America’s Free Trade Schism: A Dichotomy of Opinions
America’s Free Trade Schism: A Dichotomy of Opinions
Roman philosopher Cicero once said, “Not to know what has been transacted in former times is to be always a child. If no use is made of the labors of past ages, the world must remain always in the infancy of knowledge.” At no point is this statement more relevant than today as American consumers are faced with moral decisions affecting their everyday lives. Most arguments against free trade are made by special interest groups, who believe that it will make laborers or countries worse off. People arguing against free trade will say that we need to keep jobs in the United States, we want to keep money in our country, and that our national security is at stake. The opposite side argues in favor of free trade saying it makes countries better off, and creates peace and wealth distribution. These arguments have been heard in our country, before we were a country, as angered colonial pioneers contemplated trade between their ruler, Great Britain versus domestic industrialization.
Knowing the friction trade has caused throughout our relatively short history and how the world views free trade today, I ask myself, and I implore you to ask yourself the same, did free trade begin in the United States, and more importantly, is free trade a good thing? To contemplate this historic schism, I asked myself these questions, and looked at a dichotomy of opinionated sources including Eric Foner’s Give Me Liberty!, Daniel Griswold’s Mad About Trade, Ha-Joon Chang’s Bad Samaritans, and Gregory Mankiw’s Principles of Macroeconomics. The United States has had a long history of both support and opposition to free trade. Ideologies of protectionism and isolationism have all plagued America’s stance on free trade. Opposition to free trade can be found in George Washington’s Farewell Address, to which he advised the young nation at the time to avoid “entangling alliances.”1 America’s first president wanted to prevent America from creating permanent allies or enemies abroad.
Today, free trade is so enter-woven into the very fabric and foundation of our nation. Consider your typical day: You wake up and drink a cup of coffee with beans from Brazil and Ethiopia. You watch for traffic and weather updates on a television made in South Korea or Japan, you put on your cloths made from cotton grown in Georgia and sent to Thailand to be sewn together. You drive your car made from parts manufactured in multiple different countries. This is just in your first hour of your day! Every day, we all rely on many people, in many different countries, to provide us with a certain quality of life. This quality of life is due in part to a system of globalization, delivering a level of goods and services through free trade. To make a trade, you need to consider what you gain or lose by making a trade.
Countries don’t need to make trades however, and can opt to be interdependent, but this too is a sacrifice. What is free trade? Free trade is a system of trade policy which allows a trader to trade across national borders without interference from respective governments.2 Free trade does not mean “free of cost” and is not to be confused with free markets. In a system of Free Trade, according to the law of comparative advantage, the free trade policy permits trading countries mutual gains and advantages of goods and services. It’s not an even “trade” per say, according to the law of comparative advantage, each trade done by each country has a different relative or real cost depending on the nominal costs assigned to each good, service, and trade. Historians have traced this law back to 1815, in an essay written by Robert Torrens, who was an English economist, describing the trade of grains from Portugal to England, because it was cheaper to produce grain in England than in Portugal.
This concept was actually given global recognition, when another English economist, David Ricardo explained it in his essays in 1817, saying that it was possible to produce both wine and cloth with less labor in Portugal, than in England.3 This is perhaps the beginning of “free trade” as we think of it today. Why choose free trade? To understand why countries choose to create free trade agreements, let’s pretend we have two countries that only produce one industry. Let’s say The United States only exports cattle, and Mexico only exports corn. The gains from trade are most obvious is one country only has cattle, and the other corn. In one scenario, the countries choose not to do business with each other, but after years of not doing business and choosing not to import goods from any other country, they grow tired of eating only corn, and only beef, and both countries are not living up to their true economic and national potential.
It is easy to see that in trading between the two countries, they can have a complete meal of corn, and beef, and create many new business opportunities in each country. Where this scenario can begin to be difficult to understand, is what the regulations of a free trade agreement are? In a nutshell, it is up to the countries interested in the agreement to negotiate the terms, bargain, and to allocate resources between themselves. This is the theory behind “free trade.” Most present day examples of free trade implies that the goods trades are tax or tariff free, and have free access to markets, information, free movement of labor and physical capital between countries. Today, Free trade is a reflection of supply and demand, and prices of goods are based on contractual agreements and protectionist trade policies. These contract agreements and policies, can cause governments to intervene and increase or decrease their goods or services to both consumers and producers.
