Is Free Trade Good or Bad for the American Economy - Essay Example

Is Free Trade Good or Bad For the American Economy? Introduction Free trade is an economic model in which goods and services are exchanged between parties without tariffs or government regulation. The benefits and drawbacks of adopting a worldwide system of free trade are the subject of heated debate, but most economists agree that free trade improves the overall wealth of the involved parties. The establishment of free trade has been compared to the improvement of farming equipment and factories, which made many jobs obsolete and caused economic upheaval while being implemented, but ultimately was deemed an improvement, as it also created new jobs and increased wages. (Odell, 27) Because it is generally agreed upon that free trade improves aggregate wealth, opponents tend to be those who would personally suffer, such as business owners whose businesses would be unable to compete with foreign rivals. (Lars, 209) Ideally, under a free trade model, every person and every country would produce what they are best at producing and then use the money from the sale of their products to buy those products they are not skilled at making. Many detractors focus on the harmful effects that free trade has on the environment, since free trade agreements allow companies in countries with lax environmental regulations and little financial incentive to reduce emissions or control waste to compete with American companies, which have to expend a great deal of money to meet environmental regulations. (Shaikh, 136) The result, critics say, is that foreign companies have an economic advantage over American companies, or that American companies will move their operations overseas to avoid compliance with U.S. regulations. (Odell, 34) A similar argument claims that trade with countries that have poor conditions for workers reinforces the legitimacy of those conditions. Supporters of free trade, however, claim that free trade is beneficial for the environment, since products are more likely to be produced in places where production is easier, and thus less harmful to the environment. Proponents of free trade claim it is the most equitable trading practice, since foreign companies can compete on equal footing with domestic companies. Free trade allows companies to sell their products to consumers willing to pay the highest price, and allows consumers to buy from the company selling the highest quality product at the lowest price. (Graham, 68) Free trade advocates claim that the taxes and tariffs imposed on imported goods makes it doubly hard for foreign producers to compete: because of the cost of exporting their goods into the United States, companies will be able to export less than they would without the tariffs, and these increased costs in turn mean they cannot produce as much. (Lars, 70) History The conception of Free Trade is usually credited to eighteenth-century economist and philosopher Adam Smith, whose treatise "The Wealth of Nations" (1776) outlined the idea and the benefits of free trade. David Ricardo, a British economist, built on Smiths ideas, specifically his idea of specialization, eventually forming the theory of comparative advantage. The United States Constitution explicitly established mandatory free trade between the fifty states, and for years trade with other nations was also essentially free. Following the stock market crash in 1929 and the subsequent years of economic downturn throughout the world, many countries became much more protective of their domestic industries and wary of trade with other nations. (Folsom, 112) This protectionism only served to exacerbate the problem, however. While the United States slowly recovered from the slump, however, Europe and Japan became embroiled in World War II. After the war, the U.S. emerged as the economic superpower, and other countries wanted to reopen trade. The 1948 General Agreement on Tariffs and Trade (GATT) helped reduce import tariffs in order to spur more trade. (Russell, 195) Despite backlash among workers in certain industries, GATT managed to increase trade significantly; the original 23 countries had increased to 142 by the time the World Trade Organization (WTO) supplanted GATT. (Gallagher, 154) In January 1994, the United States signed a trade agreement with Mexico and Canada, extending the existing Canada-U.S. Free Trade Agreement, to include the entire continent of North America in a free trade area. The North American Free Trade Agreement (NAFTA) is still one of the most comprehensive free trade agreements in the world, increasing U.S. exports to Mexico 150 percent and to Canada 66 percent within the first decade. (Gallagher, 158) Nevertheless, it has been controversial since its inception. As with almost any institution of free trade in a country that has historically been protectionist, many industries were hurt by the sudden increase in competition, and the U.S. trade deficit with Canada and Mexico grew significantly, from $16 billion USD a year to $82 billion USD a year. Estimates indicate that, within six years, NAFTA had resulted in the creation of 28 million jobs, with a net loss of 3 million jobs. (Natalie, 78) Among other concerns raised by the creation of the WTO and NAFTA, many people were worried about the environmental impact of allowing the United States to trade with less-developed, less-advanced, less-environmentally conscious nations. Since other countries factories did not have the same environmental regulations and standards as U.S. factories, foreign companies could produce equivalent products for lower prices, but at a greater cost to the environment. (Sherrod, 56) Since NAFTA did not require Mexican companies to match U.S. environmental regulations, environmentalists argued that it would encourage those companies to cut corners with regard to emissions, pollutants, and other environmentally relevant issues. (Henry, 93) Some economists also argued that, since American companies