Free trade is good. Economists of all stripes; Classicals, Supply-siders, Monetarists and Keynesians, agree that this is so. Economic studies of the issue show that in rich and poor country alike, free trade raises net standard of living and creates a net gain in jobs. What's more, the jobs created are better paying and higher skilled than the median domestically available alternative. Economists have known this in theory since the days of Adam Smith in the 1700s, and since then have backed it up with detailed economic analysis.
The media and unions want you to make the mistake of thinking of the country as a metaphor for a single business. Exports are like sales (good), imports are like expenses (bad). This metaphor is simple, seductive, and wrong. The media like it because they are lazy, and grief sells. The unions like it because they disproportionately represent workers displaced by competition (see below).
Every protectionist measure is nothing but a transfer of wealth from domestic consumers (often poor) to domestic producers (often rich). This is the opposite of what Democrats claim to want, yet they are the primary proponents of protectionism.
Protectionism is, in some ways, an extension of the Broken Window Fallacy. In that famous example, the glazier gets richer because the baker's window broke and that is said to benefit everyone because it stirs economic activity. The reality, as exposed by the Fallacy, is that the baker is poorer, offsetting the glazier's gains, and making society poorer in aggregate. Likewise, in protectionism, the protected producer benefits, but the domestic consumer, like the baker, suffers due to less efficient outcomes.
Furthermore domestic exporters, who would have benefitted from trade making their inputs less expensive are less competitive abroad. 4 out of 5 US anti-dumping measures affect inputs that are consumed by US producers. A famous example being the steel tarriffs of the early 2000s that badly injured US automakers and other industries that use steel. Another example: in 2002, LifeSavers relocated a candy plant in Michigan, at the expense of 650 jobs, to Canada because US sugar tarriffs were making them uncompetitive. In 1990, Brachs did the same in Chicago to the tune of 3000 jobs.
Does trade hurt low skill domestic jobs? Yes. The US standard of living and skill level is very high. In this environment it is difficult for companies in low skill positions to compete. But the solution isn't to make everyone poorer to benefit that small number. The solution is to make sure job retraining is available to help low skill workers move to the higher skill, higher paying jobs that are created. Unfortunately, an OECD study of government lead retraining programs (like the US's TAA) shows that they seldom accomplish their objective. But I think that's more a criticism of the program, not of free trade.
I'd also like to take a swipe at the very idea of tracking "trade balance" as a significant statistic. It is not. The basic accounting principle of balance of accounts exposes this statistic for how worthless it is. What trade imbalance statistics fail to tell you is that while we are buying more than we sell in comodities, money is coming in from outside nations and individuals buying US dollars and assets. Why only measure and report one half of the ledger?
Further, a controversial economic theory called Comparative Advantage actually argues that even if one nation could produce EVERY good more efficiently than another, the nations would STILL benefit from trading with one another because while the former produces all goods better than the latter, it produces some goods more efficiently than others and so would be better off producing more of those goods while outsourcing production of other goods to the latter nation. An economist would describe it as the difference between OPPORTUNITY cost and ABSOLUTE cost. Look up Comparative Advantage, it's complicated and counter-intuitive, but a very good theory.
Protectionism is an income transfer from domestic consumer to domestic producers. Nothing more. There was a time when both parties recognized this, and most western governments agreed. it became known as the Washington Consensus. Bill Clinton however was the last major Democratic politician to no succumb to the union's insistence that the Democrats oppose trade. And it seems that quite a few Republicans have begun to fall into this trap as well, mostly with respect to China.
Answered By: Entropy - 10/13/2012