Donald Trump has repeatedly emphasised his preference for “fair trade” while casting doubt on the desirability of “free trade”. In his address to a joint session of Congress on 27 February, the president said: “I believe strongly in free trade, but it also has to be fair trade. It’s been a long time since we had fair trade.”
This may be news to the White House, but the world has never experienced a trading environment that has been entirely fair. What’s more, a country doesn’t need to worry about what other nations are doing in order to experience free trade – all it has to do is keep its borders open to imports.
President Trump and other free-trade sceptics fail to understand the true beauty of open markets.
First, unfairness. It’s generally accepted that life itself is unfair. Thus it should be no surprise that world trade also is unfair. Manufacturers and workers facing competition from imports are unlikely to see the situation as fair. Likewise exporting firms dealing with other countries’ import restrictions. Fairness and unfairness are very much in the eye of the beholder.
America has been dealing with trade unfairness since its early history. The Navigation Acts, imposed under English law, required all imports to be purchased from Britain. Tea from India or wine from France could enter the North American colonies only after it had cleared customs in England. Not surprisingly, many colonists found this policy to be both costly and unfair.
Recent years have witnessed an abundance of unfairness in world trade. Japan has used regulatory policies to discourage importation of automobiles. The European Union has applied food safety standards not based on science to keep out genetically modified corn. China has used industrial planning and subsidies to encourage growth in its steel industry, thus leading to massive exports. The United States has imposed 388 antidumping or countervailing duty (AD/CVD) measures to restrict the importation of products that the Department of Commerce deems to be traded unfairly. And AD/CVD restrictions themselves are seen to be unfair by the people who pay the costs.
If trade often is not fair, can it still be beneficial? Building on Adam Smith’s earlier work, David Ricardo answered that question 200 years ago by articulating the concept of comparative advantage. Ricardo observed that it made no economic sense to pursue self-sufficiency, because no nation can do everything well. Rather, countries should specialise in activities at which they have the strongest relative advantages, then trade to obtain other needed goods and services. Trade based on comparative advantage allows resources to be put to their highest-value uses, which helps to spur economic growth.
So, what is free trade? It does not depend on whether the policies of other countries are good or bad, or even whether they are fair. In fact, free trade is not about what other countries do at all. Rather, it exists when a country allows its own citizens the opportunity to buy and sell in the global marketplace without restrictions. People’s living standards rise when they have open access to millions of products, services, and customers available in the world market.
Judged by that criterion, the governments most committed to free trade are in Singapore and Hong Kong, cities with few natural resources that have become two of the wealthiest places on earth. Open markets played a major role in building that wealth.
Despite having an economy that is generally market-orientated, the United States can’t really call itself a free trader. It restricts imports through numerous tariffs, duties, quotas and other policies. From the perspective of individuals and businesses disadvantaged by these trade-distorting policies, they seem neither free nor fair.
It’s time to rethink the trade policy status quo. Instead of maintaining trade restrictions to punish another country for selling low-priced products, the strategy should be to eliminate import restrictions to take advantage of the other country’s foolishness.
Economists across the political spectrum agree that removing import restrictions always increases a country’s economic welfare. The gains to consumers are greater than any possible losses experienced by firms that compete against imports. In other words, the United States would be better off ending its tariffs and other import restrictions unilaterally, as Singapore and Hong Kong have so admirably demonstrated.
It’s time to rethink the trade policy status quo. Instead of maintaining trade restrictions to punish another country for selling low-priced products, the strategy should be to eliminate import restrictions to take advantage of the other country’s foolishness. If a country is willing to transfer wealth to America by selling items at artificially low prices, perhaps it would be best just to buy them and say, “Thanks!”
But what about firms and workers that compete against unfair imports? Don’t they deserve help? Perhaps, so long as that help doesn’t involve trade-distorting subsidies or import restrictions. Governments may wish to encourage firms to restructure or to adopt new technologies. Workers who lose their jobs may benefit from some combination of unemployment compensation, educational support, and relocation assistance. The goal should be to facilitate the transition to new employment.
President Trump and other free-trade sceptics fail to understand the true beauty of open and competitive markets. A country that allows goods and services to flow freely across its borders creates a climate of opportunity for its citizens. Free trade is an approach to trade policy that a country adopts for its own benefit, regardless of what other nations may be doing. It is something we can and should do to help ourselves.