5 good reasons to support free trade.
- Trade boosts economic growth and reduces poverty.
Since WWII, the world has seen the collapse of communism and the expansion of international trade. Economists have long believed that both markets and trade are important contributors to economic growth and thus poverty reduction. In fact, there is a large body of empirical evidence which supports these theoretical presumptions…there is strong evidence that market economy is economically superior to socialist central planning and that trade is important for growth.
A 2013 meta-analysis of 60 studies which examined the economic performance of formerly centrally planned socialist economies after undergoing economic liberalization (pro-market reforms) found that the empirical literature indicates that liberalization reduced economic growth in the short run, but had strong positive effects on economic growth in the long-run. In particular, “the positive effects of reforms outweigh the costs after about a year and then continue to contribute to economic growth.”
Trade liberalization, a process which entails lessening or removing government erected barriers to international trade, has been found to be particularly beneficial. According to the aforementioned meta-analysis, the short-run costs of trade liberalization are 20% smaller compared to the average economic reform, and the long-run benefits are about 40% larger.
Graph from Estevadeordal and Taylor (2008)
While protectionists have often argued that policies which restrict trade are necessary to reduce poverty, empirical evidence favoring this assertion is scarce. A review summarizing the findings of more than one hundred papers on the relationship between trade and poverty found that:
“Despite the impossibility to rigorously and unambiguously assert that trade openness is conducive to growth and poverty reduction, the preponderance of evidence supports this conclusion…it is in fact extremely arduous to find evidence that supports the notion that trade protection is good for the poor.”
One paper found that trade liberalization in the form of reductions of import tariffs in Indonesia lead to an increase in income among poor households, which allowed them to pull their children out of the labor force, ultimately leading to substantial reductions in child labor.
A 2004 review of the evidence on trade liberalization by economist Alan Winters found that, “In the long run and on average, trade liberalization is likely to be strongly poverty alleviating, and there is no convincing evidence that it will generally increase overall poverty or vulnerability.” In 2014, a decade later, Winters published another review to see if new evidence had changed that finding. According to that review, “The conclusion that liberalization generally boosts income and thus reduces poverty has not changed.”
- Trade reduces unemployment.
One of the most common arguments against free trade is that if consumers purchase foreign goods in place of domestic goods than domestic unemployment will rise. Recently, protectionists have been flaunting research which found that import competition from China lead to meaningfully large drops in American manufacturing employment in order to justify protectionist policies.
However, this revelation is not a good argument in favor of protectionism. It’s to be expected that import competition in a given industry leads to domestic losses in employment in said industry, however, the money saved by consumers buy purchasing foreign goods may be spent or invested elsewhere, creating employment in other industries. For this reason, it’s worth looking at the relationship between trade openness and unemployment on a macro level rather than a micro level. This can be done by comparing the employment outcomes of countries of various degrees of trade openness, while controlling for confounding factors of course.
A few studies which have attempted to accomplish such a task, and they consistently find that protectionist policies, such as higher tariffs on imports, are associated with higher unemployment. According to a recent paper by economists at the World Bank:
“…there are only two major cross-country empirical studies that look at the impact of trade policy on unemployment rates. One is [a] paper by Dutt, Mitra and Ranjan (2009) and the other is [a paper] by Felbermayr, Prat and Schmerer (2011). Both papers show that countries that have less protectionist (more open) trade policies have lower unemployment rates.”
It seems like this relationship isn’t due to reverse causality either, according to Felbermayr, Prat and Schmerer (2011), “in the long-run, higher trade openness is causally associated to a lower structural rate of unemployment.” A more recent paper, Gozgor (2013), which is apparently unknown to the World Bank, came to similar conclusions. The author of said paper examined how trade openness affected unemployment rates in the G7 countries, which are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. The empirical findings in this paper demonstrate that trade openness has a significant and negative effect on domestic unemployment. The authors concluded by stating that, “the continuation of the globalisation process instead of protectionism is of great importance in reducing the unemployment rate in developed economies.”
- Trade increases compliance with labor standards.
