Fisher Investments Editorial Staff
Trade, US Economy, Globalization

A Triumph for Trade

By, 04/07/2011

Story Highlights:

  • The US and Colombia are nearing a new free trade agreement,which could pave the way for similar agreements with South Korea and Panama.
  • As we’ve said many times, freer trade globally benefits all participants.
  • Free trade agreements help level the playing field, ensuring fair rules and an equal chance for competitors—both domestic and global.

A long-awaited free trade agreement with Colombia now seems imminent as officials iron out concerns surrounding labor issues. This adds to the list of other agreements signed globally in the last year (listed here) and could help the US finalize an agreement with South Korea (currently held up in Congress pending progress on agreements with Colombia and Panama). 

But first, cue the typical complaints about free trade agreements—primarily that free trade hurts American companies and exports domestic jobs. The protectionist mindset’s so entrenched they even employed mathematical gymnastics in attempts to skirt the rules—the World Trade Organization (WTO) has ruled twice against the US recently. But misguided slogans (“Buy American!”) and mental acrobatics aside, history’s rather clear: Protectionism is a misnomer. It doesn’t actually protect very much, but it certainly can destroy—harming trade and wealth, increasing consumer prices, and worsening international relations. 

Freer global trade’s benefits are equally clear when one dispenses with political rhetoric. It sets the stage for increased exports—promoting US industry and providing Americans jobs. And as domestic companies gain access to more open world markets, they achieve increasing economies of scale, lowering costs and making them more globally competitive. Many think a free trade victory is solely when exports exceed imports. But true triumph is increased total trade—exports plus imports. 

Imports’ benefits are less discussed but equally valuable: Many US imports are intermediate goods, which are then used to manufacture final goods, which are then (yep, you guessed it!) exported! Cheap imports are also hugely beneficial to American families, allowing them to achieve higher living standards. And US imports provide our foreign partners with capital to either invest in America or buy our goods—all positive things. 

The key to obtaining these benefits is free trade agreements. They level the playing field, providing US producers market access they otherwise wouldn’t have because of duties levied against American products or subsidies for foreign competitors. Yes, they also introduce a vastly wider playing field and,along with it,the possibility of failure. But that risk exists whether the field is purely domestic or fully global—and protectionist measures can easily backfire if our foreign trade partners respond in kind, ironically adding to the risk of failure. Agreements among countries about basic rules and lowering barriers provide the best opportunity for bilateral success and can mean fewer free market distortions, increasing efficiency. 

Most Americans are seemingly in favor of free interstate trade. When’s the last time you heard cries of “Buy Californian!” or “Buy Kansan!”? If you did, you’d probably chuckle. Because given the choice between buying something locally and paying materially less through an online retailer based in another state, all else being equal, most folks acknowledge the economic benefit of the lower cost item. 

And consider that well known, virulent disease which has been many companies’ and even whole industries’ demise—technology. But you rarely hear people insisting we protect printing presses or newspapers or even brick-and-mortar bookstores and record stores—they’re likely too busy downloading music or reading their electronic books.

If the logic applies at the personal, local, and state level, itmust also apply at the global level. And while there will no doubt be intermediate losers—just as brick-and-mortar bookstores and video outlets have been hurt by newer technology—the benefits outweigh the costs, and in the long run, global free trade agreements will provide better, more equal access to those benefits.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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