Free trade is bad for the economy, right?

It must be. I just read that two thirds of Reps and two thirds of Dems think so:

So, what am I missing here? No sarcasm intended at all. I just have a hard time understanding what the problem is with free trade.

Well, I mean it’s obvious why people think this. They know that other countries have lower wages and fewer controls on businesses, and so can produce goods more cheaply than the US can. Thus, free trade means people choosing cheaper foreign-made goods over more expensive US-made goods, thereby costing US jobs. Whether this loss is offset by other gains to the US worker or US economy is obviously a relevant question, but not one that most people have the information to answer.

I think you may be looking for this. But free trade is a nice name for it, isn’t it? How could one be against free trade!

In theory, free trade between nations of equal economic strength should not present problems. The trouble with “free trade” comes when there are economic disparities among the nations trading freely.

No one complains about free trade with Canada. Put a Ford plant in Canada, and hardly an eyebrow is raised. The assumption is that the relative economic strengths of the two economies will not result in a massive flow of jobs into one country or the other. We’ll buy the Fords built in Canada, but the Canadians will buy the Jeeps built in Ohio. But put an automobile plant in Mexico, and all of a sudden, hackles are raised here in the United States. Why? The perception is that the Mexican labor force is so “cheap” that manufacturers will rush to move operations to Mexico, reducing labor cost. This will cause a loss of jobs here in America. But, the perception holds, the Mexicans are so relatively poor, they won’t be buying as much of what is made here to make up for that loss of jobs through an expansion of other jobs. So they get jobs, and dollars, and we get Mexican made cars, and not much else.

It is, of course, an overly simplistic view of international economy. However, it is part of a long existing struggle between those who view foreign trade as a benefit and those who prefer to protect our economy by insularizing it. These days, the leaders of the struggle for internationalization are the leaders of big business, and those people right now aren’t viewed particularly popularly, given their other interests and ties (hint: how popular is our President at the present time?).

I’m generally on the side of free trade, but the simplistic defense by people like Milton Friedman does not sit well with me. It is all well and good to say that another country is producing things cheaper than we are, and therefore, as consumers, we gain from purchasing them, but this is too much of a snap shot approach. For example, the other country may have lower costs because of exchange rate manipulation; once the exchange rate normalizes, and if the host country has de-industrialized, then the long term effect can be higher prices. Further, there is also the question of why costs elsewhere may be lower. Competing by, for example, use of prison labor, or slave labor, may give a cost advantage. But enjoying the fruits of such conditions has ethical problems attached.

Free Trade is a euphenism for sending jobs overseas, in our case, since there’s very few countries on equal economic footing with the U.S. There’s no benefit except to the ownership class, who get savings in labor costs. Just like trickle-down economics is a fallacy, so is the notion that the savings in labor costs get passed on to consumers. But those poor capitalists just can’t seem to get ahead on cheap labor alone. That’s why there’s all those tax cuts. I’m still waiting for the first drop of trickle-down largesse, but I still haven’t seen it going anywhere but into a catch basin placed conveniently just out of reach of the average American.

I dunno – isn’t almost everything we buy in this country made somewhere else already? I wonder if maybe the “opposition” is more against an idea than the fact. Otherwise, why do we keep hearing about a trade deficit?

People are idiots, especially when it comes to economics. It doesn’t surprise me that Republicans and Democrats are voicing their fears about competing with low wage countries and don’t understand why the overwhelming majority of economists think free trade is a net good for any country. We went over this in a thread a few months ago, and I will chase down the cites I gave for that assertion later on today. IIRC, the number was something like 90% of economists agreeing on free trade being good.

ETA: Here it is. This thread, posts 59 and 63.

Exactly. Economics education is terribly lacking, and I really didn’t realize my own ignorance of it until I took a course in it. In the interest of fightin’ ign’rance and all, I give a brief summary below.

