Impromptu Debate 1: Free trade is good for the economy

Unfortunately it appears that there has been an error as to timing, so instead of 10 minutes, we’ll have 30 minutes per round. This is unfortunate. My apologies, Con. Hopefully we can maintain the same pace that we originally intended. My case, as Pro, will be to be argue that free trade is fundamentally good for the U.S. economy. This does not mean that there aren’t potentially negative impacts of trade liberalization, but my case is that the benefits outweigh the Cons and protectionism, while well-intentioned, is inefficient and lackluster – that is, if your intention is to save domestic jobs, protectionism is the wrong approach. First and foremost, trade increases economic growth. A paper from the NBER’s Sebastian Edwards speaks to this point [1. http://tinyurl.com...]. His intention was to use nine indexes to gauge the relationship between countries that are relatively open and countries that aren’t as it pertains to TFP (total factor productivity) growth. His conclusion was that, in every single alternate index, the same result holds: open country are more productive, and this trend was true not merely at a fixed point in time, but broadly speaking from 1960 to 1990. In the process, he controlled for other factors – property rights, political instability, and macroeconomic instability – which bear on TFP growth, and found that, though these variables are certainly pertinent when considering economic growth, they do not refute nor even materially impact the positive correlation between trade liberalization and productivity. Second, there is a moral argument for free trade. Many will argue that free trade can lead to outsourcing and wage depression; there is truth to this, unfortunately. The notion of free trade is that countries will specialize – incompletely, for the most part, though there are some goods that are limited to very few countries (e.g., dragon fruit is produced in Taiwan and Vietnam) – on the goods in which they have comparative advantages. Hecksher and Ohlin [2. http://tinyurl.com...] argue that the basis for trade is relative factor endowments: countries will specialize with respect to the relative costs of capital and labor. In the process, they’re able to attain higher prices for their export goods (goods they can produce well), lower prices for imports (goods they don’t produce as well as other countries), and reach a higher overall indifference curve, meaning a net overall gain to society. But I want to take the very limited time I have left to examine the arguments that Con will likely present against trade. He may argue that it is actually dangerous for countries to have cheaper imports: that domestic industries will suffer. But why will they suffer? Well, they don’t have the capacity to produce as efficiently or to profit at such a low price, and as imports flood domestic markets, they would need to lower the prices of their similar goods. In the process, consumers benefit from lower prices and more variety, but producers will face more competition and may lose jobs, especially considering that, even if their units sold remained the same as it was, their revenues are plummeting. However, there is more the story. Now, an increasing amount of imports are factors used in the production of goods produced domestically. Benjamin Bridgman from the Bureau of Economic Analysis finds that this form of vertical specialization trade has increased significantly since 1960, largely due to trade liberalization since then [3. http://tinyurl.com...]. What this means is that increasing tariffs on imports will actually hurt many domestic producers, as it will raise the costs of producing their own products. This is in addition to the fact that any form of protectionism – tariffs, quotas (even “voluntary” quotas, such as VERs), export subsidies and taxes, etc. – produces a deadweight loss to society. Consumers loss out on variety and quality, and many industries are never formed. For, contrary to popular belief, free trade doesn’t actually decrease the number of jobs: instead, it causes society to adjust in order to accommodate its comparative advantages. For instance, let’s say that it’s determined that the domestic industry has a comparative disadvantage at producing wheat. So, the domestic industry makes less wheat and imports more of it. This frees up labor and resources to produce goods they actually can make efficiently, meaning that domestic production is in line not only with the societally efficient quantity of production, but with the market allocation. Workers and resources can be allocated to the industries of the abundant factor (exported factor), and as a result everyone is better off. But what about the workers who lost their jobs? What if they aren’t able to shift to another industry? Indeed, there may be some displaced workers, and this may lend itself to structural unemployment. I could point to the fact that there are a number of papers on this subject showing that structural unemployment is negligible relative to cyclical, but I don’t have much time left at this point. The point I would make, and I’ll expand on this later, is that protecting those workers is significantly more inefficient than it would be to accommodate them via macroeconomic policies – e.g., social programs. So, fundamentally, I submit that free trade is a net gain to society in spite of the potential negative ramifications. The implicit costs of protectionism are far greater than even the explicit costs of free trade, and there are better ways to combat outsourcing and wage depression than tariffs and quotas – not to mention that protectionism is largely a function of political corruption, evidenced by the push for a steel tariff under Bush, push for protection from the domestic auto industry under Reagan, etc. but more on this later.