Weighing free trade benefits

Protectionists favour tariffs and other trade barriers to reduce imports from abroad and to prevent businesses from buying labour in other countries through outsourced manufacturing or service jobs. However, most economists agree that the benefits of trade far outweigh the costs.

To be sure, there are disruptions from expanding trade as existing jobs may disappear -- to be replaced by new ones requiring different skills. But cheaper products reduce prices to consumers. Most economists believe that the "consumer surplus" that results from lower prices far outweighs the cost of lost jobs or lower wages. Furthermore, trade stimulates productivity growth because it makes possible enormous economies of scale in manufacturing, services and marketing, and enhances competition. For example:

A 1972 study by Stephen P. Magee found that the benefits of eliminating all trade restrictions would outweigh the costs of unemployment due to international competition by a ratio of 100 to 1.

A 1980 study that took into account job dislocation costs found that benefits from a 50 percent cut in global tariffs exceeded dislocation costs 20 to 1.

A 2003 study by Michael W. Klein, Scott Schuh and Robert K. Triest ("Job Creation, Job Destruction and International Competition," Upjohn Institute) found that if the costs of job dislocation were taken into account -- including unemployment, job search and retraining costs and potentially lower pay -- the benefits of trade would outweigh the costs by 2 to 1.

Workers are also dislocated by technological changes that may rapidly make existing products obsolete. Klein, a professor at Tufts University, says that portability of corporate benefits like pensions and health insurance would more directly address some costs of job dislocation.

Source: Jeff Madrick, Questioning Free Trade Mathematics, Economic Scene, New York Times, March 18, 2004.

FMF Policy Bulletin\23 March 2004