Will Expanding Free Trade Policies Help Lead the U.S. Out of the Current Economic Recession or Hinder Our Recovery?

By Max Lesser

 

As the world becomes a more globalized marketplace, there is no doubt that the expansion of Free Trade has become a hot-button topic amplified by our current economic recession. According to opponents of Free Trade, imports and outsourcing jeopardize our jobs, wages, and future well-being; while proponents of Free trade point out that the competition of Imports provides the U.S. with lower prices, more selection, and greater quality, especially for the impoverished and the lower middle class. "History makes a mockery of the claim that trade cannot work for the poor. Participation in the world trade has figured prominently in many of the most successful cases of poverty reduction [...]." Free trade gives the buying public the opportunity to purchase goods and services at the most competitive pricing.

 

As we explore these two different viewpoints and debate their merits, let us start with the definition and origins of Free Trade. According to the Merriam-Webster dictionary, Free Trade is "trade based on the unrestricted international exchange of goods with tariffs used only as a source of revenue." Many people believe that the modern day viewpoint of Free Trade originated back in 1776 with Economist Adam Smith, who wrote The Wealth of Nations.

 

Smith argued for Free Trade, rather than the protectionist economic policies that were in place at that time. It was Smith's belief that man's pursuit of his own self-interest would always triumph into a better economy than if Governments were to interfere and restrain trade between Nations. Trade Interference by Governments is often defined as Protectionism. Protectionism restrains International Trade between Counties with the use of high tariffs, quotas, currency exchange rate manipulation, and other restrictive governmental policies that are used to protect local products and corporations and deter the imports of foreign goods and competition. A country under the banner of protectionism may also impose anti-dumping duties against foreign producers in order to protect their domestic market. Because of these back and forth practices, competing countries may try to retaliate by not allowing another country's product into their markets creating a vicious cycle. Due to this practice, countries lose out, as true market prices are not realized since real competition is not present. This is especially true when these items (many of them, raw materials) keep that country's manufactured products at a non-competitive higher manufacturing cost. This scenario shows that protecting one domestic industry may well do harm to other domestic industries that count on the best pricing of the first material to remain competitive in their sector.

 

Many economists point out that the Great Depression deepened and was prolonged due to the signing of the Smoot-Hawley Act of 1930 by President Herbert Hoover. The original rationale of this Act was to offer a layer of protection to the U.S. farm industry against foreign agriculture imports. This move backfired as protectionist measures by other nations flooded in against the U.S. in the way of retaliatory Trade policies. These retaliatory measures stunted International Tirade in its tracks. As a result, U.S. Imports dwindled down to $390 Million in 1932 from a high of $1.3 Billion in 1929, while U.S. Exports decreased to $784 Million in 1932 from $2.3 Billion in 1929. Overall, between 1929 and 1934, World International Trade decreased by 66%.

 

It would seem that. Smoot-Hawley was a major factor in deterring an earlier emergence from the Great Depression and created dangerous barriers and animosity between Nations at a key turbulent time just prior to World War II. Economic confidence was lost on Wall Street and the U.S. was isolated without potential growth in site. Unemployment rose to 25.1% in 1933 from a low of a 7.8% rate in 1930.

 

Other factors that contributed to the Great Depression included higher taxes and huge government spending brought on by the New Deal. However, it cannot be denied that the protectionist measures of Smoot-Hawley severely impacted the U.S. economy, which shrank by 27% from 1929 through 1934. Many economists believe that our protectionist policies were one of the key sources of the severity of the Great Depression.

 

In 2010, Americans are hurting because of the Global Recession. With U.S. unemployment reaching above the 10% mark, it is imperative that we learn from the past and do not follow the same path we did during the Great Depression. Tax increases, big government spending, and protectionism are surely a proven formula from our past that we need not repeat in order to avoid the next Great Depression.

 

In President Obama's 2010 State of the Union Address, he pledged to double U.S. exports by 2015. The President's promise has been outlined and includes many aspects of promoting Free Trade through Free Trade Accords with Columbia, Panama, and South Korea. According to the International Trade Administration (ITA) "Free trade agreements (FTAs) have proved to be one of the best ways to open up foreign markets to U.S. exporters. Today, the United Stales has FTAs with 14 countries. In 2006, six new FTAs were implemented: with Bahrain, El Salvador, Guatemala, Honduras, Morocco, and Nicaragua. Last year, trade with countries that the United States has FTAs was significantly greater than their relative share of the global economy. Although comprising 7.5 percent of global GDP (not including the United States), those FTA countries accounted for over 42 percent of U.S. exports." Along with other promotional measures, the U.S. will need to export more than $2 Trillion in goods by 2014 in order to meet President Obama's goal of doubling our exports within 5 years. The President has been applauded for this export initiative and he believes that doubling U.S. exports in the next 5 years will support two million American jobs.

 

Free Trade agreements between countries help broaden their markets and develop prospects for new business. New business translates into increased labor demand and more jobs. More jobs translate into increased wages and increased wages stimulate and grow into a robust healthy economy. It is imperative that the current administration continues to support strong Free Trade policies in order to lead the U.S. out of our current economic woes and into robust economic growth. Taking these essential steps is necessary to prime our Free-Market society and keep the economy on the path of strong growth.

 

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