These interventions and policies can include taxes, tariffs, legislation, and subsidies. Nowadays, the North American Free Trade Agreement or the Central America Free Trade Agreement regulates most the United States’ inter-governmental trade agreements, and governmental market-intervention reflecting in the rise or fall of prices.4 Economists believe one of the reasons why notable ancient civilizations were so prosperous, was because of ancient versions of free trade. Most developed countries have used protectionism of trade to increase revenues, to protect industries, and like in the United States for centuries, mercantilism. Both historians and economists speculate that the domestication of the camel allowed Arabian traders to cross the deserts, opening up the ancient incense, spice and silk trade routes in the Far East. Egypt, Greece, Rome, and China, for example, traded with neighboring countries for hundreds of years, through either voluntary trade or by conquest.
Multiple wars have been fought over trade routes, like between Athens and Sparta in the Peloponnesian War, and between China and Great Britain during the Opium War in 1840.5 It is not uncommon to hear that free trade is promoting world peace, or a term used today, globalization. This was most notably introduced in the Treaty of Versailles, in which Germany needed to sign this treaty, in order to see an internationally coordinated domestic economic policy after World War One. This meant that now different countries now hand an invested interest in each other’s economies. This was a step closer to free trade policies known today. Eric Foner, in his book, Give Me Liberty! talks about the mercantilist system during the expansion of England’s empire.
Under a mercantilist system, governments regulate all economic activities to promote national power. Foner says this “should encourage manufacturing and commerce by special bounties, monopolies, and other measures. Above all, trade should be controlled so that more gold and silver flowed into the country than left it.”6 (Today, we think of this as a trade surplus or a trade deficit, in figuring out net export or import ratios.) Foner suggests the “Foreign trade” was first mentioned by an influential London merchant in 1664, though his text failed to give the name of the book or author who first put this concept to paper. One of the first documented articles describing free trade, like we know it today, was done by Adam Smith in 1776, when he released his book, An Inquiry into the Nature and Causes of The Wealth of Nations.
Adam Smith was an economist and philosopher, who wrote this book as a reflection of economics at the beginning of the American Industrial Revolution, arguing primarily that free market economics are more productive and beneficial to their countries. 7 In his book, The Wealth of Nations, he wrote: “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy… If a foreign country can supply us with a cheaper commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way which we have some advantage. “8 Isn’t this the epitome of free trade today? In this statement, Adam Smith is suggesting that in using the concept of absolute advantage, countries can gain from one another, the goods or services that they are most suited for. To make a country successful, they need to product a consumable good or service to sell to the other.
The value of this good or service exported in relation to its imports is irrelevant, but they final value of goods and services produced by a nation. In today’s economic structure, this is referred to as, Gross Domestic Product or simply, GDP.9 The United States has had the notion of free trade since its very conception and birthing. When Columbus sailed the ocean blue in 1492, he did it to establish trade routes with Asia, and when the colonists landed on the eastern seaboard, all trade in the new America was regulated by Great Britain’s mercantile system. The beginning of the free trade, as we think of it today, began after America’s Revolutionary War. The desire for free trade was not a cause of the war, but when Great Britain’s Parliament issued the Prohibitory Act, blocking the colonies ports, free trade, just sort of happened, as a result of Britain’s blockades, as the colonists had to look elsewhere for economic independence during the late 1770s.10 One of the first structured free trade agreements was between Great Britain and France in 1860, which created much uproar and successive agreements between other European countries. (This does not mean countries weren’t trading with one another that have been happening for thousands of years!)
Free trade has not always been welcomed with open arms and still isn’t! Alexander Hamilton, one of the primary advocates for restricting imports, wrote in his 1791, Report on Manufactures: “…to the introduction of the same branch into a country in which it did not before exist constitutes an obstacle. To maintain, between the recent establishments of one country, and the long-matured establishments of another country, a competition upon equal terms, both as to quality and price, is, in most cases, impracticable. The disparity… must necessarily be so considerable, as to forbid a successful rival ship, without the extraordinary aid and protection of government.” 11 He basically said that each country should make focus on their own special products of industry, and to spread the wealth, is impracticable, and would create rivalry and competition. He wasn’t completely wrong. In Give Me Liberty! Foner described Hamilton’s five parts of his economic plan: 1) Establish the nation’s credit worthiness (stocks and bonds) 2) Creation of new national debt.
