The Myths Around Free Trade Agreements

For a long time, Americans favored the purchase of services over goods. After a boost in the 1990s, the share of spending on high-tech products, such as computers and peripherals, has even declined despite a relative decline in the prices of these products. In the current context, reducing the trade deficit by increasing exports can boost employment in manufacturing. However, any respite should be temporary and the downward trend in the share of employment in manufacturing will continue sooner or later. Even given the impact of large deficits on the terms of trade, we felt that growth in developing countries has benefited the United States. In fact, a regression analysis shows that if developing countries had grown faster, the diversity of imports available to Americans would have been greater and the terms of trade would have been better for the United States. This statement illustrates with great relief how revisionists set a very low level when it comes to providing proof of their own thesis in relation to what they are asking of free trade advocates.13 More importantly, they are reluctant to ask critical questions that might lead them to an answer that might not please them. This is the point Little made in responding to Wade`s assertion in these terms: “Given that Less interventionist Hong Kong, Singapore and Taiwan have grown faster than Korea, it is not clear why Wade considers it simply less plausible that less intervention was better, also given the widespread failure of state industrial policy elsewhere. I simply find it more plausible that Korea, despite its industrial policy, has grown rapidly than because of it. 14 Reality: U.S. trade deficits are generally good for Americans.

The growing rhetoric about imposing tariffs and restricting the freedom of international trade reflects a resurgence of old arguments that remain largely alive, because the benefits of international free trade are often diffuse and difficult to perceive, while the benefits of protecting certain groups from foreign competition are often immediate and visible. This illusion fuels the general perception that free trade harms the U.S. economy. It also tilts the balance in favour of special interests seeking to protect themselves from foreign competition. As a result, the federal government currently imposes thousands of tariffs, quotas and other barriers to trade. Of course, some imports have caused damage, as job losses due to trade hurt some communities and prove costly for displaced workers. However, trade is only a small part of America`s economic problems and many myths surround its role in the emergence of these problems. If growth is seen as the panacea for social problems, trade is seen as the path to growth. International institutions such as the World Bank and the International Monetary Fund have told countries, “Open your markets, reduce your tariffs and quotas, and watch the flow of money.” They refer to South Korea and Japan as examples of countries emerging from poverty thanks to such a free trade policy. More than 170 years ago, Frédéric Bastiat noted in his masterful book Economic Sophisms that “opposition to free trade is based on errors or, if you prefer, on half-truths.” 1 Since Adam Smith, in his famous book The Wealth of Nations, successfully replaced mercantilist orthodoxy with the doctrine of free trade, free trade critics have repeatedly questioned the doctrine and offered half-truths to support their case.

Be that as it may, free trade advocates have successfully exposed the falsity of the critics` arguments. Although free trade has been increasingly accepted by policymakers over time, the challenges it faces have remained pervasive. 2 Protection has also seen a recovery in the form of a trade war between the US and China. The U.S. initial intention behind the tariffs against China was to push it to further open its markets. . . .