Free trade occurs when the government does not limit or subsidize either imports or exports—meaning that Americans can spend their dollars on goods and services regardless of where they are from and engage without restriction in voluntary, mutually beneficial transactions, both as buyers and sellers, with people in other countries.
Debates over barriers to trade have erupted from time to time during our history and have not always been resolved in favor of greater freedom, but the historical record is clear: When we have opted for freer trade, we have been rewarded with long periods of greater prosperity. As President Ronald Reagan once reminded his fellow citizens:
The winds and waters of commerce carry opportunities that help nations grow and bring citizens of the world closer together. Put simply, increased trade spells more jobs, higher earnings, better products, less inflation, and cooperation over confrontation. The freer the flow of world trade, the stronger the tides for economic progress and peace among nations.
Critics of U.S. trade agreements and of free trade generally assert that free trade destroys jobs and lowers wages, but the facts show otherwise. Trade—like technology—promotes economic restructuring, eliminating some jobs but creating many others in fields such as transportation, wholesale, retail, construction, and finance. The dollars that Americans save by importing products are spent and invested elsewhere in the U.S. economy, creating new jobs.
Imports from America’s trading partners also give American consumers greater purchasing power, as free trade allows them to buy a wider variety of goods at lower prices. Imports also benefit the domestic manufacturing sector because over half of U.S. imports consist of capital goods and intermediate products, such as steel for carmakers and lumber for builders, which are the lifeblood of U.S. manufacturing.
Skeptics of free trade often tout the misleading concept of a “trade deficit,” which implies that dollars are being drained from the U.S. economy. However, once all financial transactions, including foreign investment, are accounted for, this deficit vanishes. While Americans sent $4.4 trillion abroad in 2014, they also received that much from people and companies abroad that bought U.S. exports, invested in the U.S., paid U.S. investors, or otherwise transferred money to the U.S.
The biggest threat to U.S. prosperity comes from the decline in economic freedom in the United States. In 2010, for the first time ever, the United States fell from the ranks of the economically free in the Index of Economic Freedom, published annually by The Heritage Foundation and The Wall Street Journal. This reduction in freedom has been accompanied by economic stagnation, persistent unemployment, and lethargic economic growth.
Fundamentally, free trade is about rejecting favoritism and expanding economic opportunity for all. What is needed is a return to the free trade policies that have created economic dynamism, which engenders continual innovation and leads to better products, new markets, and greater investment.
Trans-Pacific Partnership (TPP). The proposed Trans-Pacific Partnership could be a major step toward building a free trade area in the Asia–Pacific region if it increases economic freedom for all Americans, both producers and consumers. A sound TPP would reinforce American political leadership in the Asia–Pacific region and around the world, demonstrating that the United States will continue to make the decisions necessary to remain fully engaged in the global economy. A TPP agreement that reduces economic freedom and is over-burdened with regulatory processes or bureaucracy would be detrimental to U.S. interests.
Transatlantic Trade and Investment Partnership (TTIP). Congress should encourage negotiators to pursue a trade deal with the European Union that results in a real free trade agreement, not a new cross-Atlantic regulatory regime. In addition to reducing tariff and non-tariff trade barriers, negotiators should embrace mutual recognition of each region’s standards. If a successful agreement is reached, it should apply to EU member states both collectively and individually.
U.S. Tariff Cuts. Congress should permanently phase out all tariffs on inputs used by U.S. producers. Imports such as steel for carmakers, wood for homebuilders, and sugar for candy manufacturers help these U.S. industries produce affordable, high-quality cars, homes, and food.
Because tariffs increase the cost of many inputs, they make it harder for U.S. companies to compete with foreign companies. In some cases, U.S. businesses have even been forced to relocate to countries where tariffs on inputs are lower than they are in the United States. U.S. trade policy should make it easier for companies to operate here, not drive them out of the country.
Miscellaneous Tariff Bills (MTB). In the past, Congress has engaged in targeted, short-term tariff cuts through “miscellaneous tariff bills.” Although tariff cuts are beneficial, this process is open to abuse because it requires companies that want a tariff cut to ask their legislator to introduce a specific bill on their behalf. Miscellaneous tariff bills are prohibited under internal congressional rules that ban earmarks and “limited tariff benefits.” A better approach would be to permanently eliminate all tariffs on inputs used by U.S. producers.
Facts and Figures
- In the United States, trade volume topped $5 trillion in 2013, for the first time ever. Since 2002, U.S. trade in goods and services has grown at a fast pace, increasing from 23 percent of gross domestic product (GDP) to 30 percent of GDP.
- A comparison of the countries that have the best trade scores in the 2016 Index of Economic Freedom with those that have the worst scores demonstrates the importance of trade freedom. Countries with the most trade freedom have higher per capita incomes, less hunger in their populations, and cleaner environments.
- Headlines with assertions like “U.S. Economy Lost Nearly 700,000 Jobs Because of NAFTA” and “Growing U.S. Trade Deficit with China Cost 2.8 Million Jobs Between 2001 and 2010” are not uncommon. In reality, however, the U.S. economy has generated over 25 million net new jobs since the North American Free Trade Agreement (NAFTA) took effect in 1994 and 11 million net new jobs since China joined the World Trade Organization in 2001.
Selected Additional Resources
Anthony B. Kim and Bryan Riley, “Freedom to Trade: A Guide for Policymakers,” Heritage Foundation Backgrounder No. 3064, October 20, 2015.
Bryan Riley and Ambassador Terry Miller, “Why Trade Matters and How to Unleash It: Trade Rankings from the 2015 Index of Economic Freedom,” Heritage Foundation Special Report No. 161, November 6, 2014.