Free Trade and the Common Good

by Alfred Lagan - October 27, 2008

Reprinted with permission.

Trade and open markets have been the bedrock of our nation's growth and prosperity since at least the end of the Second World War. But it was not always so: We learned the hard way that protectionist policies are not an effective cure for economic problems at home and in many cases have severely worsened domestic economic conditions. When used as a tool of government policy, initiatives to restrict trade have often failed to achieve their intended objectives and complicated our relationships with other countries.

Numerous historical examples attest to the unsatisfactory outcome of attempts to address problems at home with trade restrictions. Prior to the war of 1812, President Thomas Jefferson's embargo on British goods – an effort to force the British government to stop seizing American ships and cargoes for booty and to cease impressing our sailors – led to disaster. The British government retaliated immediately with an embargo of its own and a blockade of European ports, effectively negating American trade with the Continent. The action resulted in a dramatic decline in production, employment, and incomes, especially in the northeast, and was quickly rescinded.

In the interregnum spanning the end of the First World War and the Great Depression, raising tariffs on foreign goods became official government policy. This was justified as a means of protecting our infant industries and agriculture from foreign competition, as well as a politically palatable means of generating income for the federal government. Not satisfied with the various tariffs enacted during the 1920s on a limited number of goods, Congress passed the Smoot Hawley Tariff Act in 1930. This radical measure raised tariffs on over 20,000 imported goods to record levels. Other countries retaliated quickly with increased tariffs on American goods. Within one year our imports and exports plunged by more than half, and the entire world economy sank further into a depression. Many economists believe that the Smoot Hawley Act effectively transformed a recession into a depression and was a major contributor to the depth and duration of the Great Depression.

Since the end of the Second World War, Democratic and Republican administrations alike have recognized the two-way nature of trade and have embraced openness as official U.S. policy in trade matters. Since 1985, successive administrations have entered into eleven Foreign Trade Agreements (FTAs) with 17 countries, including NAFTA countries. Three others – Colombia, Korea, and Panama – are pending but currently blocked in the House.

The results of FTAs have been beneficial to all parties. In 2007, FTAs accounted for more than $1 trillion of two-way trade – 34 percent of total U.S. global trade, and growing. In the first year of the new U.S.-Singapore Trade Agreement, our trade surplus with Singapore grew to $4.3 billion. Similar benefits were evident from all of these agreements – the result being sharp increases in American exports to these countries.

Of course, the most contentious of the FTAs is our agreement with Mexico and Canada, which created NAFTA. Despite initial concerns, this agreement has proven to be a boon for all three countries. Canada and Mexico together are America's largest trading partners, accounting for 39 percent of all U.S. trade with the world in 2007. It is estimated that today over $2 billion in trilateral trade flow each day between our three nations.

Since the implementation of NAFTA in 1994, trade among the United States, Canada, and Mexico has more than tripled. The dire predictions of some that NAFTA would "suck growth out of the U.S." have been wrong. In fact, our economy has thrived: According to the office of the U.S. Trade Representative, GDP has expanded over 50 percent, new employment has risen by 24 percent, manufacturing output increased by 58 percent, and business investment in the United States has expanded by 117 percent. The painful economic retrenchment we are experiencing currently is caused mainly by self-inflicted wounds stemming from the collapse of the subprime mortgage market. Foreign trade, including trade with Canada and Mexico, is actually mitigating the slowdown.

Critics of open trade often point to employment, especially in manufacturing, as a victim of unfair trade arrangements. Manufacturing jobs have declined for many years as the relative contribution of this sector to total economic activity has given way to newer industries. As a percentage of the GDP, manufacturing peaked at 28.3 percent in 1953 and today is around 12 percent.

Despite the decline in relative importance of manufacturing, employment has boomed over the period as new forces swept through our prolific economic landscape. Service industries have grown as technology and vigorous productivity trends raised the standard of living for all Americans. The process is ongoing, as our economy today trends increasingly to knowledge-based endeavors. One need look no further then the new iPhone 3G as an example of new technology advancing the ability of consumers to access information. Rather than pointing to protectionist legislation, our economic success points to the importance of a sound education system and the need for a solid safety net.

The benefits of free trade extend beyond the number of jobs created. Domestically, an open market system brings more choice to the marketplace, keeping prices low and quality high in order to retain and increase market share. This natural process leads to increasing innovation, higher productivity, and keeps inflation at bay. The United States in particular has been a major beneficiary of the creative process. Our flexible model has been an example to all the world that economic freedom is the paradigm that best satisfies human beings' innate desire to help themselves and provide a better life for their children.

From an international standpoint, trade has benefited poor nations enormously. The World Bank estimated that the evidence of extreme poverty around the world decreased from 24 percent of global population in 1990 to 18 percent in 2004. While warning that improvements in domestic infrastructure efforts such as education, transport, and water projects must accompany the progress, the Bank recognized that a shared agenda emphasizing trade and investment are primary drivers of a sustained reduction in world poverty.

Five decades of evidence – along with the recent examples of North Korea and Myanmar – have proven that an open trade system is a more effective anti-poverty program than government-to-government handouts, which often do not reach the people they are intended to help.

Alfred A. Lagan is founder and chairman of the Congress Asset Management Company.