Expanding free trade agreements (FTAs) became more difficult when the Democratic Party took over control of Congress. And with both Democratic presidential candidates expressing skepticism over free trade, there is little immediate optimism about continuing to advance the liberalization of trade policy.
Even opponents of free trade grant that trade liberalization benefits the "poorer" country or countries involved. The key question is whether free trade helps or hurts the richer, or in this case, the U.S. economy. The answer is: Increased trade helps ANY economy because free trade encourages the most efficient use of workers’ time and skills.
Here’s why:
You have a skill, let’s say accounting, that you do well. But you find your ability to do even more work is limited by other demands on your time: obtaining food, taking care of the yard, cleaning the house, maintaining the car, and on and on. The list is endless.
Not only do these necessities eat into your productive labor, but you don’t like doing them very much.
However, your neighbor, a farmer, is really good at growing food, and he’s willing to sell you some at a price you are willing to pay. In economic terms, that means that an hour’s worth of your accounting skill will buy you a lot more food than you can produce in an hour.
So you buy his food, which gives you more time to do your own work. You benefit, and so does he.
Another neighbor is willing to care for your lawn, and again at a price that benefits you. And so on for car maintenance, housekeeping, etc.
Everyone benefits from these arrangements, and you now have a "trade deficit" with each of these workers. But far from being hurt by these exchanges, everyone benefits because every worker's abilities are being used in the most economically efficient manner, which increases productivity--and wealth--for all involved.
There is nothing wrong with paying someone else to do a job you COULD do yourself, but that they can do better or cheaper.
That’s how a local economy works; and it is exactly how a global economy works.
Some countries have lots of low-skilled, low-income workers who are willing—nay, eager— to work hard and for long hours. If they can create a product—let’s say a food item—for less of your dollars (and therefore less of your time), it increases economic efficiency to buy it from them.
Free trade (and thus FTAs) opens up markets so that those who are most efficient—that is, producing the highest quality product or service for the lowest cost—thrive.
To reject that economic efficiency is like telling you that you must go back to doing everything yourself--go back to mowing your own yard, cleaning your own house and fixing your own car. Under this logic, you stop taking advantage of the comparative advantages of others, but somehow you're better off by eliminating all those "trade deficits."
We don't think so. But if you'd like to hear from the various presidential campaigns about how they view trade policy, consider attending IPI's trade event next Thursday, March 27th in Washington, DC.