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ECONOMIC ANALYSIS: Why the arguments against free trade don't hold water

May 12, 2008

Americans are in a tough spot when it comes to negotiating free trade agreements. With the exception of a small Scandinavian country and a couple of European principalities, everyone we trade with has lower wages, weaker environmental standards, and less personal liberty. So it is easy to argue that we shouldn't trade with a country until it becomes like us. This is the siren song of economic catastrophe. Here's why.

First, countries don't trade with each other; people do. The choice to buy goods and, increasingly, services from producers in other nations is a choice made by individuals.

Countries can and do block trade to benefit special interests that abhor the freedom of consumers to make decisions. The movement to open borders to trade is one that empowers consumers and citizens, those without political and economic power, the hungry and destitute. The anti-free-traders, from large agricultural interests to labor unions, do so to protect themselves from the discipline of market competition. They do this at the expense of everyone else.

The benefit of trade is probably the hardest thing for economists to explain to a lay audience. The very liberal New York Times columnist and excellent economist Paul Krugman flatly refuses to do so without resorting to algebra. I'll hazard an attempt at it without an equation.

Visualize the world of two small farmers. Both are scratching out a living on hardscrabble farms, doing all the various tasks themselves. Both would be hard-pressed to raise themselves up from poverty. Now, suppose they decide to become specialists. One raises animals, a year-round job, while the other raises crops in the summer, and manufactures clothing and tools in the winter.

A fine idea this, but it works only if they exchange the fruits of their labor with each other. And, of course, they become more skilled at their specific tasks if they specialize. The result is that both farmers can consume more goods by specializing and trading than they could if they worked alone.

The critics say, sure, but this doesn't work for countries, especially the United States, where we are so much better at almost everything we do. They are wrong. Suppose one of the farmers was a bit dim, unschooled and lazy. Suppose he took siestas, watched hockey late into the evening, or whiled away his weekends watching football. All the benefits of trade would still occur-the only loser would be the less productive farmer.

Trust me: I can make the story as complex as we want, with asymmetric tariffs, pegged currency regimes, tradable emissions permits and unequal labor protections. The result remains the same. Trade benefits all but those protected special interests.

So why oppose free trade? Clearly, trade hurts the special interests. Sadly, many of these special interests have faces, and may be our neighbors. Even so, we neither can nor should continue to protect them from the rigor of markets at the expense of the rest of us. The results would be devastating to our economy.



Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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