Summary
● Free trade improves the well-being of all parties to it. The most significant way that trade achieves this outcome is by enabling and incentivising specialisation in production, and also encouraging mechanisation and innovation. As specialisation deepens, and as mechanisation and innovation advance, the per-person output of goods and services increases.
● Total economic output rises as specialisation increases; specialisation increases as trade expands; and trade expands as the size of markets grows.
● Specialisation that takes place according to comparative advantage increases total economic output even if it does not increase the productivity of any individual workers. Each of us gains when our trading partners improve their efficiency at production.
● Neither free trade nor protectionism affects a country’s level of total employment over the long run. Trade policy affects only the kinds of jobs that prevail. Specifically, free trade destroys jobs in industries for which the country has a comparative disadvantage and creates jobs in industries for which the country has a comparative advantage. Protectionism’s effect on jobs is the opposite.
● Trade results in no net reduction of jobs in the home economy because home-economy imports result in foreigners either buying more homeeconomy exports or investing more in the home economy – both activities that create jobs to offset those jobs destroyed by imports.
● Trade deficits are not necessarily evidence of economic or policy problems. They are not caused by ‘unfair’ trade practices by foreign governments, they do not reflect a shortfall of savings in countries that run them, and they do not necessarily increase domestic citizens’ indebtedness to foreigners. Trade with foreigners differs in no economically essential way from trade with fellow citizens.
Introduction
International trade is as old as human civilisation. But, until recently, it didn’t amount to much. It didn’t really take off until the industrial revolution and the repeal of Britain’s ‘corn laws’ in 1846, which led to a wave of trade liberalisation across Europe. In the centuries prior to 1800, the value of goods traded across national borders was about 5 per cent of global output, measured by gross domestic product (GDP). By 2015 it had increased to 60 per cent of global GDP. This explosion of international trade played an important part in the astonishing economic growth over the period. In 2018 US dollars, global per capita GDP has risen from $1,000 in 1800 to $16,000 today. In the UK, it has risen from $3,500 to $43,000 over the same period.
But ‘globalisation’ was not an uninterrupted progression. International trade dipped sharply during the inter-war period and, especially, after the Smoot-Hawley tariffs introduced with the goal of protecting American jobs during the Great Depression. Between 1914 and 1939, international trade declined from 30 per cent of global GDP to 10 per cent.
Tariffs were widely recognised to have exacerbated the problems they were intended to solve and, following World War II, a slow process of international trade liberalisation began. The General Agreement on Tariffs and Trade (GATT) was first signed by 23 countries in 1949. After many ‘rounds’, it was replaced by the World Trade Organization (WTO) in 1995, which now has 164 member countries. Import tariffs and export subsidies in member countries were eliminated or reduced during the second half of the twentieth century and international trade took off again.
Until recently.
The reversal is most evident in Donald Trump, the American president, who has acted on his protectionist rhetoric during the 2016 presidential campaign by imposing new tariffs on steel imported from China and the European Union. But even before Donald Trump ran for president, the reversal had begun. Between the 2008 financial crisis and 2016, G20 countries introduced 1,583 new tariffs while eliminating only 387. And the persistent growth of international trade since WWII has stalled. The political consensus in favour of free trade is weakening.
Hence this Discussion Paper. It explains why trade makes everyone who participates in it better off than they would otherwise be, and why it makes no difference if the trading parties live in different countries.
The case for free trade has been familiar to economists since the work of Adam Smith in the late eighteenth century and David Ricardo four decades later. But politicians keep forgetting it, if they ever knew it. And so, apparently, do the voters who elect them.
If only people would stop forgetting, we defenders of free trade could stop repeating ourselves.
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