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Is Free Trade Harmful or Beneficial?
Does free trade offer a route to increased global prosperity, or does it threaten environmental and labor standards? In this Point/Counterpoint Sidebar, David Vogel, a professor of business at the University of California at Berkeley, argues that free trade is essential to economic growth in the United States and around the world. Jeff Faux, president of the Washington D.C.-based Economic Policy Institute, counters that the benefit from additional trade liberalization over the last few decades can never outweigh the resulting job losses and environmental damage.

The Case for Free Trade

By David Vogel

The case for international trade is essentially the same as that for domestic trade. As Adam Smith convincingly demonstrated in The Wealth of Nations (1776), individuals are better off if they specialize instead of trying to be economically self-sufficient. Likewise, countries are better off if they exchange the products and services that they are relatively good at producing for those things that other countries are relatively better at producing. The resulting international division of labor enables all workers to be more productive.

This principle underlay the establishment of the United States in 1789. By prohibiting states from restricting trade with other states, the U.S. Constitution created a large and efficient domestic market that helped make the United States one of the richest economies in the world. New Yorkers benefit from importing motion pictures made in California, just as Californians benefit from exporting their movies to New York and importing books from New York. The case for free trade among countries rests on the same logic. It makes no more sense for New York to restrict sales of movies produced in California than it does for the United States to restrict imports of coffee produced in Brazil. California’s specialization in movie production and Brazil’s in coffee production improves the well-being of consumers and workers in both places.

A tariff is essentially a tax on consumption: It raises the prices of imported goods and services. When tariffs are reduced or eliminated, consumers benefit by being able to purchase goods produced in other countries more cheaply. This in turn forces domestic producers to be more efficient in order to remain competitive—again benefiting consumers.

Consider how inferior American cars would now be if the American automobile industry had not been forced to compete with the less expensive, better quality cars made in Japan during the 1970s. How much poorer Japanese consumers would be if Japan tried to be self-sufficient in food, instead of exporting automobiles and electronics to the United States and importing fruits and vegetables grown on more efficient American farms?

Trade restrictions impose considerable costs on consumers. In 1990 U.S. tariffs and other import restrictions cost American consumers about $70 billion by adding to the price of imported goods. Since 1990 the United States has entered into trade agreements that have substantially lowered the costs of many imported products. The increase in foreign competition in turn has made it more difficult for American firms to raise their prices, thus helping reduce inflation. By contrast, in 2000 food prices were 34 percent higher in the European Union (EU) and 134 percent higher in Japan than in the United States largely because the EU and Japan had higher tariffs on imported food.

In addition, trade makes it possible for businesses to choose from a wider variety of inputs (materials used to make goods) than would be possible if they relied solely on domestic suppliers. The freedom of firms to choose from an array of inputs improves efficiency, promotes innovation in technology and management, encourages the transfer of technology, and otherwise enhances the growth of productivity.

Free trade does not, as many proponents argue, create jobs. Although exports create jobs, imports frequently destroy them so there is no net gain in jobs. But free trade does shift a country’s resources into those goods and services in which its workers are most productive. Significantly, in the year 2000 export-related jobs in the United States paid 13 percent to 18 percent more than other jobs. The same was true in developing countries: The firms that produced goods for export tended to pay higher wages than those that produced only for domestic markets. By contrast, the world’s poorest citizens tend to produce few or no internationally traded goods or services.

The benefits of free trade can be seen clearly in the case of the United States. In recent decades, the United States has become increasingly integrated into the global economy. As both U.S. and foreign trade barriers have declined, exports and imports have grown substantially. Heritage Foundation Fellow Daniel Mitchell argued this persuasively in The American Enterprise in 2000. From 1980 to 1998, U.S. exports increased from $272 billion to $934 billion, Mitchell argued, while imports grew from $292 billion to $1,100 billion. During the 1990s, a period when U.S. links with the global economy were more extensive than ever before, the United States had among the fastest growth rates of any major industrial nation.

The positive effects of trade on economic growth are confirmed by numerous studies. According to one study reported on by Mitchell, during the 1970s and 1980s, developing open economies (those with relatively free trade), such as Chile and South Korea, grew on average by 4.5 percent, while closed economies (those with restrictive trade policies), such as India and Cuba, grew by only 0.7 percent. A statistical study of 70 nations found that a 10 percent increase in tariffs on capital goods (goods that are used in the production of other goods) would cause the gross domestic product (GDP; the total value of all goods and services produced within a country) to grow by 0.2 percent less each year. An analysis of 93 countries revealed a close link between open economies and rates of productivity. Another statistical study, based on 123 nations, found that every percentage-point increase in total imports and exports leads to a 0.34 percent increase in per capita income (income per person). Over a period of years, small differences in economic growth such as these have a large impact on living standards.

