First, nothing about political borders justifies treating trades that cross those borders differently than trades that don’t.
Second, all economic activity is ultimately justified by how much it enables us to expand our consumption, not by how much it enables us to expand our production. Consumption is the end; production is the means.
Third, specialization expands output. And the greater the amount of specialization, the greater the output.
Fourth, specialization requires trade. A Manhattan-based pediatric gastroenterologist today enjoys a high standard of living, but only because many people willingly pay him to specialize in that highly specialized line of work and willingly accept his money in exchange for what they produce.
Fifth, specialization increases with the size of the market. The greater the number of consumers and producers, the larger is the scope for each producer to focus on a narrow specialization.
Points four and five working together spark self-reinforcing improvement: more trade promotes more specialization which, in turn, promotes more trade. Economies grow and standards of living improve.
Sixth, expanding the area of trade – increasing the size of the market – results in what economists call “increasing returns.”
Seventh, there’s no limit to the degree to which labor can specialize and to which, as a result, total output can expand and expand at an increasing rate – that is, exhibit increasing returns.
Eighth, economic competition is good and it works just as effectively across political boundaries as it does within political boundaries.
Ninth, as Julian Simon taught, human beings in market economies are the ultimate resource.
The ultimate resource isn’t land or petroleum or deposits of iron ore or of gold; it’s not factories or software or tractors; it’s not inventories of wheat or of rolled steel or of cash on hand. It’s human creativity and ingenuity. Indeed, it’s only because human creativity made them so that petroleum and iron ore and wheat and you name it are resources. Without human creativity these things would be mere raw materials, mere stuff, that’s no more valuable or useful to human beings than they are to antelopes and hamsters. Free trade maximizes the ability of the people of a country both to contribute their own creativity and effort to the global economy and to tap into the creativity and effort of the billions of other ultimate resources that reside in other countries. We tap into that creativity directly when we offshore productive tasks to foreign workers. We tap into it indirectly when we buy goods produced by foreign workers and entrepreneurs. Why would we wish to artificially reduce our and our fellow citizens’ access to supplies of the ultimate resource?
Tenth, restrictions on trade inevitably are driven by special-interest-group politics.
That’s the elemental case for free trade. But there’s a second part to the case for free trade. It’s the part that’s been constructed in response to the multitude of misunderstandings that have arisen over the centuries with regard to trade.
First, over the long-run free trade causes no net loss of jobs. Put differently – and harkening back to a point made above – any change in consumer spending causes some workers to lose jobs while creating jobs for other workers. International trade isn’t unique on this front. The jobs lost today to imports are replaced tomorrow by other jobs.
And these other jobs are, overall, better than the lost jobs because they are the ones at which the workers in the country have a comparative advantage. The jobs lost are ones at which the workers have a comparative disadvantage. The number of jobs is determined not by the freedom of trade but by the size of the labor force and by flexibility of labor markets. What free trade does is to replace bad jobs with good jobs; protectionism protects bad jobs by preventing the creation of good ones.
Another objection to free trade is that it is undesirable if it creates trade deficits. This is an egregious fallacy, because another name for trade deficits is “capital surpluses.” Every cent of a U.S. trade deficit is a cent invested by foreigners in America or in dollar-denominated assets. These investments not only return the dollars to the U.S., they also signal that the U.S. is a relatively attractive place to invest and by enlarging our capital stock, they enrich us. If commenters started referring not to “our trade deficit” but to “our capital surplus” – an exactly equivalent term – there’d be much less misunderstanding and mischief.
Finally here, it’s a myth that high-wage Americans can’t compete against low-wage foreigners. Specialization arises according to comparative advantage, which doesn’t stop operating as the wages of workers in a nation rise relative to wages elsewhere. But this point is esoteric.
Another point is that low wages reflect low productivity. Americans’ wages are higher than Chinese wages because American workers on average are more productive than Chinese workers. So next time someone says “We can’t compete against low-wage foreigners,” translate that claim into its equivalent: “We can’t compete against low-productivity foreigners.” The latter claim sounds as silly as it really is.
There is no good argument against free trade.
Excerpts from Donald J. Boudreaux, The Elemental Case for Free Trade, edited by Technoratus.