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Policy 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.
~ Economic 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 of labor.

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 cost).

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 been developed,
  • 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 industry.

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:

  • 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).
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.

In recent years, much of the debate in the U.S. has been focused on:

  • 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.
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.

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 here.)

  • 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 product categories.

  • Tradeport
    This site contains a collection of links to international trade resources.

  • Lex Mercatoria
    The Lex Mercatoria web site contains an extensive collection of links to web pages that provide information related to international trade law.

  • 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 Track legislation.

  • 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 trade.

  • 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 States.

  • 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 America's Economy"
    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",01318.cfm
    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 protection.

  • National Center for Policy Analysis, "Tariffs and Other Trade Barriers"
    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 manufacturing firms.

  • 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",00.html
    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 WTO.

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