The last three decades have seen a significant improvement in living standards for hundreds of millions of people. Without exception, the countries in which living standards have improved most rapidly have substantially reduced trade barriers and increased their exports. Since 1970 Asia’s “four little tigers”—Hong Kong, South Korea, Taiwan, and Singapore—have been transformed from impoverished areas into some of the world’s richest areas. Many of their citizens now enjoy living standards comparable to those of the United States and Europe. Not coincidentally, these four entities are among the 20 largest traders in the world.

The positive impact of international trade on economic growth can be dramatically seen in China. From 1978 to 1998, China’s total imports and exports grew from $21 billion to $324 billion. During this same period, the country’s per capita income increased by more than 8 percent per year, helping raise some 200 million people out of absolute poverty. By contrast, India’s economic growth has been significantly reduced by the persistence of high tariffs and restrictions on foreign investment. Africa, the only continent whose citizens have experienced an absolute decline in living standards in recent decades, is also the region least involved in international trade. Economists point to many causes for Africa’s relatively poor economic growth—inadequate infrastructure, government corruption, and low levels of education—but most agree that international trade is vital to turning around the economic decline.

Activists in the United States have often criticized free trade on the grounds that businesses are simply attempting to exploit low-wage labor in developing countries. They point to the sweatshop conditions in which goods such as textiles, toys, and sneakers are produced for export to the United States and other wealthy countries. Wages in many developing countries remain very low, certainly by Western standards. Although the working conditions in some of these factories are deplorable, in most cases they represent a substantial improvement from the abject rural poverty in which these workers formerly lived.

The growth of export industries has been accompanied by a measurable improvement in living standards, not only for these workers, but also for the entire economy. Thanks to the ripple effects of export-oriented firms, Thailand sustained one of the highest rates of growth in the world from 1977 to 1996. The percentage of individuals in poverty declined from 33 percent to 11 percent, while the number of rural residents with access to safe drinking water increased from 1 in 6 to 4 in 5. Nor has the economic growth from trade increased inequality: Trade raises average income and the incomes of the poor in roughly equal proportion.

In fact, the most effective way for the world’s richest countries to promote economic development in poor countries is to lower their tariffs and other import restrictions on exports from the world’s poorest countries. Such a free trade policy, along with debt relief, offers these countries their only hope for improving the living standards of their impoverished citizens. Unfortunately, such a policy prescription is strongly opposed by trade unions in the United States and Europe, which fear a loss of jobs for their members. Imports from developing countries represent only 4 percent of total U.S. production.

Are such fears justified? Do imports from low-wage countries adversely affect U.S. workers? Since 1993, the United States has significantly lowered its trade barriers and created 20 million new jobs. In 1999 the United States enjoyed its lowest unemployment rate in 30 years. At the same time, the U.S. economy has grown at record levels. Moreover, most U.S. trade is with other rich countries: The country’s biggest trading partners are Canada, Europe, and Japan. All of these countries have wages that are comparable to those of the United States.

Nonetheless, trade does change the composition of employment. As trade barriers decline, workers in industries that are no longer competitive on world markets do experience increased unemployment. However, these losses are accompanied by increased employment in those export-oriented industries in which developed countries continue to enjoy a comparative advantage. Indeed, an important purpose of free trade is precisely to move American workers out of unskilled jobs in textiles to high productivity jobs such as in computers and software production. It is short-sighted to focus on the job losses associated with imports, while losing sight of the job creation from the increase in exports.

The increase in imports from a low-wage country such as Mexico is a good, not a bad thing for the U.S. economy. As Mexico becomes richer, its imports from the United States increase. By increasing employment in export-oriented high-skilled jobs, the export of low-skilled jobs to Mexico raises rather than lowers U.S. living standards. To be sure, this transition is often a painful one. However, the appropriate response is not to maintain trade barriers to keep low-skilled jobs in the United States and thus prevent Mexican workers from raising their living standards. It is rather to provide sufficient funds for worker retraining.

