Is Free Trade Worth the Cost?

The era of globalization is over. After years of trade deficits and watching our jobs go overseas, we're taking a hard look in the mirror.

Why hold the fate of our economy hostage to other nations?

Why not make everything we need right here in the United States?

Why not choose economic independence?

It's a bold new idea. Except … it's not that new. In fact, it's been tried before.

And there is one teensy drawback.

Which is that it tends to totally backfire.

[OPENING SEQUENCE]

"International trade." Two words so interesting that … ok, they probably want to make you scream into a pillow.

Totally understandable. Economics can be that way. But here's the thing: If we understand trade, it makes understanding the rest of economics a lot easier. Because the principle it makes clear is: Most of our natural intuitions about wealth … are wrong.

What do we mean by that? Well, start with this: In the last 70 years or so, the world has seen an explosion in international trade — in goods or services that are made in one country and then sold in another.ⁱ And during that same time the world has become about 10 times wealthier.ⁱⁱ

Now, of course, that doesn't mean that all that wealth was caused by trade. But what it almost certainly means is that trade isn't bad for growth.

In fact, the World Bank reports that trade has increased incomes around the world by nearly 25 percent since just 1990, and by 50 percent for the poorest parts of the world. ⁱⁱⁱ

In the U.S. about one in every five jobs has some relation to international trade.^iv And in fact, a poll of more than 80 of the country's leading economists — a group, we should note, that disagrees on everything — couldn't find a single one who said the country would be better off without free trade.^v

All of which seems … counterintuitive, right? How exactly does it make us wealthier to send a whole bunch of our money overseas?

If it seems weird, think about it this way: Imagine that you decided to be entirely self-sufficient — grow your own food, make your own clothes, generate your own power.

In other words, imagine living in Vermont.

Now, you could do this, but chances are that the quality of those products would be worse than if you'd just bought them from … you know, someone who knew what they were doing. And you'd also be missing the opportunity to make more money doing something you're actually good at.

That's why most of us don't live that way in the modern world. Because doing the opposite allows us to make more money and get higher-quality goods and services.

I mean, remember what it was like to cut your own hair during COVID?

This approach also has another benefit, which is that the more people are trying to get your business — the more competition there is — the lower it tends to keep prices.

And that's the same principle behind free trade. Let people all around the world do what they're best at and we'll all benefit from lower costs and better products.

It's a win-win! Well … kinda.

Actually, we should think of it as win-win-lose. Because here's the thing: Many of those same economists who are so quick to say that trade is good for the country as a whole will also tell you that not everyone benefits.

More foreign competition can drive American companies out of business and cost workers their jobs. And particularly, when America expanded trade with China, certain parts of the country were hit especially hard.^vi Some once-vibrant parts of the nation now feel like ghost towns. People's entire livelihoods were lost.

All of which seems like it should be a deal-breaker. Why stick with trade if it victimizes the most vulnerable Americans?

Well, ready for this to get trickier? Because the one thing that may be worse for vulnerable Americans than free trade … is the lack of free trade.

Research has found not only that restricting trade drives up prices for Americans, but that it drives them up the most for the least well-off Americans. In fact, it's estimated that the poorest Americans lose more than five times as much of their income to tariffs as the wealthiest ones. ^vii Now, maybe that's worth it to protect jobs, but … about that.

When the U.S. put tariffs on foreign steel and aluminum in 2018 it was estimated to have created 1,000 jobs for people who produce steel … but led to 75,000 fewer jobs in industries that use steel.^viii After all, if you make the prices of raw materials more expensive, that's gonna mean less business … and fewer workers.

All of which brings us to one conclusion: None of this is simple. Whatever we do on trade, there are real costs involved. Which leaves us with two questions: (1) Which path does the least damage? And (2) what can we do to help the people who get caught in the crossfire? Because there are no easy options here.

Unless we decide to go full Vermont.

But trust us, you never go full Vermont.