- North American Free Trade Agreement
This complete text of the North American Free Trade Agreement appears
at this site.
- Free Trade Area of the Americas
This site is the home page of the Free Trade Area of the Americas, a
proposed free trade area that would encompass most of the countries
of North and South America. Information about the nature and status
of this proposal is available at this site.
- Biz/ed, "David Ricardo"
This page, provided by Biz/ed, contains a biographical sketch and discussion
of the theoretical contributions of David Ricardo, the primary developer
of the theory of comparative advantage.
- World Trade Organization
The World Trade Organization was created in 1995 as a result
of the 1986-94 Uruguay Round negotiations on the General Agreement on
Tariffs and Trade (GATT). This organization is charged with monitoring
and enforcing the provisions of existing international trade agreements,
resolving trade disputes, and negotiating new trade agreements that
will further encourage free international trade. This web site contains
information on the functioning of the WTO, research conducted at the
WTO, and the status of current trade disputes.
- National Trade Estimate Report on Foreign Trade Barriers, 2006
This report, provided by the Office of the U.S. Trade Representative,
contains a detailed discussion of foreign trade barriers for most foreign
countries that engage in a significant amount of trade with the United
States. (To view this document, the Adobe Acrobat viewer plugin is required.
You may download this viewer by clicking here.)
- 2006 Trade Policy Agenda & 2005 Annual Report of the President
of the United States on the Trade Agreements Program
This document provides a description of trends in U.S. trade, international
trade agreements, and trade policy issues. (To view this document, the
Adobe Acrobat viewer plugin is required. You may download this viewer
by clicking here.)
- United Nations Conference on Trade and Development
The United Nations Conference on Trade and Development is a United Nations
organization charged with assisting developing nations achieve success
in international markets. This web site describes their functions, details
the problems faced by developing countries in international markets,
and presents summaries of research conducted by this organization.
- U.S. Foreign Trade Statistics
This Census Bureau web site contains recent and historical data on U.S.
imports, exports, trade balances, and other relevant measures of trade.
U.S. trade statistics with major trading partners are provided for broad
This site contains a collection of links to international
- Lex Mercatoria
The Lex Mercatoria web site contains an extensive collection of links
to web pages that provide information related to international trade
- Trade and Commercial Relations
This site, provided by Tufts University, contains links to the full
text of the major international trade treaties and agreements.
- Public Citizen, "Fast Track"
This page, provided by Public Citizen, provides arguments against Fast
- Trade and Environment Database
The Trade and Environment Database provides an extensive collection
of cases involving conflicts between international trade law and the
environment. These cases may be sorted by a variety of criteria or listed
by geographical region.
Different Perspectives in the Debate
- Economic Report of the President, 1998
The Economic Report of the President, 1998 contains arguments
describing the benefits of free trade (in particular, see Chapter 7
of this document). This document includes:
- a discussion of trends in U.S. imports and exports,
- an argument in support of maintaining "fast-track" authority in
which the executive branch negotiates international trade agreements
and then submits them to Congress for either approval or disapproval
(amendments are not allowed under this process),
- a discussion of the proposed Free Trade Area of the Americas,
- a description of recent trade agreements and those under negotiation,
- a description of the gains from free international trade and estimates
of the benefits of recent agreements on the level and rate of growth
in output in the U.S., and
- a critique of the arguments used by opponents of free trade agreements.
- Heritage Foundation, "Research: Trade and Foreign Aid"
This web site contains links to a large collection of Heritage Foundation
articles and studies that suggest that trade barriers should be reduced.
These articles provide recommendations for U.S. policy on many
contemporary trade issues.
- Renato Ruggiero, "From Vision to Reality: The Multilateral Trading
System at Fifty"
In this speech delivered at the Brookings Institution on March 4, 1998,
WTO Director General Renato Ruggiero describes the impact of the GATT
at the 50th anniversary of it's initiation. He argues that the success
of the GATT is due to it's "rule-based nature." Ruggiero notes that
under GATT average industrial tariffs declined from approximately 40%
to less than 4%.
- World Trade Organization, "The Case for Open Trade"
This document, provided by the World Trade Organization, provides a
clear and succinct summary of the economic arguments for free international
- Public Citizen Global Trade Watch
This page, provided by Ralph Nader's Public Citizen organization, contains
links to a variety of pages detailing this organization's opposition
to existing and proposed free trade agreements. It is argued that free
trade agreements lower domestic employment, reduce environmental quality,
and eliminate protections on the quality of food consumed in the United
- Patrick J. Buchanan, "Free Trade is Not Free, Mr. President"
Taking a rather extreme position against free trade, Patrick J. Buchanan
argues that free international trade does not exist since all other
countries engage in trade policies that protect their national interests.