The most important reason for the long-term erosion of wages for unskilled workers in the United States in recent decades has not been free trade, but low productivity growth. Productivity growth means that workers are able to produce more goods and services in less time. Higher productivity increases profits and enables employers to offer higher wages. According to the U.S. Census Bureau, many industries in the United States were actually less productive in 1997 than they were in 1988, forcing wages down. Once again, the appropriate policy response to low productivity growth is not to maintain or increase trade barriers but rather to provide the education and job training that will enable workers to qualify for more productive, and thus better-paying, jobs. Foreign workers in developing countries should not pay the price for the shortcomings of U.S. social policies.

Trade liberalization has also been criticized on the grounds that it undermines environmental quality, both in the United States and in other countries. This criticism is also misplaced. A nation’s environmental quality is primarily determined by the standard of living of its citizens. To the extent that free trade enhances living standards, it improves environmental quality. The evidence is clear: The lowering of global trade barriers in recent decades has been accompanied by a steady improvement in environmental standards not only in the world’s rich countries but in a number of rapidly developing ones as well.

In the short run, economic growth does reduce environmental quality. But as nations become richer, domestic environmental standards tend to improve as its citizens become sufficiently affluent to demand and afford improvements in air and water quality. In recent years, for example, environmental quality has substantially improved in countries such as Chile, Israel, Poland, South Korea, and Spain. In addition to demands by citizens, the economic logic of free trade encourages environmental improvement. This is because many of the world’s most polluting firms are also among the most inefficient. The opening of trade barriers in Latin America and the former Communist nations of central Europe has measurably improved environmental standards in these countries because inefficient, highly polluting industries have been forced to shut down.

To be sure, environmental conditions remain deplorable in much of the world. But the most serious environmental problems in poor countries, such as burning of forests and the lack of safe drinking water, are caused not by trade but by poverty. Poor countries cannot afford complex water supply systems, and their citizens may cut down forests for firewood and to clear land for farming. Trade restrictions are not likely to solve these sorts of problems, and may make them worse.

Moreover, opening up their economies improves environmental quality in poor countries in three ways. First, multinational firms based in the United States and Europe frequently employ better environmental standards than domestic firms. Second, trade facilitates the international transfer of pollution-control technologies. Third, firms in poor countries, whether domestic or foreign owned, are often forced to adopt the stricter environmental standards of rich countries in order to be able to export their products to them.

Thus free trade, rather than producing a decline in regulatory standards (sometimes called a race to the bottom) actually produces a race to the top. Both trade and foreign investment facilitate the export of the stricter environmental standards of richer, more environmentally friendly countries to poorer, less environmentally friendly ones.

Free trade increases the productivity of workers, lowers prices for consumers, facilitates economic growth, and improves environmental quality. These benefits may not be distributed evenly throughout the world, or even within a country, but on balance they are substantially greater than they would be in the absence of trade liberalization.

About the author: David Vogel is George Quist Professor of Business Ethics and Professor of Political Science at the University of California at Berkeley. He received his B.A. from Queens College in New York and his Ph.D. in politics from Princeton University in New Jersey. He is the author of Trading Up : Consumer and Environmental Regulation in a Global Economy.

The Case Against Free Trade

By Jeff Faux

People of different nations have bought and sold from each other for centuries but rarely have they traded freely. Historically, countries have treated goods made abroad differently from goods made at home, primarily by charging taxes, or tariffs, on imported goods or setting quotas to limit the quantity of imports. For most of its history, the United States used both tariffs and quotas to regulate foreign trade.

Regulating trade helps protect the standards that we set in our own domestic markets. For example, in order to protect public health, the United States government requires that food sold in our stores be fresh and clean, that toys be safe, and that products only be made in factories that do not pollute the environment. To protect workers from being exploited by business, the government sets minimum wages, defends the right of employees to bargain collectively through unions, and prohibits people from employing young children. To protect business, the government enforces commercial contracts and protects corporate trademarks and patents. This balance of protections for consumers, workers, and business has helped make America the world’s most successful economy.

Meeting labor and environmental standards often adds to the cost of production. Therefore, if businesses could lower their costs by not meeting the standards, they might make more profit and lower the price of their products. Yet most people in the United States believe it is worth protecting workers and our air and water, even if that makes goods and services produced in America more expensive.

However, different nations have different values. Governments in many countries, especially those that are not democracies, often do not protect workers or the environment. The prices of goods imported from such nations will tend to be cheaper than goods produced in the United States. In that case, consumers who usually look for the lowest prices will buy foreign goods in preference to products made in the United States. As a result, U.S. workers will lose their jobs.

