Do Free Trade Agreements Encourage Economic Development in the U.S.?

By Brandon Scudder

 

International trade is the framework upon which American prosperity rests. Free trade policies have created a level of competition in today's open market that provokes continual innovation and leads to better products, better-paying jobs, new markets, and increased savings and investment. Free trade enables more goods and services to reach American consumers at lower prices, thereby substantially increasing their standard of living.

 

Free trade is an important component of our system of economic liberty. Under a system of natural liberty in which domestic commerce is largely free from restraints on competition, though not necessarily free from government regulation, commerce would also be permitted to operate freely between countries. Adam Smith, the author of The Wealth of Nations in 1776, made a case for free trade with a persuasiveness that is still visible to this day. Adam Smith advocated the system of natural liberty, one, that would allow individuals the right to pursue their own interests, while the government would provide the foundation or framework in which commerce would take place (Irwin, 2002). President Reagan stated that, "government can and must provide opportunity, not smother it; foster productivity, not stifle it" (Froning, 2000).

 

Free trade is the only type of truly fair trade because it offers consumers the most choices and the best opportunities to improve their standard of living. It promotes competition, spurring companies to innovate and develop better products and to bring more of their goods and services to market, keeping prices low and quality high in order to retain or increase their market share. For example, from 1990 - 1999, the U.S. economy grew by more than 23 percent, adding more than $2.1 trillion to the nation's gross domestic product (GDP) and raising the wealth of the average American consumer by more than $5,500. The economy responded well to the expansion of trade that occurred after the signing of the North American Free Trade Agreement (NAFTA) in 1993 and the establishment of the World Trade Organization (WTO) in 1995 as an opportunity for settling trade disputes. The economy responded well and as a result the imports of real goods and services increased 115 percent, which, in turn increased the number of full-time jobs by 13.4 percent.

 

Free trade also spurs innovation. The U.S. market has demonstrated repeatedly, particularly over the last decade that competition leads to increasing innovation. This is evident, for example, in the intense competition to create the newest and updated personal computer at the lowest cost. With the growth of electronic commerce have come unlimited choices of goods and services and lower prices for products. This competitive advantage derives largely from America's open market practices. Free trade promotes innovation because, along with goods and services, the flow of trade circulates new ideas. Since companies must compete with their overseas counterparts, American firms can take note of all the successes as well as the failures that take place in the global marketplace. Consumers then benefit because companies in a freely competing market must either keep up with the leader in order to retain customers or innovate to create their own niche. Clearly, removing counterproductive barriers to competition, such as quotas and tariffs that limit access and competition is both good economic and public policy. Free trade, reinforced by the rule of law, removes such incentives for corruption by spurring economic growth, increasing the number of better-paying jobs, and ultimately increasing the level of prosperity (Froning, 2002).

 

By fostering opportunities for American businesses, free trade rewards risk-taking by increasing sales, profit margins, and market share. Companies can choose to build on those profits by expanding their operations, entering new market sectors, and creating better-paying jobs. This also allows American companies to saturate the market in a country that previously was without the goods and services a particular business offers. Consequently, if a trade market is not taken seriously, the market share for a good or service will be lost to its competition. According to U.S. Trade Representative Barshefsky, U.S. exports support over 12 million jobs in America, and trade-related jobs pay an average of 13 percent to 16 percent higher wages than do non-trade related jobs (Binder, 2011).

 

The nature of employment in the United States is indeed evolving away from manufacturing and toward more service-oriented and high technology jobs. However, record shows that trading freely with America's NAFTA partners, Canada and Mexico, has not resulted in a cumulative loss of manufacturing jobs. Instead, from 1994 - 2000, 14 million new American jobs were reported. The unemployment rate in America fell from 6 percent to 3.9 percent (1994 -April 2000). The number of manufacturing jobs in America remained steady, employing 18.3 million people in 1994 and 18.4 million in 1999, which represents 14 percent of the total American workforce. On balance, not only has NAFTA not resulted in a loss of factory jobs in the United States, but it has not led to a loss in real wages for manufacturing workers (Froning, 2002).

 

Free trade transmits more than just physical goods or services to people. It also transmits ideas and values. A culture of freedom can flourish whenever a great society, as economist Adam Smith termed it, emerges with the self-confidence to open itself to an inflow of goods and the ideas and practices accompanying them. A culture of freedom can become both the cornerstone and capstone of economic prosperity. One reason why the United States did so much better economically than Europe for more than two centuries is that America had free movement of goods and services while the European countries "protected" themselves from their neighbors. To appreciate the magnitudes involved, try to imagine how much your personal standard of living would suffer if you were not allowed to buy any goods or services that originated outside your home state.

 

In conclusion, we see that free trade agreements are essential to our nation's prosperity. Without government to forge trade relationships with other countries, our businesses would not be able to reach foreign markets and expand the market share through innovation and competition allowing the consumers and American workforce to benefit from these conditions.

 

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