How’s the trade war treating you? A lot of people had hope it would be coming to an end soon, but well, they forgot how unpredictable President Trump is (and how economically illiterate). Now, instead of doing what pretty much every article out there is doing (pointing out that trade barriers hurt us), I’m going to take it a step further. Not only should we not be raising trade barriers, but we should lower all trade barriers across the board (unilateral free trade), regardless of whether other countries (yes, even China) do it or not. After all, Trump’s supposed actual goal is to get other countries to lower their trade barriers to our exports, so even he ultimately believes (somewhat) in free trade. But why do we need to get other countries to lower their trade barriers? Unilateral free trade is the pursuit of free trade policies by a country without the guarantee that other countries will do the same.
Unilateral free trade gives consumers the cheapest possible goods, giving them more purchasing power, or, in normal speak, more bang for your buck. Think about it. If I can get t-shirts from China at a lower price than in the United States, then I can either buy more t-shirts than I normally would buying American, or, I can put my money elsewhere. This is why free trade increases consumers real income: prices on goods and services that are imported fall, so the consumer can get more goods and services with the same amount of income. (If you want to help reduce poverty, one thing you can do is make the goods and services that the poor purchase cheaper through free trade.)
Unilateral free trade doesn’t just support consumers, but also businesses. Are you operating a business in the United States? Chances are, you use some goods and/or services that are made cheaper by the production of inputs in other countries. This is why so many manufacturing firms have been harmed by President Trump’s steel tariffs. Steel is an input. If the cost of an input rises, so to does the cost of the products it is used to make. What happens when a firm’s costs rise? They either can raise prices, or fire employees. This is why free trade is so often a boon to exporting businesses in the domestic economy. Those exporting businesses utilize inputs that they themselves import from other countries.
There are really three counterarguments to unilateral free trade. First, some domestic industries will be harmed by competition from foreign firms in those same industries. The argument goes that, since such free trade would harm domestic producers, we ought not pursue it. This is a limited view in that it only considers the producers, and not the consumers, who undoubtedly benefit from this economic restructuring towards those firms that produce a good better, and more cheaply, than other firms.
Now, in a more specific argument against unilateral free trade, opponents argue that unilateral free trade would leave domestic firms at a competitive disadvantage, since other countries will still have their trade barriers. I cannot say that this argument is incorrect. However, if the pursuit of unilateral free trade brings us the significant benefits that I believe it does, then other governments will most certainly consider instituting such policies in their own countries. This is especially true since we are the largest economy in the world: our example will have an immense ripple effect.
Opponents also argue that we must maintain trade barriers as tools for negotiation of trade agreements with other countries. This goes back to the point I made before. If our economy benefits significantly from this change in trade policy, surely it is possible that other countries, in order to reap the same benefits, also pursue such policies.
Now, what about the unfair propping up of industries in other countries that compete with our own unsubsidized and unprotected industries. Currency manipulation and export subsidies are thought of as unfair. Even many free trade proponents dislike these actions taken by foreign countries. Initially, their arguments seem, well, fair: these actions distort markets functioning naturally. That’s true, but who benefits and who loses?
Well, in both cases, if the US is importing from countries doing these actions, then US consumers (and, just as before, some US industries) benefit, since both actions result in cheaper imports for the US. I am not saying these market distortions should remain, but the argument that these two actions are reason alone to forego pursuing unilateral free trade is flawed. Pursuing unilateral free trade will bring far more benefits than will waiting for these countries to finally agree to reduce their support measures for their exporting industries.
Now, who loses? Well, in both cases, most of the people in the market-manipulating country lose. Currency manipulation, as the Chinese have done it, well, devalues their currency, decreasing their purchasing power. In other words, goods and services will cost more for Chinese consumers. Both to this point and on top of it, as Karishma Vaswani points out, currency manipulation is a double-edged sword, helping exporters in the short-run, but discouraging investment in the long-run. The story is slightly different for export subsidies, where taxpayers in, say, the EU, pay more in taxes to subsidize their industries that export to the US at lower prices. The EU is literally footing the bill for part of what we pay to buy their goods and services. Again, hardly a clear lose-win relationship for the US. The point of what I’m saying is that market distortions at the least are not costly enough to warrant foregoing the benefits of unilateral free trade.
An argument for unilateral free trade is little different than one for free trade agreements (FTAs). Both operate on the idea that trade is good for a country. The only difference is that people argue that unilateral free trade lacks the “fairness” of FTAs. I attempted to address the arbitrariness of this point in the previous paragraphs. The question remains. Are there countries that have pursued unilateral free trade? How have they fared?
As it turns out a few countries have already instituted unilateral free trade, and the results are clear: unilateral free trade is extremely beneficial. Singapore, Macau, and Hong Kong all have near-zero trade barriers, and have been among the most prosperous places in the world in the past few decades. As Dan Mitchell points out in the article cited, the only competition in the rankings are “oil sheikdoms and tax havens.” Mitchell even goes into the case of New Zealand, who, after reducing trade barriers significantly, experienced significant economic prosperity. Tired of the examples that involve small countries? Okay. Back in the 19th century, the British were among the first to realize the boon of unilateral free trade. They abolished the Corn Laws, and subsequently experienced significant economic growth.
This is a big reason why I have moved from being a skeptic of Brexit to a supporter. People mistakenly believe that EU membership means greater free trade. While it does mean so between countries in the EU, members must adhere to common external tariffs enacted by the EU Parliament. In other words, the British have no control over trade interactions with non-EU countries. It would behoove the British to take full advantage of this opportunity, and lower its trade barriers to EU countries and non-EU countries alike.
It should be noted that this isn’t much of an issue at all to economists, be they liberal or conservative. Hell, even Marx thought free trade was good.