The Economic Benefits of Trade

My last post dealt with the arguments for trade restrictions.  While there are reasons to restrict trade, for the most part they are not compelling and the benefits of trade outweigh those of protectionism.  This post will briefly outline some of the reasons for freer trade.  This should not be considered a complete list.

One frustration in discussing trade is that proponents of trade assert that there are no losers; and opponents of trade assert there are no winners.  Neither is the case.

It Promotes Efficiency

Competition between firms in different countries will have tendency to keep prices low and encourage methods to either reduce costs, or enhance product attributes preferred by consumers.  Consumers, especially of those of imported goods, are a major beneficiary of freer trade.  

Firms that are exporters are also beneficiaries of freer trade.  These firms and industries tend to be more efficient than other firms.  Whether protectionists realize it or not trade barriers promote the interest of less competitive firms and industries at the expense of more efficient firms and industries.  In so doing it reduces the incentive of less efficient firms to innovate.  Often efforts to restrict trade are little more than efforts of special interests to protect their profits and incomes.  This does help explain why trade barriers are often politically popular.

It Promotes Equity

A common argument against globalization is that it promotes income inequality.  This is exactly wrong.  Global competition promotes equity by reducing firms' ability to charge excessively high prices.  By definition the number of firms in a open global market is greater than those in a closed national market.  The number of global monopolies is extremely small.  Enhanced global competition improves the buying power of consumer incomes, and increases the number of choices consumers have. 

However, it does reduce the incomes and profits of  firms who face foreign competition, as well as workers who work in these industries. However, it also curbs the incentive to move workers and assets into more efficient sectors of the economy.

It Promotes Peace

While efficiency and equity are important the fact that free trade promotes peace is probably more important.  This especially true for the U.S., a nation with a comparatively small trade sector, and a extremely large military and international affairs sector.  

Realizing that trade barriers such as the Smoot-Hawley tariff were contributing factors to World War II, a series of institutions were created in the aftermath of that war.  Of particular importance was the creation of the World Bank, the International Monetary Fund, and especially the General Agreement on Tariffs and Trade (GATT) which has evolved into the World Trade Organization (WTO).  These institutions have allowed countries to negotiate lower trade barriers over time, promoted economic development, and increased foreign investment in different countries including the U.S..  This has aided in global economic integration and the confluence of interests.  It has only been with the recent rise in economic nationalism that the world has become a somewhat less safe place.