The Free Trade Debate

The Free Trade Debate

Mini Teaser: Joseph Stiglitz and Gary Hufbauer

by Author(s): Gary Clyde HufbauerJoseph E. Stiglitz

Free Trade
Gary Hufbauer


FREE TRADE can benefit everyone-the developed and developing world. In large part because of open markets, the global economy is experiencing its greatest half century. In fact, free trade has increased American household income by lowering costs of products, increasing wages and making more-efficient American companies. And even though open markets may come with costs, the gains of globalization exceed them five times over. So, this means when there are burdens to be borne at home, Congress can well afford to help spread the benefits as workers transition. And if done right, free trade benefits the developing world, too, helping bring states out of poverty, allowing them to bargain on equal terms with far-larger countries and potentially stemming state failure.

Yet, the Democrats have splattered their primaries with nonsense about a "time-out" from trade agreements and "opting out" of the North American Free Trade Agreement (NAFTA). As president, neither Senator Hillary Clinton (D-NY) nor Senator Barack Obama (D-IL) could indulge such foolishness. The purpose of their catchy phrases, as everyone knows, is to snare convention delegates, not make policy. But enthusiastic supporters will call their candidate to account if he or she reaches the Oval Office.

Throughout the history of the world trading system-which is to say since the end of the Second World War-the twin objectives of U.S. commercial policy have been to foster economic prosperity and promote U.S. political alliances. These objectives will not vanish when a new president enters the White House in January 2009.

"Opting out" of NAFTA is the sort of ludicrous suggestion that can only surface on the campaign trail. Trade between the United States and its NAFTA partners represented almost 30 percent of total U.S. trade with the world in 2007. U.S. exports to Canada and Mexico totaled $378 billion in 2007, and some of this trade would be jeopardized-to the consternation of American farmers, industrialists and their congressmen. The United States needs the cooperation of Canada and Mexico on multiple fronts, from energy supplies to missile defense. Retreating from NAFTA would not only imperil relations with close neighbors, it would severely diminish U.S. credibility around the world.

TRADE IS almost miraculous in its effects. Even before NAFTA, the General Agreement on Tariffs and Trade (GATT-now the World Trade Organization, WTO) was born in Havana in 1947, part of a grand design to ensure European economic recovery. The GATT's role was to slash the protectionist thicket that sprang from the Depression and political divisions in the 1930s. During its first year, the GATT sponsored negotiations among twenty-three countries that led to forty-five thousand tariff concessions, covering 20 percent of world trade. Since then, seven successive "rounds" have reduced barriers on a progressively wider scope of commerce, now including more than 150 countries and reaching 90 percent of trade in the global marketplace. The payoff from GATT far exceeds the wildest expectations of those delegates meeting at Havana over a half century ago. World trade has expanded twenty-seven times between 1950 and 2005 (adjusted for inflation), and the world economy has enjoyed the best fifty years in recorded history.

Opposition to free trade is shortsighted-forgivable perhaps for an unemployed machinist in Ohio, but hardly the stuff of presidential policy. Free trade boosts growth and provides meaningful employment. A serious danger in the decades ahead is cascading violence in regions of low development, countries often characterized by political instability and feeble growth. Collectively, they are home to billions of people. Some of them, like Mexico and Colombia, are fighting drug lords and insurgents. Others, like Pakistan and Afghanistan, are fighting al-Qaeda. These are precisely the countries that will benefit the most from open trade and investment policies. Yet many of these countries have either marginalized themselves by erecting one barrier after another to world commerce or have been marginalized not only by the restrictive practices of the United States, Europe and Japan, but also by their own peers in the developing world.

Thus, for example, Tunisia maintains an import-weighted average tariff wall of 20 percent, which, among other harmful effects, slashes trade with its neighbors in the Middle East and North Africa as well as the rest of the world. In a perfect stroke of trade-policy inequity, the United States collects about the same tariff duties annually (approximately $400 million) from impoverished Cambodia as from wealthy Britain, even though Britain exports more than twenty times as much as Cambodia to American shores each year ($57 billion versus $2.5 billion). An outstanding example of the power of open markets is South Korea, a country that has handsomely prospered. In contrast, North Korea, which has followed a path of isolation, remains mired in poverty.