were held to these higher standards, they could not compete with their foreign counterparts. Thus, American companies would have good reason to move their heavily polluting operations overseas. The other side of this argument was that the increased revenue brought into developing countries would give them the incentive and the means to improve their environmental standards. (Sherrod, 61) These two arguments are known as the pollution haven hypothesis and the Kuznets Curve hypothesis, respectively, and they are still debated today, though neither has been shown to be entirely true. Opponents of free trade also argue that American manufacturing jobs will continue to disappear if foreign companies are allowed to freely compete with domestic companies. (Natalie, 85) The libertarian argument in favor of free trade is that the American economy has always prospered to a greater degree without government interference, and the global economy should be no different. (Graham, 65) Tariffs make it more expensive for both foreign manufacturers and domestic manufacturers (who often need to import raw materials, which are also taxed) to produce their products. The economic law of supply and demand means that tariffs and quotas necessarily make in-demand products more expensive than they would be if manufacturers could freely import as much of a product as they could produce. Free Trade Today Many people have pointed out the poor conditions and low wages paid to factory workers in other countries, particularly Asian countries such as Malaysia and China. Opponents of free trade say the United States should not trade with countries with such poor working conditions, since it only encourages those countries to continue such practices in order to maintain low production costs. (Francesco, 209) Supporters claim that trading with these countries is often the only way to improve those conditions, since safer factories and higher wages require greater income. (Henry, 91) They also say that boycotting so-called "sweatshops" is counterproductive, because they are often the only, or the best, employment option in poor countries. Compounding these problems, in the case of Malaysia, is the countrys insistence that any trade agreement with the United States include stipulations for giving preferential treatment to Malay companies, as has been the norm for decades. In recent years, the United States has attempted to negotiate a free trade agreement with South Korea. There are numerous obstacles to an agreement, including South Koreas hesitance to allow importation of U.S. beef since the discovery of a case of mad cow disease in the United States in 2003. Many U.S. legislators are unwilling to approve a trade agreement with South Korea unless it includes the stipulation that South Korea allows the free importation of American beef. If signed, the trade agreement with South Korea, the United States seventh largest trading partner, would be the largest American free trade agreement since NAFTA. Conclusion One of the most important benefits from free trade is the ability for nations to specialize in producing the items they are most efficient at producing. Different countries have unequal distributions of natural resources, different environments, levels of education, size of workforce, amount of capital, and so on. Therefore, the bottom line is that different countries are better suited for producing different things. A country will then produce what it is most efficient at producing relative to other countries and trade for products it is less proficient at manufacturing. As a result, overall production or output will increase, and a countrys economy as well as its people may benefit from a greater variety of goods at cheaper prices. Therefore, when opportunity costs are compared, the countries should focus their attention on producing the product they have the comparative advantage in, and market forces usually ensure that all nations involved share in the advantages of increased production and efficiency. In addition to increased efficiency and lower prices, free trade also escalates intense competition in terms of costs, profits, and quality. Competition is especially more rigorous in todays global environment where a company not only has to compete with domestic firms, but also faces threats from foreign companies. This desire to obtain greater profits by decreasing cost and increasing efficiency of production results in innovations that may include time-saving technology or better methods for manufacturing. Therefore, free trade fosters global competition for lower prices, cost-effective production techniques, and a greater emphasis on quality and performance. Works Cited Folsom, Ralph H. "NAFTA and Free Trade in the Americas in a Nutshell." St. Paul: West, 2004: 112-114 Francesco Duina, The Social Construction of Free Trade: The European Union, NAFTA, and Mercosur. Princeton University Press, 2007: 209-213 Gallagher, Kevin P. "Free Trade and the Environment: Mexico, NAFTA, and Beyond." Stanford: Stanford University Press, 2004: 154-159 Graham Dunkley. Free Trade: Myths, Realities and Alternatives (Global Issues). Zed Books, 2004: 63-70 Henry George, Protection Or Free Trade. Research Press, 2007: 91-94 Joseph E. Stiglitz, Andrew Charlton. Fair Trade for All: How Trade Can Promote Development. Oxford University Press, USA, 2007: 188-191 Lars Magnusson. The Tradition of Free Trade. Routledge, 2004: 207-212 Natalie Goldstein, Frank W. Musgrave. Globalization and Free Trade (Global Issues). Facts on File, 2007: 78-85 Odell, John S. "Negotiating Trade: Developing Countries in the WTO and NAFTA." New York: Cambridge University Press, 2006: 27-34 Russell Roberts. The Choice: A Fable of Free Trade and Protection. Prentice Hall, 2006: 195-200 Shaikh Anwar, Globalization and the Myths of Free Trade (Routledge Frontiers of Political Economy) Routledge, 2007: 136-138 Sherrod Brown, Myths of Free Trade: Why American Trade Policy Has Failed, New Press, 2006: 56-64 Read More