Daniel J. Ikenson
Most economists agree that free trade works better than restricted trade to increase the size of the economic pie. By enlarging markets to span national borders, free trade increases the pool of potential producers, consumers, partners, and investors, which permits greater specialization and economies of scale – both essential ingredients of per capita economic growth.
But, in practice, free trade remains elusive. It is the exception, not the rule. Sure, many tariffs and other border barriers have been reduced in the United States (and elsewhere) over the years, but protectionism persists in various guises. There are “Buy American” rules limiting government procurement spending to local firms and US-made products; heavily protected services industries; seemingly endless incarnations of agriculture subsidies; import quotas on sugar; green-energy and other industrial subsidies; shipbuilding and shipping restrictions; the Export-Import bank; antidumping duties; and, regulatory protectionism masquerading as public health and safety regulations, to list some. Ironically, protectionism is baked into our so-called free trade agreements. It takes the form of rules of origin requirements, local content mandates, intellectual property and investor protections, enforceable labor and environmental standards, and special carve-outs that shield entire products and industries from international competition.
Trade agreements may be the primary vehicle through which U.S. trade barriers are reduced, but they are predicated on the fallacy that protectionism is an asset to be dispensed with only if reciprocated, in roughly equal measure, by negotiators on the other side of the table. If the free trade consensus were meaningful outside of economics circles, trade negotiations would be unnecessary. They would have no purpose. If free trade were the rule, trade policy would have a purely domestic orientation and U.S. barriers would be removed without any need for negotiation because they would be recognized for what they are: taxes on domestic consumers and businesses.
Arguably, opening foreign markets should be an aim of trade policy, but real free trade requires liberalization at home. The real benefits of trade are measured by the value of imports that can be purchased with a unit of exports – the so-called terms of trade. Trade barriers at home raise the costs and reduce the amount of imports that can be purchased with a unit of exports, yet holding firm to those domestic barriers while insisting that foreign markets open wider is the U.S. trade negotiating strategy. Indeed, that’s almost every government’s negotiating strategy. It is the crux of reciprocity-based trade negotiations, which, at its core, is a rejection of free trade.
That the case for free trade – even acceptance of the fact that trade makes us better off – is not second nature speaks to the endurance of several fallacies that inform popular opinions about trade. One such fallacy, which is continuously reinforced by media and stumping politicians, is that trade is a competition between “Us” and “Them.” Exports constitute Team America’s points. Imports are the foreign team’s points. The trade account is the scoreboard. That scoreboard shows a deficit, which means the United States is losing at trade. And it’s losing because the foreign team cheats – often with impunity. That many Americans accept this narrative explains why protection-seeking industries couch their objectives in this “Us” versus “Them” context. By nurturing the false notion that the interests of U.S. consumers and taxpayers are inseparable from those of U.S. producers, it becomes that much easier for industry to obtain the protection that reduces competition, raises prices, eliminates choices, and slows innovation.
Why should the average American care about trade agreements if the spoils accrue to businesses in the form of export revenues? After all, the once-strong relationship between business performance and job creation has grown weaker. The better selling point is that import competition brings greater variety, better prices, best business practices, and inspires domestic companies to be more accountable and responsive to consumer demands. Import competition breeds innovation. Presumably, Americans would care more about having international competition in the domestic commercial aviation sector – where foreign carriers are currently prohibited from serving – than they wish to see pharmaceutical patents extended to 12 years in some trade agreement. But commercial air competition – on the wish list of the European Union in the Transatlantic Trade and Investment Partnership negotiations – is something U.S. negotiators do not want to discuss. Likewise, the 94 year-old Jones Act, which (among other anti-consumer features) prohibits foreign-built, -staffed, or -flagged shipping vessels from transporting goods between U.S. ports, forces Americans to subsidize less competitive U.S. shippers and their unions through the higher prices they pay for delivered goods. Again, shipping reform is on the European negotiators’ agenda but – despite the U.S economic and environmental benefits reform would bring – remains a subject that U.S. negotiators wish to avoid. The EU’s desire to open more U.S states’ procurement processes to competition is another example of where American consumer interests – in this case state taxpayers – are better served by the offensive negotiating agenda of the other government.
The takeaway is that reciprocity-based negotiations force negotiators to go to bat for their exporting interests, while they ignore the interests of those who benefit from greater import competition. There is no national team to support in these talks. Generally, producer interests are better represented by their own government, and consumer interests are, residually, better represented by the other government going to bat for its own producers.
The myth that trade is a competition between “Us” and “Them” is one of many misconceptions that serve to obscure the truth about free trade and its benefits. Following is a list of what we at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies believe to be the ten most persistent fallacies about trade.
- Trade is a competition between “Us” and “Them”
- The trade deficit means the United States is losing at trade
- Trade only benefits big business and the rich
- Foreign “outsourcing” hurts the U.S. economy
- Trade and globalization caused U.S. manufacturing decline
- Trade and globalization have spurred a “race to the bottom” in labor, environmental and product safety standards.
- The WTO is an anti-American institution that undermines U.S. sovereignty.
- Free trade is not fair trade
- Free Trade Agreements equal Free Trade
- Unilateral trade liberalization is akin to unilateral disarmament
Certainly, there are other myths invoked to advance protectionist aims and to impede broader acceptance of the benefits of free trade. In 2014, we launched Cato Trade on Campus, which is an interactive, on-campus program intended to identify, discuss, and ultimately expose these fallacies. We will be visiting the Monterey Institute for International Studies this week and will kick off 2015 with a program at North Carolina State University in late January. Over the course of the year, we will be visiting other campuses and producing additional commentaries, analyses, and videos aimed at dispelling these various myths.