The Heritage Foundation’s annual Index of Economic Freedom shows that countries that are open to trade and investment are more prosperous than countries that restrict individuals’ freedom to decide how to spend and invest their money.
Trade has played a major role in U.S. history. The Founders cited Britain’s “cutting off our Trade with all parts of the world” as a reason for declaring independence. The Framers of the U.S. Constitution created a free trade area among the states that allowed interstate commerce to flow freely. Indeed, the freedom to trade is the foundation of America’s modern economic system that provides historically unprecedented opportunities for individuals to achieve greater economic freedom and prosperity.
The process of economic specialization and trade, in which individuals focus on doing the things they do best and then exchange the products of their labor with others who are likewise concentrating on their own areas of excellence, leads to much higher levels of production of goods and services as well as the most efficient use of labor and resources. It is this process that creates and sustains the markets of the “free market” system. The development of this system upended feudalism and brought about the dramatic and revolutionary improvements in living standards that characterize the modern age.
In other words, free and open trade has fueled vibrant competition, innovation, and economies of scale, allowing individuals and businesses to take advantage of lower prices and increased choice. As a result, billions of people around the world have escaped the constraints of subsistence farming and extreme poverty that characterized the lives of most of humanity throughout history.
America Needs Free Trade. Trade—like technology—creates new, higher-paying jobs for Americans as well as for America’s trading partners. Attempting to restrict trade in order to “protect” existing jobs makes no more sense than attempting to ban the use of new technology.
Most people understand the benefits of exports, but imports from America’s trading partners also benefit Americans. They give consumers greater purchasing power, as trade allows them to buy a wider variety of goods at lower prices. Imports also benefit the domestic manufacturing sector because more than 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.
These countries with low tariffs and few non-tariff barriers benefit from stronger economic growth. But more open-trade policies do not just promote economic growth, they encourage freedom—including protection of property rights and the freedom of average people to buy what they think is best for themselves and their families, regardless of attempts by special interest groups to restrict that freedom.
Skeptics of trade often suggest that the U.S. “trade deficit” means that dollars are being drained from the U.S. economy due to unfair foreign trade practices. However, once all financial transactions, including job-creating foreign investment, are accounted for, this deficit vanishes.
While the U.S. trade deficit decreased significantly from 2008 to 2009, the unemployment rate increased from 5.8 percent to 9.3 percent. From 2009 to 2014, the U.S. trade deficit increased significantly, but the unemployment rate decreased from 9.3 percent to 6.2 percent. This is exactly the opposite of what would happen if bigger trade deficits caused more unemployment.
Nonetheless, the impact of free trade on America is regularly the subject of contentious debate both on Capitol Hill and in the media. In general, the free trade argument plays out on two very distinct levels: On one level are the efforts by individual industries or firms to obtain special protection from foreign competition through tariffs and quotas, or occasionally through “safeguards” or other retaliatory actions permitted in trade agreements. Such protectionism can be quite lucrative for the industry or firms in question, which often lobby extravagantly to gain the benefit. The cost is borne by the American public overall, which must pay higher prices and choose from a narrowed range of product options.
The second level at which trade is debated is much broader, involving issues such as exchange rates, environmental issues, and labor standards in foreign countries. At this level, those seeking “protection” are generally not seeking special favors in order to boost profits, but are seeking relief from the cost disadvantage imposed on them by burdensome regulations in the U.S. or differences in monetary policy between the U.S. and foreign governments. Broad groups, such as unions or environmental nongovernmental organizations, may join the battle to preserve and extend what they see as regulatory gains. While these motives may seem somewhat “purer” than the rent-seeking lobbying of industries or firms, the end result of such government protectionist action is the same: narrow benefits for a special interest, higher prices and less consumer choice for all Americans, and a loss of overall economic efficiency.
The current Administration is pursuing several initiatives, including the North American Free Trade Agreement (NAFTA) negotiations, tighter “Buy American” rules for government purchases, and investigations of Chinese intellectual property practices along with the national security impact of steel and aluminum imports. The Administration has also chosen to focus on trade deficits as a measure of the success of U.S. trade policy.
Free trade is about rejecting favoritism and expanding economic opportunity for all. Since World War II, government barriers to global commerce have been reduced significantly. Today, the average worldwide tariff rate is less than 3 percent, and has fallen by one-third since the turn of the century alone. The United States should lead efforts to make sure this trend continues, remembering President Ronald Reagan’s radio address on free trade:
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.
Expand and Improve the Existing Network of Trade Agreements. NAFTA and other deals should focus on eliminating government barriers to trade and investment and protecting property rights. They should not be used to impose new regulatory barriers that harm American business and taxpayers. In addition, the government should not withdraw from trade agreements that benefit the United States.