3) Creation of a Bank of the United States modeled after the Bank of England. 4) Raise revenue by taxing whiskey producers. 5) The imposition of tariffs (a tax on imported foreign goods.) The United States Congress adopted the first tariff in 1789, to raise revenues, raising tariff rates from 5% to 15%. When the War of 1812 began, Congress immediately doubled tariffs, making space for new industries to emerge by interrupting the manufactured imports from Britain and the rest of Europe. These now prosperous industrialists, wanted to continue trade protection, and wanted this to continue even after the War of 1812. In 1816, Congress adopted extreme protectionist tariffs, climbing rates upwards to 25% on textiles, and manufactured goods increased to 30%. In 1824, this protectionist ideology went towards good like wool, iron, hemp, lead, and glass. Tariffs were at its highest peak during 1828, with the so called Tariff of Abominations, raising tariff rates upwards to 49%.
This was Hamilton’s program in full effect. In 1832, Congress backed down their rates, and by 1857, they averaged approximately 20% for all goods and services.12 Alexander Hamilton provided the blueprint for the United States economic policy until the end of the Second World War. His infant industry protectionist industry program created needed conditions for a rapid industrial development. Among Hamilton’s other accolades was setting up the government bond market and promoted the development of the banking system, much to the opposition of Thomas Jefferson. The New York Historical Society has since called Hamilton, “The Man Who Made Modern America”,13 in a recent exhibition, and had the U.S. rejected Hamilton’s vision for economy, it would never have been capable of lifting itself up from being a minor agrarian power to the world’s greatest trade juggernaut it is today.
N. Gregory Mankiw, a professor of economics at Harvard University, is a prolific writer and a regular participant in academic and policy debates of many economic issues, including free trade, and globalization. In his book, Principles of Macroeconomics, he breaks down the old saying, “There ain’t no such thing as a free lunch.” When people are grouped into societies, they face different kinds of trade-offs. According to Mankiw, a classic trade-off is between “guns and butter.” The more a society spends on national defense (guns) to protect itself from foreign enemies, the less it can spend on consumer goods (butter) to raise standards of living at home. He also mentions the principle, The Cost of Something Is What You Give Up to Get It. This is an opportunity cost, to the consumer it could mean, you had to make a sacrifice to buy cheaper guns or butter.
More importantly, Mankiw talks about how trade can make everyone better off, on not only a national level, but a global level. Japan and the United States are competitors in the world economy. We know this is true, for example, because both Japan and America are in the same markets for textiles of automobile industries. Ford and Toyota compete for the same consumers making automobile purchases. Apple and Sony compete for the same customer pool to purchase their digital music players. This isn’t like a sports contest though. Trade between America and Japan is a competition, but winning or losing, makes each country better off in the long run.
Trade allows all countries participating to specialize in what industry they do best, and to enjoy a larger maker of goods and services. All countries participating in free trade are just as much our partners in the global economy, as they are our competitors. Mankiw suggests that a country’s standard of living depends on its ability to produce goods and services, which means if a country can’t contribute to free trade, than it will suffer on a global and national scale. We know this to be true, without question. This is what separate third world or developing countries from the opposite.14 It’s impossible to talk about free trade, without mentioning the market forces of supply and demand. If we have a lousy winter season and a cold snap reaches Florida, you can expect the price of your orange juice to rise. Using this same logic, airline rates rise during summer seasons, or Hawaiian airfare rises during the cold winter months. Whatever is in highest demand, the supply is in a compromising position, and prices go up to meet that increased demand, and lowered supply.
This is economics 101. Most economists that I’ve read about seam to support free trade. Their stance on the topic is that it supports economic growth and development, so it must be doing more good than bad. Daniel Griswold, the director of the Center for Trade Policy Studies at the Cato Institute in Washington, D.C. is a renowned authority on international trade and immigration, and he too, is no exception to this rule. In Griswold’s book, Mad About Trade: Why Main Street America Should Embrace Globalization, he gives multiple reasons why Americans should and have supported free trade and globalization throughout its relatively short history as a nation. Similar to Mankiw’s arguments in support of free trade, he also breaks down where our cloths hanging up in our closets are made. He describes that we have a “United Nations of pants, shirts, ties, and jackets” from China, Canada, Bangladesh, Vietnam, Peru, Korea, Egypt, India, Mexico, Thailand and many more.
Griswold says, “Politicians and pundits can rage against free trade and globalization, but much of what they convey is myth.” His main arguments in support of free trade are: 1) Import competition provides lower prices, greater variety, and better quality, especially for poor and middle class families. 2) Driven in part by trade, most new jobs are well-paying service jobs that form the backbone of today’s middle class. 3) Trade barriers erected in the United States are manipulative and harmful, and their value is often deliberately misrepresented by those with economic or political axes to grind. 4) Foreign investment here has created well-paying jobs, and investment abroad has given the United States companies access to millions of new customers. 5) Trade has helped expand the global middle class, reducing poverty, and child labor while fueling demand for U.S. products. As Griswold point out in his book, it’s not just about cheaper or better goods, he argues that free trade and globalization in the past few decades for sure, but starting centuries ago, was one step closer to a more prosperous, democratic, and peaceful world.