This is not a problem in markets for imports that the United States cannot produce much of here, such as bananas, coffee, or tea. It does become important for imported goods that compete against goods made in America, such as automobiles, clothing, or cameras. Placing tariffs on such imports adds to their price, thus making it easier for goods produced under U.S. standards to compete with imports.

By regulating imports through tariffs and quotas, the United States, until recently, kept its international trade in balance—that is, the value of the goods we exported to other countries roughly equaled the value we imported. Therefore, we paid for our imports with the money we received from our exports.

Beginning in the 1970s improvements in communications and transportation technology made it easier for American companies to locate their factories in nations with little or no labor and environmental standards and import the products from these factories back into the United States. This was a way for companies to sell to the U.S. market but avoid the cost of meeting U.S. standards. These U.S. companies were able to persuade the U.S. government to deregulate trade by drastically reducing tariffs and quotas. They argued that cheap products for U.S. consumers were more important than protecting the environment or providing jobs for workers in the United States. As a result, there was a flood of imported shoes, clothing, television sets, cars, and other goods into the country. This surge of imports was a major factor in the loss of 2.6 million manufacturing jobs in the United States from 1979 to 1999.

Recent treaties signed by the U.S. government, under both Democratic and Republican administrations, have encouraged this shift of production from the United States to areas of the world with low standards. These include the North American Free Trade Agreement (NAFTA) with Mexico and Canada and the treaty establishing the World Trade Organization (WTO) with 135 different nations.

These treaties are often called free trade agreements because the nations that signed them agree to reduce tariffs and quotas. Unfortunately, they also create new, unequal standards for the global economy by protecting business but not labor or the environment. For example, the WTO forbids a citizen of Mexico to copy a compact disc made in the United States without paying a fee to the U.S. company that sells the compact disc. However, the WTO allows a U.S. company in Mexico to make compact discs in ways that pollute the air and water and treat workers unfairly.

These so-called free trade agreements even give foreign corporations the power to stop the U.S. government from enforcing its own standards in the United States. For example, in order to protect U.S. air quality, the U.S. Environmental Protection Agency (EPA) issued a rule in 1994 to ensure that all gasoline sold in the United States met certain levels of cleanliness. Oil companies in Venezuela and Brazil complained to the WTO that the rules would put them at a disadvantage. The WTO ruled against the United States, which then had to change the rules, thus weakening air quality in the United States.

Big businesses increasingly move factories in and out of different countries. This mobility gives them the power to demand that governments also lower their domestic labor and environmental standards or else the companies will lay off workers and move elsewhere. The result has been called a race to the bottom.

Henry Ford, the founder of the Ford Motor Company, pointed out years ago that high wages are good for business as well as workers. He believed that when workers have more money in their pockets, they buy more products. However, when businesses produce goods for export to another country, they are not primarily interested in selling to their own workers. Higher wages in that case simply mean higher costs of production and less profit. So it is not surprising that when a business locates a factory in a country to produce for export, they do all they can to lower labor standards.

For example, since the passage of NAFTA, hundreds of U.S. factories that made autos, apparel, computers, and other products closed down their U.S. operations and moved their production to Mexico, where the laws protect them and not the workers. Mexican workers in factories along the border (called maquiladoras in Spanish) get low wages and work in unhealthy conditions in places that pollute the air and pour toxic waste into the rivers. One incident reported in the New York Times in 1998 is a telling example. In an auto parts factory in Mexico owned by a U.S. company, workers attempted to form an independent union. The company let thugs from a government-controlled union come into the plant and beat up the workers. The police did not intervene, and the Mexican government sided with the attackers.

The result of this imbalanced protection under free trade is that workers in both Mexico and the United States suffer. Mexican government statistics show that five years after NAFTA went into effect, “real” wages (adjusted for price changes) in Mexico fell by 25 percent. The most recent poverty statistics show that 42 percent of all Mexicans are living on less than $2.80 per day. In the United States, the Economic Policy Institute estimates that in 1999 alone, more than 230,000 workers lost their jobs because of the rising trade deficit with Mexico.

Workers in other countries also suffer because of free trade agreements. In El Salvador, for example, many young women now work in factories that make garments for major American brands. The factories “are hidden behind 15-foot walls topped with barbed wire, locked metal gates, and armed guards,” according to a February 2000 report by the National Labor Committee, a nonprofit organization in New York sponsored by churches and labor unions. The 70,000 workers, mostly young women, are stripped of their rights and paid starvation wages.” Work hours are often from 6:50 am to 10:30 pm, seven days a week. The heat within the factories often reaches 38°C (100°F). Of the 225 such factories in El Salvador, not one has a union contract. Workers get paid about 74 cents for making a woman’s jacket that sells for $118 in the United States and 20 cents for a $75 sports shirt.

