Free trade is awesome, isn’t it? The textbook economist will likely express this sentiment, an economically savvy individual would chip in their support, and even Republicans and Democrats happen to be near equivalent when it comes to showing their optimism on the matter. But you can’t talk about all the goodies of trade without mentioning the “T” word: tariff. And with the latest US/China tariff brawls, we’ve all come to learn that tariffs suck. Not only that, but free trade actually hasn’t done so much to help the US on the basis of overall welfare (I’ll prove this soon enough). So, then, why in the world are we still pursuing an agenda of international trade?
Let’s start by talking about why so many people are infatuated with free trade. The story goes that cross-border trade provides consumers with access to a variety of different goodies, the prices of which diminish thanks to an uptick in cross-country competition. This in turn enables domestic companies to take their production capabilities abroad to places like China. But this this trade game produces clear winners and losers, and when you look at international trade from the lens of welfare, the costs outweigh the benefits.
Before I dive into the statistics, let’s talk about the winners and losers of trade, especially in the context of tariffs (I will utilize the US and China as part of my elaboration). Obviously, domestic US producers benefit most from free trade because outsourcing manufacturing to China directly translated to a reduction in production costs. As a result of this, people employed at factories (and generally the manufacturing industry), are negatively affected. This is because when cheap labor is exported to China, the wages of American factory workers decreases, resulting in a smaller disposable income, and hence, making it difficult (if not impossible) to re-invest back into the economy. The situation is made worse via tariffs, which further diminish consumer welfare because as the price of imports increase, Americans have no choice but to purchase domestic goods at a higher cost (in relation to the same goods made in China). Long story short: producers win and consumers lose. But is there any real benefit to economic welfare despite this fact? As it turns out… not really.
According to a research paper by Princeton University titled “The Impact of The 2018 Trade War on U.S. Prices and Welfare,” the study found about the Trump administration’s tariffs that:
The full incidence of the tariff falls on domestic consumers, with a reduction in U.S. real income of $1.4 billion per month by the end of 2018. U.S. welfare gain from tariff reductions under NAFTA… amounts to 0.08 percent of GDP or about $1.4 billion per month, close to our estimate of the monthly deadweight loss from the Trump administration tariffs.
Now, I don’t know about you, but a 0.08% increase in overall welfare at a net loss if $1.4 billion per month isn’t a very cheerful statistic. This research basically shows that the overall welfare gains from international trade between the US and China, are…well…non-existent.
Policy makers seem to always be concerning themselves with “consumer welfare” and “greater economic welfare,” placing both items at the top of their to-do lists. International trade, however, is not going to serve their agendas. If the US truly wants to lift the spirit of consumers and bolster our economy, the stimulus needs to come from within. There is no need for us to export cheap labor to China when it can be executed here. Lastly, focusing on US will transform billion dollar losses incurred by free trade into new economic funding channels at home, and will empower consumers at the lower rungs of society (those in manufacturing jobs who are most at risk for welfare depreciation), to increase their economic contributions. Math has spoken––now it’s time to act.