According to commonly accepted economic theory, with free trade, there is always an overall social surplus*; that is, the winners win more than the losers lose. It doesn’t matter why foreign prices are low; if they subsidize their industries, then their taxpayers are paying the price (an artifically low exchange rate has a similar impact - they’re basically forcing their prices to be low at the expense of their own citizens), and if they have cheap labor, then it’s their workers who lose. How they get the low price doesn’t matter, the point is that every US consumer benefits from it.

Here’s a nice graph showing the overall benefit from free trade when foreign prices are lower. Let’s say that the good in question is shirts. The line D represents all possible consumers, and how much they value a shirt; for example, I, with my pitiful wardrobe, may value a shirt at $15, while my friend who regularly stocks up on free shirts wouldn’t want another as badly, and might bid only $5. If we line up the population by how much they want a shirt, the result is line D. Likewise, line S1 represents companies producting shirts; some can produce shirts more cheaply and so lie on the left, ones that are less efficient and thus require more money per shirt lie on the right. The intersection between D and S1 is the price that would prevail if no trade occurs.

If there is no trade, we can view “economic benefit” as follows: the triangular region between D and the dotted line P1 represents the benefit consumers get. (Let’s say the price is $10, and I value a shirt at $15; thus, I’d say ‘what a bargain!’ and snatch one up, “gaining” $5 in the transaction.) Similarly, the area between P1 and D represents the benefit producers get: if a company makes a shirt for $5 and can sell it at $10, it’s making $5 per shirt.

Now, let’s look at free trade. The dark line is the “world price” (imported shirts from China, let’s say). If we had free trade, the price would fall to P2. Now, obviously, consumers would win, and producers lose - the question is, by how much? Consumer benefit would be the area between D and P2, and producer benefit would be the area between S1 and P2. If you shade in the benefite before and after free trade, you’ll notice that there’s an extra shaded area after opening up to free trade: the little triangle between D, S1, and S2. That is a graphical representation of the benefits of free trade, demonstrating that it makes society as a whole better off.

Notice that we don’t consider how the lower world price is produced. For our purposes it doesn’t matter! The benefits of free trade appear regardless.

*The one exception is if the domestic price and the world price are the same; in that case, no international trade need take place at all.

It all depends on how you define “good”. If “good” means only the ability to buy goods at the lowest price possible, perhaps free trade is good. But if “good” means more than that, it isn’t that simple. If you want a society that has safe work environments, minimizes pollution, and provides medical care for the population, these things cost money. This money comes from making and selling things. If you can’t sell things because you can’t compete on price with other nations which don’t care about job safety or pollution and don’t provide medical care for the work force, then I’d say it’s a bad thing.

Negative. First of all, there are many different industries in the US, and so if an industry can’t “compete” with overseas industries, the workers can find jobs in industries in which the US does well. (This is unfortunate for them, as they have to learn how to do a new job, but it’s a fact of life. The same would occur if there was a significant improvement in labor-saving technology, but nobody save a few Luddites would think of complaining then.) Second of all, you seem to think that foreign trade will decrease our overall productivity; this is not the case, as shown by comparative advantage. Finally, as I said above, the loss in production revenue is more than offset by the savings consumers get from cheaper goods. In fact, if you wanted to, you could make everyone buying an imported shirt pay enough to the displaced mill workers to give them back their old wages, and there would still be money left over.

Until they boycott the U.S…

It’s interesting that you point this out, though, because in fact people DID used to complain about exactly that. It was common in the 1970s and early 1980s to hear people voice honest, seriously held fears that robots would replace all the workers, and everyone would be poor because robots don’t buy products.

The best way to illustrate the general idiocy of the anti-trade movement is to think of a foreign trade partner as exactly that: a giant machine. You send money and products into the big machine called Mexico, and other products come out. You send wheat into the machine marked “Japan,” and cars and stereos come out. If I invented a great big machine that did those things, nobody would have any problem with it.

I like your explaination, athelas.