15 One thing Griswold loosely answers, which I wanted to know more about, is why our “United Nations” of cloths hanging in our closets isn’t from the U.S.? Griswold definitely would answer my question as, yes; free trade is a good thing! Remember when I said that all economists I’ve read about support free trade, well that were up in till this point. One of the most intriguing books I’ve read from any literary genre was Ha-Joon Chang’s exploration on free trade in this book, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. Chang is a professor of economics at Cambridge University, is a former World Bank researcher who sheds light on prevailing myths of world markets, free trade, and capitalism. Chang is against free-trade and favors with protectionism, which is the economic policy restraining trade between states through tariffs, restrictive quotas designed to discourage imports to prevent foreign dominations of domestic companies and markets.
This book is very easy to read; full of fascinating information, history and structure of global markets, but is told in a rather tongue-in-cheek style, which keeps reading enlightening and hilarious. I have a feeling that if I were to ask Ha-Joon Chang if he thought that free trade started in the United States of America, he would say the birthplace was not in the U.S., but the modern take on globalization and capitalism did, start here. Chang also doesn’t agree with the “official history of globalization”, which says that Britain adopted free trade markets and free trade policies in the 18th century, before other nations, and that later because of Britain’s supremacy and superiority, other nations began to liberalize their trade and deregulated domestic economies. This is the beginning to free trade which is widely accepted by historians and economists. He says this paints a very misleading picture, “distorting our understanding of where we have come from, where we are now, and where we may be heading for.”
Chang instead spins a different record of free trade history, rooting it in the Opium War between Hong Kong and Great Britain in 1842, and the resulting Treaty of Nanking. The growing British tea industry created a huge trade deficit with China and in an attempt to fill the void, Britain started exporting opium produced in India to China. He says that the free movement of goods, people, and money that developed under British’s thumb between 1870-1913, was made in large part, by military might, not market forces, like other historians would have you falsely believe. Like Hong Kong after the Opium War, and other poorer countries they had been forced into, as a result of colonial rule or unequal treaties, which deprived them the rights to set their own tariffs, quotas, and stipulations of trade. Britain also banned exports to their colonists in early-America that competed with its own products. Great Britain really was the founders of trade, and forced free trade.
Then comes America, who is now the juggernaut of current free trade markets. Under British rule, America was given the British colonial treatment, of being denied the use of tariffs to protect its new industries. In fact, outright restrictions were imposed on what Americans could and couldn’t manufacture. William Pitt made a remark in 1770, upon hearing that industries were emerging within the colonies, saying “The New England colonies should not be permitted to manufacture so much as a horseshoe rail.” 16 Eric Foner in his text, Give Me Liberty! shared this historic outlook, and went further saying that Americans benefited from these tariffs, and most did not complain about British regulations because commerce enriched the colonies. This sounds like Daniel Griswold’s outlook as well, claiming that free trade helps share the wealth. Chang does not agree with this however, and neither did Adam Smith in his book, Wealth of Nations, where he argued that any attempt to stop the importation of manufacturers would obstruct instead of promoting the progress of countries towards real wealth and greatness.
The title of his book, Bad Samaritans, comes from Chalmer Johnson, who referred to “people in the rich countries who preach free markets and free trade to the poor countries in order to capture larger shares of the latter’s market and preempt the emergence of possible competitors.”17 He points out that the richer countries (which includes the United States) have all used protection and subsidies in their pasts to encourage their manufacturing industries. He cuts the throat of what most people think of when they think of “free trade” as helping third world nations. Chang says that in free trade (reducing tariffs as low as possible) creates a larger problem, undermining national budgets in poorer countries because they lack efficient tax collection capabilities and tariffs are the easiest way to collect those taxes.
Combine this lack of taxes raised, with other damages caused by free trade empires, struggling third world nations are left far worse than before, and continue to be able to fund for health care or education for their citizens. Chang’s main arguments against free trade and globalization are: 1) Free trade reduces freedom of choice for poor countries. 2) Keeping foreign companies out may be good for them in the long run. 3) Borrowing ideas from more productive foreigners is essential for economic development. 4) Corruption exists because there is too much, not too little, market. 5) Free markets and democracy are not natural partners.