A country that accedes to the WTO, such as Ukraine is now doing, must first undertake a series of legislative and structural reforms to bring its trade regime up to par with the practice of other WTO members. This process gives the newly admitted states the basis for a stronger economy, thanks to the spillover effects to commercial law, property rights and many other areas. Over past decades, many developing countries have prospered from these disciplines. Once in, the country can join negotiations with other members and bring trade complaints to the WTO's dispute-settlement body. The new inductee becomes a full-fledged member of the WTO "club," with all the attendant rights and privileges. Thus, tiny Antigua won an important case against the mighty United States, and midsized Peru was victorious over the European Union.

Put simply, the World Trade Organization engages countries of all economic sizes and political shapes in a cooperative setting designed to liberalize commerce to their mutual advantage. It is hard to imagine President Obama or President Clinton paying serious attention to naysayers such as Senator Sherrod Brown (D-OH) or Lou Dobbs, who would have the United States turn its back on the most successful piece of economic architecture since 1945.


FURTHERMORE, Democratic and Republican presidents alike have often pushed the free-trade agenda to buttress their foreign-policy objectives. Foreign policy was a core reason why President Harry Truman supported the GATT in the late 1940s in the face of opposition from leading Republicans, notably Senator Robert Taft (R-OH and intellectual godfather of the aforementioned Senator Sherrod Brown). Truman wanted to banish the specter of American isolationism in the Great Depression and forge an enduring transatlantic alliance. More recently, trade agreements have changed the political tenor with partners as varied as our immediate neighbors to the north and south, and China, our potential peer to the east.

Foreign-policy logic has thus informed many of the U.S. trade-policy choices that find expression in free-trade agreements (FTAs), beginning with Israel (1958), then Canada (1989) and Mexico (1994), and more recently Jordan (2000), Chile (2004), Australia (2004), Bahrain (2004), Morocco (2004) and Peru (2007). In each of these cases, the goal was to strengthen political relations as well as boost two-way trade and investment. Likewise, the two FTAs now awaiting congressional ratification with South Korea and Colombia are motivated by hopes of cementing alliances-in Asia where U.S.-Korea military ties are gradually supplanted by economic alliances and in South America where the overarching U.S. priorities are to root out terrorism and drug trafficking and establish a bulwark against Venezuela's Hugo Chávez. But FTAs are not just foreign-policy tools; FTA partners now buy more than 42 percent of total U.S. exports.

Our memories of the vital role played by trade diplomacy during the cold war are now fading. Even as we expand our global commerce, and even when rising exports are offsetting economic weakness at home, public support has slipped-both for the WTO and for other parts of the free-trade agenda. Polls suggest that U.S. popular opinion has swung into opposition; NAFTA and China have become metaphors for all that is supposedly wrong with globalization. But, no other tools of foreign policy-from traditional diplomacy to military operations-have the same change-making potential as trade. When properly implemented, in association with market reforms, free trade can lift the lives of hundreds of millions of people.


STILL, ECONOMISTS teach that there is no such thing as a free lunch, and this is just as true of free trade as anything else. Dismantling trade barriers almost always entails adjustment costs as workers and firms change their jobs and products. This applies to the United States just like other countries. Moreover, gains are spread widely across the American population while costs are concentrated on older workers in less-dynamic industries (think clothing and auto parts)-a severe political handicap. But serious analysis shows that gains exceed costs by at least five to one. In fact, U.S. gains from globalization are so large that Congress could easily afford to quintuple the size of our meager trade-adjustment programs (now under $1 billion a year), in order to cover far-more impacted workers in manufacturing and service industries with much-better transition assistance.

The important point is that free trade is not some sort of "gift" to foreign countries; it pays off for the United States as well, to the tune of $10,000 annually for each American household. U.S. firms and consumers alike benefit from low prices. U.S. companies and their employees gain new access to markets abroad. More efficient U.S. firms thrive and expand, and in this way, trade creates new and higher-paying jobs for American workers.

Essay Types: Essay