Free trade agreements
What’s in a number?
Published 17 November 2016
Every trade negotiation is an exercise in pushing the government-imposed cronyism out of the way and freeing up space for markets to work, which is good for consumers and for economic freedom.
The real goal of any trade agreement
Let’s consider the much-maligned North American Free Trade Agreement (NAFTA). Before NAFTA, the average U.S. applied tariff on imports from Mexico was around 4 percent. The average Mexican tariff on U.S. imports was 13 percent. Was it a “bad deal” for the U.S. if both parties reduced tariffs to zero?
The terms of trade — or the commercial environment for firms trying to trade with one another — before a trade negotiation is typically an assortment of protections which are better understood as government subsidies for politically-connected industries—also known as “crony capitalism.”
Every trade negotiation is an exercise in pushing the government-imposed cronyism out of the way and freeing up space for markets to work, which is good for consumers and for economic freedom. Cronyism persists in U.S. trade law (consider the sugar program, or the 32 percent tariff on brooms). But in general, the barriers faced by U.S. exporters in other countries are far greater than those here at home.
Garnering support for trade agreements requires that the average person knows the starting point (protectionist subsidies for connected firms at the expense of poorer citizens) as well as the goal (neutral, market-based, fair treatment for all products and services).
The economic benefits of free trade have been well known since Adam Smith published The Wealth of Nations in 1776. Mercantilism, based on the theory that state power was enhanced by the accumulation of positive trade balances, was shown by Ricardo and others to be harmful to societal welfare over 200 years ago. Yet almost every argument for a policy of free trade uses a mercantilist rationale: “industry A will be able to boost exports if agreement B is approved.”
It’s a tempting line of argumentation. Industry associations whose members benefit from higher exports are making accurate claims about their business interests. But selling trade liberalization policies on the basis of export performance creates as many problems as it solves. First, the general public gets the impression that the only reason to pursue trade liberalization is to generate American exports.
Imports are, by extension, viewed with suspicion, which feeds directly into protectionist arguments that somehow imports shrink economic output and cost jobs. In reality, imports are beneficial to consumers and producers. Fully half of U.S. imports are raw materials and intermediate goods used as inputs to U.S. manufacturing. Imports greatly enhance the global competitiveness of U.S. finished products.
Second, the focus on export performance feeds the mistaken notion that the trade balance is a handy scoreboard for gauging the effectiveness of U.S. trade policy. Finally, export data and forecasts of future export performance are both boring and nearly impossible to get right, because trade flows and national economic performance rely on many factors that have little to do with trade policy. When, as usually happens, the numerical promises fail to materialize, they become a club for opponents to bash the projections for new agreements.
Instead of measuring exports, measure economic freedom
In political communication, winners tell stories while losers give lectures. Free traders should not shy away from the moral case for trade: at its heart, it is the story of individual freedom. At a recent public event, House Ways and Means Chairman Kevin Brady (R-TX) made his convictions clear:
“Free trade isn’t about China, or Mexico, or Britain. It’s about America—and guaranteeing Americans their economic freedom. This is protecting our freedom against those who would tell you which smart phone you can buy, what car you can drive, what groceries you can choose, and at what price. This is freedom against Washington dictating where your business can sell its legal products and how much you can charge. This is freedom against “Washington knows best.’”
Yes, trade agreements are imperfect, and can be improved. Yes, U.S. domestic policy has failed to help workers and firms adjust to disruptive forces like globalization and technology. But the freedom to engage in mutually beneficial exchange with minimal interference from governments ought to be at the center of all our arguments. It’s a principle we share with our fellow citizens.
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