Question…how do you know line D doesn’t drop because jobs are shifted overseas?

Note that I was careful to say “net good”. Free trade can be “bad” for people who lose their jobs because of cheaper imports (some subset of the population), but it’s “good” for the people buying those imports (almost everybody).

I recall an interview with an economist bashing Bush when he imposed tariffs on imported steel. In order to save “X” number of jobs in the steel industry, we end up destroying “Y” number of jobs in other industries ( and Y > X) because of the higher price of steel, not to mention the added cost to consumers.

Thanks; I was hoping that it was clear enough for a ground-up sort of explanation.

Until a real expert comes in, this is my thinking about your question: you’re right in that is is possible that the displaced workers, whose incomes drop as they look for another job, would not be able to pay as much for shirts. This would have the effect of shifting the demand curve (line D) downwards, and reduce the consumer’s benefit. However, since any single industry employs a relatively small fraction of the national workforce, and the unemployment is usually temporary, as the workers find new jobs. Therefore, in this rough analysis, and in the long term, we can ignore this effect.

You could imagine a country, Hatland, in which almost everyone is employed in hat factories. The emergence of Uberhatland as a cheaper producer of hats would temporarily do great harm to the Hatlandian economy, as most of the population would suddenly be out of jobs until new industries get started, in which Hatland is more competitive (software development, let’s say). But once that has happened, Hatland would be happily be waxing fat off an operating-system monopoly, and with the added benefit of getting cheaper hats. But the temporary displacement is definitely a Bad Thing, which is one reason why one-product economies are not usually desirable. In a diversified economy, like that of most first-world nations, the shock is more easily absorbed.

You’ve done a great job in yet another of these threads about ‘OMG! Free trade sucks no matter WHAT those damn corrupt economists say! And Republican’s are evil capitalists pigdogs!’.

However, I wanted to give you a link to a potentially serious problem with your Hatland theory. Its the Shoe Event Horizon…and I thought it might be good food for thought here:

It can be tragic if such a thing comes to pass. Very sad. And it goes to show that free trade is definitely bad for the economy …


The problem with this is that it is a fundamentally static analysis, that only works without significant entry costs to an industry. Country X is producing a particular good cheaper than us, for whatever reason, so we close down our industry producing that good and import it - and everyone is happy? The problem here that is not addressed is what Country X does next. Country X is now a monopolist. It decides there is no reason to keep on subsidizing the production of that good, and the prices rise back higher. Possibly even to a level higher than was produced in the domestic market before.

The free marketeers then simply tell us domestic supply will return. But that presumes zero costs of entry - a fully contestable market. The real world isn’t like that. In fact, the cost of restarting an industry may be prohibitive; infrastructure and skills may have totally disappeared, distribution networks may have totally dried up. The dynamic analysis is different to the static snap shot given us by neo-classical economics.

As I said earlier, I am generally a fan of free trade. But it does carry significant risks. And where a trading partner has shown itself willing to absorb short term losses for long term economic and/or strategic advantages, it is wise to consider all the implications of free trade before blindly presuming it to be economically beneficial per se.

You’re right - we need to consider all the disadvantages of other countries subsidizing our demand for consumer goods by selling below replacement cost. :smiley:


Reading the article, there’s some ambiguity. The opening says that two thirds of 'Pubs think free trade is bad for the economy, but a later paragraph says that they think free trade “has been bad for the U.S.”, and also that they want limits on imports. The two are different things of course. Free trade is good for the economy, if one defines “good for the economy” in the narrow way that most economists define it. But free trade is not good. So before I interpret this poll, I’d like to see the actual text of the poll.

As for what “the problem is with free trade”, I think that’s not too difficult to see. The problems are that free trade destroys communities and local economies, concentrates power in the hands of the few, gives foreign nations control over our nation, promotes human rights abuse and environmental destruction abroad, exposes us to unsafe foreign products, and does many other bad things.