Why Free Trade Is Good for Consumers
Ellig, Jerry, Consumers' Research Magazine
Americans enjoy freedoms that are envied and emulated around the globe. But when Americans try to sell the products of their labor to consumers in other countries, or purchase products made outside the United States, government trade policy limits our freedom.
Trade barriers such as quotas and tariffs, as well as environment and labor provisions attached to trade agreements, make Americans poorer by limiting their ability to trade. Free trade, on the other hand, generates significant savings for consumers and new opportunities for workers.
Popular protectionist arguments view trade, or the trade deficit, as a threat to economic security. In reality, there is no necessary relationship between unemployment and the volume of trade or trade deficits. Imports, exports, and employment all rise as the economy grows.
Why Trade Matters. During the past two decades, information technology and deregulation of communications and transportation have made goods, people, work, and investment capital more mobile than ever before. As a result, more Americans than ever have a stake in the global economy.
An autoworker in Tennessee, for example, assembles parts from the United States, Canada, and/or Mexico into a car destined for Florida, using production management methods borrowed from Japanese automakers that learned them from an American. Driving home, he stops for gas at a station owned by Royal Dutch Shell. Like many Americans, a big chunk of his retirement savings is invested in "foreign" companies like Siemens, Unilever, and DaimlerChrysler--and in "American" companies like Coca-Cola and Procter & Gamble, which actually earn a huge portion of their revenues overseas. The U.S.-based insurance company that protects his home and family sends its paperwork to Ireland for processing.
Because of such globalization, the American economy's dependence on trade has doubled since 1980. Total U.S. trade (exports plus imports) rose from 14% of GDP in 1980 to 29% in 1997. Most of this growth occurred just since 1990, when trade equaled 19% of GDP.
Ongoing developments promise to expand international trade still further. In November 1999, members of the World Trade Organization began meeting to negotiate new agreements that would further reduce tariffs, eliminate import quotas, and open world markets to trade in both goods and services. (See "World Trade, Consumers, and Seattle," at page 34.) Many developing nations formerly hostile to Western influence are now eager to drop their substantial trade barriers in exchange for access to industrialized nations' markets.
Direct Consumer Benefits
* Lower prices. The most obvious way free trade benefits American consumers is by making imports less expensive. The United States practices selective protectionism; tariffs, quotas, and outright prohibitions generate significant price increases for textiles, clothing, peanuts, leather goods, tile, and shipping. A 1999 study by the U.S. International Trade Commission estimated that removal of U.S. import barriers in 1996 would have reduced the prices of these products and services by 6% to 37%, depending on the item.
Free trade can bring big benefits even if it produces only modest price reductions. For example, U.S. tariffs raise the price of ball bearings by only 2.2%, but American firms buy so many ball bearings that they pay at least $214 million more than they would under free trade. Thanks to protectionism, American consumers and businesses paid an extra $6.1 billion for products and services, including textiles and apparel, agriculture, maritime transportation, footwear, and other high-tariff items.
* Regressive protectionism. Some of the biggest price increases occur on necessities like food and clothing. Producers of sugar, peanuts, milk, butter, and cheese receive significant protection from foreign competition. Even more important, however, is the effect of trade barriers on textiles and apparel. …