A huge chapter in Chang’s book called, The Double Life of Daniel Defoe, chronicles Abraham Lincoln’s bid for supremacy and protectionism taking Hamilton’s trade policy to higher levels. After the 1820s tariffs were a huge source of tension in U.S. politics for decades. The Southern or Confederate states tried desperately to lower tariffs, while the Northern of Union states argued to keep them higher. At one point, South Carolina refused to accept a new federal tariff law, which caused President Andrew Jackson to retort with military action.18 This burning ember of resentment eventually erupted in the Civil War, in which Abraham Lincoln continued to honor high tariffs, to both pay for the expensive war, but also to protect American economies, and to keep the Confederacy from getting imports from other sources. This was not only the point of Alexander Hamilton but also Ha-Joon Chang. What have I learned from all of this? I’ve learned that the birth place of free trade theory began in Europe, but the free trade of today’s economy did begin in the United States.
This truly is my opinion though, that Chang would share, but Mankiw and Griswold probably wouldn’t. For me the most interesting thing about doing this research and analyzing different specialist’s opinions, was that really there are still just two sides of the argument on free trade, and no one side is right, or wrong. Opinions are opinions, and truth can be spun to make any perspective a valid truth. I guess ultimately you need to ask yourself how do you feel about free trade, and it’s impacts on our global community. I think the idea of free trade is great, and greatly benefits me as a consumer in America, but if I’m a tea farmer in Bangladesh, it gives me a job, with better pay than I might otherwise find, so I guess it’s a good thing that way too. It’s a bad thing if my country lost a war, and can’t pay the tariffs on exports or imports, and it’s a bad thing if globalization takes over my town’s small family owned businesses and turns them into retail locations like a McDonalds or a Starbucks.
I think the true colors of free trade will play out in the future, our ever growing population scrounges to eat the last cow, the last head of corn, and burn the last barrel of oil. Hopefully now you should understand more fully the benefits of living in an interdependent economy, now knowing the labors of your past, not being ignorant or an infant in free trade economic knowledge. When you put on your socks made in China, when you buy lobster from Maine, and if you hire a Mexican immigrant outside of Home Depot up the street, you are utilizing economic forces of free trade. According to the principle of comparative advantage, it shows that trade can make everyone better off in the long run, but is the world really better off with a McDonald’s Big Mac in Sri Lanka or a Starbucks Frappuccino in South Africa?
1) Foner, Eric, Give Me Liberty!, New York: Norton and Company, 2005. 2) Mankiw, N. Gregory, Principles of Macroeconomics 5th Edition, South Western, Cengage Learning, 2008. 3) Chang, Ha-Joon, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, New York: Bloomsbury Press, 2008. 4) Mankiw, N. Gregory, Principles of Macroeconomics 5th Edition, South Western, Cengage Learning, 2008. 5) Griswold, Daniel, Mad About Trade: Why Main Street America Should Embrace Globalization, Washington D.C., Cato Institute, 2009. 6) Foner, Eric, Give Me Liberty!, New York: Norton and Company, 2005. 7) Foner, Eric, Give Me Liberty!, New York: Norton and Company, 2005. 8) Chang, Ha-Joon, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, New York: Bloomsbury Press, 2008. 9) Mankiw, N. Gregory, Principles of
Macroeconomics 5th Edition, South Western, Cengage Learning, 2008. 10) Foner, Eric, Give Me Liberty!, New York: Norton and Company, 2005. 11) Chang, Ha-Joon, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, New York: Bloomsbury Press, 2008. 12) Foner, Eric, Give Me Liberty!, New York: Norton and Company, 2005. 13) Chang, Ha-Joon, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, New York: Bloomsbury Press, 2008. 14) Mankiw, N. Gregory, Principles of Macroeconomics 5th Edition, South Western, Cengage Learning, 2008. 15) Griswold, Daniel, Mad About Trade: Why Main Street America Should Embrace Globalization, Washington D.C., Cato Institute, 2009. 16) Chang, Ha-Joon, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, New York: Bloomsbury Press, 2008. 17) Chang, Ha-Joon, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, New York: Bloomsbury Press, 2008. 18) Foner, Eric, Give Me Liberty!, New York: Norton and Company, 2005.
Foner, Eric, Give Me Liberty!, New York: Norton and Company, 2005. Mankiw, N. Gregory, Principles of Macroeconomics 5th Edition, South Western, Cengage Learning, 2008. Griswold, Daniel, Mad About Trade: Why Main Street America Should Embrace Globalization, Washington D.C., Cato Institute, 2009. Chang, Ha-Joon, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, New York: Bloomsbury Press, 2008.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 9 November 2016
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