Opponents of free trade have often argued that it leads to a “race to the bottom” in regards to labor standards. According to the Organization for Economic Co-Operation and Development, “Trade-induced competitive pressures could conceivably encourage countries to compete against each other by reducing labour standards and working conditions to minimise costs – a “race to the bottom.” However, review of the evidence by the National Bureau of Economic Research found that:
“Existing empirical studies find little support for “race to the bottom” arguments. If anything, there is some evidence that more [trade] “openness” increases the level of, and compliance with minimum wages, and reduces child labor. Similarly, there is little evidence that trade reforms are associated with…a worsening of working conditions.”
Another review of the empirical evidence published in the Journal of Commerce and Economics found that, “research suggests that trade openness may improve rather than degrade labor conditions.” Thus, the available evidence comes to a conclusion which is in complete opposition to the “race to the bottom” argument.
- Trade reduces the likelihood of war.
Proponents of free trade have often argued that economic interdependence in the form of trade limits the incentive for interstate belligerency in the form of military conflict. This is because Classical economist Frederic Bastiat is often quoted as saying, “When goods do not cross borders, soldiers will.” Indeed, this hypothesis may actually be true.
Research by economists from the Asian Development Bank examined a large data consisting of 290,040 country-pair observations from 1950 to 2000. Using this data, they discovered that the more countries traded with each other, the less likely they were to engage in military conflict. Additionally, the more the world as a whole engaged in trade, the less military conflict occurred. In the words of the authors, “an increase in bilateral trade interdependence and global trade openness significantly promotes peace.” In an article explaining the implications of their findings, the authors warned of the possible consequences of protectionism, saying:
“In response to the current financial crisis and economic recession, some countries have resorted to trade-restricting measures to try to protect national businesses and jobs. The world should remember that protectionism in the interwar period [between WWI and WWII] provoked a wave of retaliatory actions that not only plunged the world deeper into the Great Depression but also put international relations at greater risk.”
Also, in a seminal paper titled, “Peace through trade or Free Trade?” by Patrick J. McDonald of the University of Texas examined how different degrees of protectionism influenced the likelihood of interstate conflict. After controlling for relevant factors such as economic growth, political structures (such as whether or not a country’s government is a democracy), and geographic proximity, McDonald found that “higher levels of free trade, rather than trade alone, reduce military conflict between states.”
In other words, it’s very reasonable to believe that Bastiat’s insights were in fact true. International trade has expanded over time and as a consequence it seems that the world has gotten much more peaceful. As scholars from the University of Essex have put it, “the period since World War II has seen progressive realization of the classical-liberal ideal of a security community of trading states.”
- Trade makes increases life expectancy and reduces infant mortality.
Since the evidence seems relatively straightforward that openness to trade increases economic growth and thus reduces poverty, it should come as no surprise that research finds that countries which are more open to trade generally have better health outcomes. Consider for example, a recent paper by Dierk Herzer, a German economist. Herzer examined the long-run relationship between international trade and population health for a sample of 74 countries over the period 1960-2010. The results indicate that
“…trade openness in general has a positive long-run effect on health, as measured by life expectancy and infant mortality, and that increased trade is both a consequence and a cause of improved health. Thus…in general, [there is] a virtuous cycle in which improved health leads to more trade, and increased trade further benefits population health.”
Herzer isn’t alone in coming to this conclusion. Two earlier papers, Owen and Wu (2007) and Stevens et al. (2013) also came to the conclusion that the populations of countries more open to international trade experienced higher life expectancies and lower infant mortality rates than those which were less open to it. Additionally, a recent analysis of 40 episodes of trade liberalization found that half of them lead to significant reductions in child mortality rates. Only in one case did liberalization increase child mortality and in the rest it didn’t have any impact.
There is rather convincing evidence that freer trade policies lead to faster economic growth and less poverty and unemployment, contrary to the assertions put forth by protectionists. Furthermore, the adoption of free trade policies in the post-WWII period has been instrumental in reducing military conflicts, setting the world on path to peace. The benefits of freer trade seem undeniable, and it’s worth keeping them in mind when neo-mercantilists assert that the best means by which a country can grow rich is by engaging in protectionism and economic nationalism.
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