Trade
The Issue
When American patriots dumped crates of imported tea into Boston harbor rather than pay duties to the English Crown, they started a rebellion against taxes and protectionist trade measures that not only led directly to American independence, but also inspired—and continues to inspire—freedom-loving people around the world. While “cutting off our Trade” was high on the list of abuses cited against King George III in the Declaration of Independence, it was the genius of the U.S. Constitution, with its encouragement of free trade among the states, that truly laid the foundations for our economic success, in effect creating the world’s first continental free trade area.
Debates over trade restrictions have erupted from time to time during our history, and they have not always been resolved in favor of greater freedom. But the historical record is clear: When we have opted for freer trade, we have been rewarded with long periods of greater prosperity. As President Ronald Reagan observed:
The benefits of free trade are well known: It generates more jobs, a more productive use of a nation’s resources, more rapid innovation, and higher standards of living both for this nation and its trading partners. While a unilateral commitment to free trade benefits the Nation, Americans gain even more when U.S. trading partners also open their markets.
Many critics of U.S. trade agreements and of free trade in general assert that free trade destroys jobs and lowers wages, but the facts show otherwise. Countries that have the lowest trade barriers also have the strongest economies, the lowest poverty rates, and the highest average levels of per-capita income.
The biggest threat to U.S. prosperity does not come from free trade, but 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, published annually by The Heritage Foundation and The Wall Street Journal. This reduction in freedom has been accompanied by a stagnant economy, persistently high unemployment, and lethargic economic growth.
Trade is the framework upon which American prosperity rests. What is needed is a return to the free trade policies that have created economic dynamism, which engenders continual innovation and leads to better products, new markets, and greater investment.
Recommendations
- Resist pressure to erect new trade barriers. Facing persistently high unemployment and a stagnant economy, some politicians may attempt to blame other countries for these problems and demand higher tariffs. However, raising trade barriers will not help our economic recovery any better today than it did in 1930, when Congress passed the protectionist Smoot–Hawley Tariff Act.
- Unilaterally reduce U.S. trade barriers whenever possible. By lowering U.S. tariffs on products imported from developing countries, programs like the Generalized System of Preferences, African Growth and Opportunity Act, and Andean Trade Preference Act promote mutually beneficial trade and growth. These programs should be expanded to include more categories of imports and extended on a long-term basis.
- Eliminate trade-distorting agricultural subsidies. U.S. farmers and livestock producers increasingly rely on access to fast-growing foreign markets. Decisions about what crops to plant and what livestock to raise should be made by farmers, not legislators. Barriers to imported agricultural products should be eliminated along with government subsidies that distort agricultural production.
- Continue to pursue regional trade agreements that make our economy more competitive and reduce barriers to exports. The North American Free Trade Agreement (NAFTA) and subsequent agreements have spurred competition, job creation, and economic growth. These agreements play an important role in maintaining American competitiveness and prosperity, spreading freedom around the world, and fostering economic development. They safeguard investors’ rights, increase regulatory transparency, combat corrupt practices, and protect intellectual property rights. New agreements should focus on expanding trade opportunities, not on imposing environmental and labor provisions that could stifle commerce and economic growth.
- Set a firm deadline for concluding the Doha Development Round of trade negotiations at the World Trade Organization. The Doha Round was established to promote economic development through trade. The need for all nations to embrace trade and investment liberalization is critical to help the global economy recover from today’s economic turmoil. Doha Round talks have been underway for 10 years, and the United States should insist on a deadline to conclude negotiations.
- Now that the free trade agreements with Colombia, Panama, and South Korea have finally been concluded, pursue other trade and investment agreements. For example, the proposed nine-country Trans-Pacific Partnership (TPP) could create new economic opportunities by expanding trade between the United States and Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam.
Facts & Figures
- One out of 10 U.S. jobs depends on foreign direct investment or international trade. Over 14 million Americans owe their jobs to international commerce.
- The average U.S. tariff rate has fallen by 90 percent since 1940. If U.S. imports were taxed at the same rate today as they were 70 years ago, the typical U.S. household would pay as much as $2,238 a year more for imported goods. In other words, U.S. tariff cuts since 1940 save Americans up to $2,238 per household. The actual benefits are even greater if improvements in productivity and competitiveness resulting from lower U.S. trade barriers are taken into account.
- Data in the Index of Economic Freedom show that there is a strong correlation between low trade barriers and economic prosperity. Average per-capita gross domestic product (GDP) in the 10 countries with the lowest trade barriers is $38,200. In the 10 countries with the highest trade barriers, per-capita GDP is just $4,680.
- Government borrowing from abroad significantly reduces foreign spending on U.S. exports and foreign investment in the productive private sector of our economy. In 2010, foreign nations lent the United States $654 billion in funds that they could otherwise have used to purchase U.S. goods or invest in our economy.
Selected Additional Resources
Bryan Riley and Ambassador Terry Miller, “Global Trade Freedom Needs a Boost,” Heritage Foundation Backgrounder No. 2614, October 7, 2011.
Bryan Riley and Ambassador Terry Miller, “Trade Freedom Continues to Advance—Barely,” Heritage Foundation Backgrounder No. 2472, September 29, 2010.
Heritage Experts on Trade
Regulatory Excess
U.S. trade agreements apply different “rules of origin” to determine whether products are eligible to enter the country duty-free. Reasonable rules allow companies to bring low-cost goods to consumers by making the best use of global supply chains. Unreasonable rules undermine the benefits of free trade agreements.
For example, imagine if the North American Free Trade Agreement (NAFTA) required that 100 percent of the value of every car must originate in the United States, Canada, or Mexico to count as “North American.” Under such a restrictive rule of origin, no car would count as North American, since cars produced in each of the three countries contain components from other parts of the world.