Free trade has also encouraged the use of child labor. The International Labor Organization (ILO), an agency of the United Nations (UN), estimated in 1998 that there were at least 250 million children from the ages of 5 and 14 working for wages. Researchers at the University of Veracruz in Mexico recently reported that child workers there are exposed to dangerous chemicals, carry heavy loads, and do not get enough nutritious food to eat.

There are about two million child workers in Brazil. Many work 10 hours a day producing sisal for rugs, rope, and handbags sold in the United States. According to a report in 2000 in the Washington Post, “The sharp blades and processing machines used in the fields have left many children and their parents with punctured eyeballs, missing fingers and amputated arms.”

The problem with free trade is the unfairness that results when business is protected while labor and the environment are not. That is why some 30,000 people from all over the world marched through the streets of Seattle, Washington, in protest when the WTO met there at the end of November 1999. The marchers called upon the WTO to protect the rights of people and the environment just as it protects the rights of corporations. For the same reason, many people oppose the entry of China into the WTO. In China in 2000, the typical worker made 13 cents an hour and was not allowed to complain about conditions. The government of China strongly opposed making worker and environmental rights part of the rules of trade.

In the United States, free trade has destroyed our balance of imports and exports. Since the movement of U.S. production to other nations began in the 1970s, U.S. imports have grown much faster than its exports. By 2000, the United States was buying almost $350 billion more than it sold to other nations. This deficit is financed largely by borrowing the money from foreigners to pay for imports. Since the United States has been running a trade deficit for more than 20 years, Americans now owe more than $1.5 trillion to foreigners. As the debt grows, so does the interest that has to be paid back to overseas lenders, which reduces income in the United States.

The promoters of free trade argue that its benefits always exceed its costs. Yet, in the 20 years since international trade and investments have expanded, the growth in incomes of the world’s workers has slowed. In advanced nations, such as the United States, Japan, and the countries of Western Europe, after adjusting for inflation, incomes per person are now rising at about half the rate they were before the increase in global trade. People in the poorest countries have been even more hard hit. According to a 1996 UN report, since 1980, “economic decline or stagnation has affected 100 countries, reducing the incomes of 1.6 billion people. In 70 of these countries, average incomes are less than they were in 1980 and in 43 countries, less than they were in 1970.” As a result, the gap between the incomes of the world’s richest and poorest countries has widened.

Within countries, the gap between rich and poor has also generally increased. In the United States wealthier people tend to receive more income from owning shares of companies, while poor and middle income people get most of their income from wages and salaries. If a company makes more profits by moving its production offshore, those who own its shares will see their incomes rise while those people who lost their jobs will see their income fall. So as the trade deficit has increased, the rich have gotten richer and the poor have gotten poorer. In 1997 the richest 1 percent of people in the United States owned 39 percent of all the wealth in the country, according to economist Edward Wolff of New York University.

Advocates of free trade point to the lower prices that consumers pay for imported goods. How great are the benefits of cheaper goods and are they really worth the cost? One telling measure of the limits of free trade comes from a 1999 study by the Organization for Economic Cooperation and Development (OECD), a group that favors free trade. The OECD study estimated that if all of the tariffs in the world were eliminated, and if everyone who lost a job immediately got another one, the result would be just a 3 percent reduction in the prices that people paid for the goods they buy.

We need to ask ourselves, is a 3 percent price cut for sneakers or t-shirts worth adding to the pollution of the world’s air and water and the suffering of millions of the world’s workers—including children?

For most people in the United States, the answer is no. A 1997 poll commissioned by the AFL-CIO (a trade union federation) bears this out. The poll showed that 72 percent of Americans thought that labor and environmental protections should be part of trade agreements and that the U.S. government should restrict imports from countries that violate them.

Free trade, in the sense of markets without rules, does not work between countries any more than it works within countries.

About the author: Jeff Faux is the president of the Economic Policy Institute, a nonpartisan think tank in Washington, D.C., that studies labor and environmental issues. He is the author of The Party’s Not Over: A New Vision for the Democrats (1997) and has written numerous articles in the liberal magazine The American Prospect.

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