One of the many tough issues facing policymakers these days is trade. Using the North American Free Trade Agreement (NAFTA) as a model, the White House has been pursuing free trade agreements with additional countries and regions. But opposition to such agreements, both inside Congress and outside the Beltway, is strong enough that they may not be ratified. With the monthly trade deficit still posting near-record levels, net U.S. indebtedness at an all-time high, and concern rising over the outsourcing of both low-skill and high-skill jobs, the free trade consensus that has dominated policy in the last two decades has begun to erode.
Is it time for a new vision? Here's a discussion of the arguments for and against free trade with Mark Obrinsky, chief economist for the National Multi Housing Council.
Q: What's the underlying rationale for free trade?
A: There are some non-economic reasons for supporting free trade—namely, the view that trade means reduced tensions and, therefore, reduced likelihood of warfare. However, the primary argument for free trade is an economic one.
That argument rests firmly on the theory of comparative advantage. Briefly, the theory argues that two nations (or, for that matter, two regions, two cities, or two people) will be better off if they each concentrate on those activities in which they are comparatively more efficient and then trade for the other's products. This is true even if one nation has an absolute advantage in all endeavors. In those cases, by focusing on the areas in which its advantage is greatest, a country will exchange its excess for other goods produced elsewhere, and the sum total of products it will have available will be greater.
Q: Is that the same argument behind existing free trade agreements?
A: Not quite. The economic case for free trade is actually quite a bit stronger than generally recognized—it is, in fact, a unilateral one. Any nation is better off economically if it allows goods and services to be freely imported from other countries, regardless of the policy its trading partners pursue. (Yes, you read that right.) In other words, other countries might slap tariffs or quotas on U.S. imports—or ban them altogether—yet we will still have more goods to consume, as a nation, if we allow goods to be imported from these countries freely.
To be sure, the same conclusion applies to other countries—they'd be better off if they eliminated all barriers to trade. Even if they don't, however, it's still in our best interest to pursue free trade.
Q: Then why not adopt free trade unilaterally rather than bother with complicated trade agreements?
A: Good question. Perhaps it seems too radical. More likely, it may be politically risky. For better or worse, many voters are willing to reduce barriers to foreign goods only if our goods get equivalent treatment. Hence, it's much safer politically to negotiate multilateral steps toward free trade. In fact, trade agreements are more often about politics than economics; that they are advertised as “free trade” agreements is more of a marketing tactic. (It's similar to calling any piece of tax legislation “tax reform.”)