Update NAFTA. NAFTA can be modernized to allow Americans to make the most of their 21st-century economy. Much has changed since NAFTA took effect in 1994. Google and Netflix did not exist then, and 90 percent of Americans did not own a cell phone. Today, many government barriers may interfere with digital transactions, including measures that block cross-border data flows and efforts to mandate the use of domestic servers or content. U.S. negotiators should work to reduce barriers to digitally traded goods and services.
Some politically sensitive areas were exempted from the original NAFTA agreement, including Mexico’s energy sector. Since NAFTA was implemented, Mexico has made major strides to open its energy market. Constitutional reforms enacted by Mexico in 2013 liberalized the oil, natural gas, and energy sectors. These reforms should be locked in and expanded as NAFTA is updated.
While working to improve NAFTA, U.S. negotiators should also resist efforts to weaken existing provisions that benefit Americans. For example, they should not accept demands to water down NAFTA’s dispute-resolution system, which ensures that Canada and Mexico play by NAFTA’s rules, and they should refuse to weaken “investor-state dispute settlement” provisions that protect Americans from having their property seized by foreign governments.
An improved NAFTA that benefits the United States, Canada, and Mexico would serve as a template for future trade agreements.
Permanently Phase Out All Tariffs on Inputs Used by U.S. Producers. Imports, such as of steel for carmakers, wood for homebuilders, and sugar for candy manufacturers, allow U.S. industries to 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. 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.
Protect Access to Affordable Steel. The Department of Commerce is conducting an investigation of steel imports under Section 232 of the Trade Expansion Act of 1962, which gives the federal government the ability to investigate foreign trade practices in order to determine the effects of imports on U.S. national security. This investigation is purportedly intended to discover whether intervention, including tariffs, is needed to further insulate domestic steel producers from foreign competition. The inquiry is unnecessary and inappropriate.
Steel is a vital commodity for America’s manufacturing and construction sectors, and steel imports play a vital role in many supply chains supporting the defense industry. Imposing tariffs under Section 232 would increase the cost of one of the most crucial intermediate goods for these two American industries that together employ more than 12.8 million Americans, whose jobs will be at risk if the government imposes new tariffs on steel imports. In order to best serve the interests of U.S. national security and U.S. industries, Congress and the Administration should reject unnecessary and harmful tariffs on steel imports.
Pursue a U.S.–U.K. Free Trade Agreement. President Trump should instruct the U.S. Trade Representative and the White House National Trade Council to fast-track the pursuit of a U.S.–U.K. trade pact by putting forward clear negotiating objectives, pursuant to congressional guidance, that will advance the Special Relationship between the two countries. The free trade deal should be implemented within 90 days after Britain leaves the European Union, which is expected by the end of March 2019. The overriding goal should be to sign the best deal possible by then.
A U.S.–U.K. free trade agreement would make it easier for Americans and Britons engaged in lawful finance and commerce to work together. The deal should aim for the elimination of all tariff barriers between the United States and the United Kingdom, two nations with highly developed economies, skilled workforces, and comparable wage levels. Such a deal would create jobs on both sides of the Atlantic and enhance investment opportunities.
Reverse All “Buy American” Product Mandates. Taxpayers benefit when the government buys the best products at the best prices. Congress and the Administration should eliminate all domestic content laws currently on the books, subject to legitimate national security concerns.
Reverse the U.S.’s Continued Decline in Economic Freedom, Which Makes It More Difficult for Americans to Compete Globally. 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. The government should enact tax, spending, and regulatory reforms that increase economic freedom and make it easier for Americans to compete in the global economy.
Facts and Figures
FACT: Americans benefit from international trade and investment.
- The Heritage Foundation’s Index of Economic Freedom shows that countries with low barriers to trade and investment are more prosperous than those that restrict trade.
- Thanks in part to international trade, real U.S. gross domestic product is 68 percent higher than it was when NAFTA took effect in 1994.
- 7.4 million Americans owe their jobs to foreign direct investment in the United States.
FACT: U.S. manufacturing output and wages are at an all-time high.
- Real U.S. manufacturing output has increased by 28 percent since China joined the World Trade Organization (WTO).
- Real U.S. manufacturing output has increased by 56 percent since NAFTA was enacted.
- Real U.S. manufacturing compensation per hour has increased by 9 percent since China joined the WTO.
- Real U.S. manufacturing compensation per hour has increased by 23 percent since NAFTA was enacted.
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, “2017 Index of Economic Freedom: Trade and Prosperity at Risk: Trade Rankings from the 2017 Index of Economic Freedom,” Heritage Foundation Backgrounder No. 3168, November 23, 2016.
James Roberts, “A 12-Step Plan for Global Economic Freedom,” Heritage Foundation Commentary, August 31, 2016.
Tori K. Whiting, “‘Buy American’ Laws: A Costly Policy Mistake That Hurts Americans,” Heritage Foundation Backgrounder No. 3218, May 18, 2017.