Free trade: What to do about the “losers”?
The recent flare-up of tensions over trade policy between the United States and its trading partners has transformed that topic into one of the most heated issues in recent political history. Consequences of recently heightened trade restrictions have spread throughout the American economy, its foreign counterparts, and the global economic environment. Its effects have led some to question whether the United States would be better off if the government eliminated all barriers to free trade.
Basic economic theory suggests that limiting trade barriers is the most mutually beneficial policy for both sides of an exchange. However, free trade does not benefit everyone; it has the potential to negatively affect certain firms and individuals, both domestic and foreign. Even if we accept the assumption that free trade is efficient, we should still consider its complications. In that vein, the Federal Reserve Bank of Minneapolis is asking students in its 32nd annual student essay contest to explore the following question: What, if anything, should government do to address the adverse consequences of free trade for some firms and individuals?
Since the dawn of civilization, trade has shaped the global landscape and played a key role in the development of nations. Trade facilitated the transfer of wealth and valuable goods between cultures and across continents and vast oceans.
Trade provides nations with a number of benefits. First, in contrast to closed economies, in which access to natural resources and human capital is restricted to what lies inside borders, countries that partake in international trade can tap into the global stock of goods and services. Secondly, trade allows countries to capitalize on comparative advantages, allowing for specialization and the creation of economies of scale, both of which increase output and availability of goods for both trading parties. Finally, free trade increases competition and facilitates the flow of expertise and innovation, leading to lower prices, higher-quality goods and services, and maximized consumer surplus.
Economists from Adam Smith to John Maynard Keynes have expressed belief in the superiority of free trade. “Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards,” wrote current Harvard economist Greg Mankiw.1 Low barriers to trade promote wealth and prosperity across the globe.
However, one cannot ignore the fact that free trade does adversely impact select firms and individuals. In a market with minimal trade restrictions, many companies choose to outsource work to foreign countries, as imports from countries with cheaper labor cost less without the presence of tariffs than when tariffs are in place. This can harm both domestic and foreign workers: domestic individuals find themselves unemployed, while their jobs are filled by foreigners who may work under less restrictive labor regulations, toiling exorbitantly long hours in unsafe conditions.
Turning to firms, opening up global free trade can crowd out developing industries as well as small businesses that cannot compete on an international level. For example, many family farms, domestic and foreign, have difficulty competing with large international agricultural entities.
Lastly, import tariffs and fees are a source of tax revenue that governments embracing free trade lose out on.
How should government intervene?
A number of government interventions have the potential to assist those negatively affected by free trade. Workforce retraining or other education, transfer payments, tax incentives, exchange rate controls, and loan and grant programs are just a few of the many options students might consider.
One can also make the case that the theoretical advantages of free trade no longer extend to today’s economies, which face complexities the likes of which have never been seen. Economists have penned convincing arguments in favor of the necessity of tariffs, quotas, embargoes, and other trade restrictions.
No free lunches
International trade is by nature mired in complexities. Factors such as currency, foreign policy, judicial systems, and market intricacies all play a role in the international exchange for goods, services, and capital.
The concept of opportunity cost rules economics; there really is no such thing as a “free lunch.” There will be some level of fallout from any solution, partial or whole, to the problems faced by those disadvantaged by free trade. A good essay will not only detail potential solutions, but address unintended consequences and externalities as well, weighing the costs and benefits of a proposal and delivering a final judgement.
A Wealth of Possibilities
This primer is simply an introduction and is far from the last word on the subject. An abundance of information is available for students to draw upon, and essays can take a variety of approaches. The judges will reward creative thinking in addition to careful research, persuasive writing, and solid economic reasoning. Good luck!
If you have any questions, email EssayContest@mpls.frb.org.