He suggests that free trade harms U.S. workers. Buchanan argues that
free trade results in a slowdown in economic growth, worsening income
inequality, and a loss in U.S. sovereignty.
- John Sweeney, "NAFTA's Three-Year Report Card: An 'A' for North
John Sweeney, a policy analyst at the Heritage Foundation, summarizes
the evidence of NAFTA's effect on U.S. exports and employment in this
online article. He argues that NAFTA has been successful on a variety
of fronts. Sweeney suggests that NAFTA has increased trade, economic
growth, and employment.
- "Statement by Richard Trumka, Secretary-Treasurer, AFL-CIO ON
NAFTA and President Clinton's Trip to Mexico"
In this May 5, 1997 press release, Richard Trumka argues that NAFTA
has reduced employment in the United States and has lowered wages in
Mexico. He suggests that the problems are due to the ineffective side
agreements involving labor and environmental law. It is suggested that
fast-track authorization should require that future free trade agreements
include requirements for effective labor and environmental legislation.
- John Sweeney, "Myths and Realities of the Fast-Track"
In this Heritage Foundation document, John Sweeney argues that fast-track
authority should be renewed. He suggests that the elimination of fast-track
authority would substantially reduce the influence of the U.S. in international
relations. As part of his argument, Sweeney provides a discussion of
the advantages of free international trade.
- AFL-CIO, "Global Economy"
This site, operated by the AFL-CIO, details the AFL-CIO's opposition
to fast-track legislation. Their opposition is primarily based on the
arguments that agreements (such as NAFTA) created under this authority
will result in job losses and environmental problems.
- Robert E. Scott, "Fast Track to Lost Jobs"
In this October 2001 online document, Robert E. Scott describes his objections
to fast-track authority. His objections concern the possibility of an attempt
to extend the concepts underlying the NAFTA treaty to agreements with
other countries. Scott's concerns primarily focus on adverse effects
on U.S. labor markets. He cites statistics on import expansion as a result of NAFTA and
other trade agreements to support his argument.
- Sierra Club, "Responsible Trade Campaign"
At this site, the Sierra Club discusses their concerns about the effect
of free trade on environmental quality. Examples of specific environmental
problems are provided on these pages. The Sierra Club is opposed to
fast-track legislation that does not require that enforceable environmental
protection requirements be mandatory in future trade agreements.
- Fred L. Smith, "Free Trade for All"
In this article, Fred L. Smith, the President of the Competitive Enterprise
Institute, argues that free international trade increases the wealth
of all trading countries. Smith notes that there is substantial evidence
that higher national wealth increases the likelihood of better environmental
- National Center for Policy Analysis, "Tariffs and Other Trade
This site, provided by the National Center for Policy Analysis contains
information about current trade disputes. Summaries of studies that
investigate the cost of trade barriers are also provided here.
- Aaron Schavey, "The Ailing Steel Industry Needs Less Government Intervention, Not More"
In this February 22, 2002 Heritage Foundation document, Aaron Schavey argues against the imposition of steel
tariffs. He believes that government protection of the domestic steel industry is the source of the inefficiency. Schavey
observes that wages in the steel industry are 56% higher than in other industrial firms. Prior to
the introduction of government protection (in 1968), wages in the domestic steel industry were comparable to those in other
- Daniella Markheim, "America’s Free Trade Agenda: The State of Bilateral and Multilateral Trade Negotiations"
In this November 2, 2005 Heritage Foundation article, Daniella Markheim discusses the benefits of
recent free trade agreements in which the U.S. has participated. She argues that further reductions in trade barriers
will benefit the economies of the U.S. and our trading partners.
- United States Trade Representative, "China Affairs"
This United States Trade Representative website contains press releases, fact sheets, and other
information related to U.S.-China trade issues. (To view some of the documents on this site, the
Adobe Acrobat viewer plugin is required. You may download this viewer
by clicking here.)
- World Bank, "Trade Policy and WTO Accession for Russia"
This WTO website contains links to studies, policy papers, and other online materials related to
Russia's accession to the WTO. The annual report to Congress on China's WTO compliance that is
provided on this site is of particular interest.
- National Public Radio, "Russia Nears Deal to Join WTO"
This site contains an audio copy of the November 10, 2006 NPR Morning Edition discussion of
the status of the negotiations between the U.S. and Russia concerning Russia's attempt to join the