"[L]abour union lobbies and their political friends have decided that the ideal defence against competition from the poor countries is to raise their cost of production by forcing their standards up, claiming that competition with countries with lower standards is “unfair”. “Free but fair trade” becomes an exercise in insidious protectionism that few recognise as such."
Jagdish Bhagwati,
"Obama and Trade: An Alarm Sounds," Financial Times. January 9, 2009.
Below are some of the most frequently asked questions about globalization and free trade. CTPS scholars have answered these questions and have provided links to related works that provide more in-depth analysis of the subject matter.
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Do you have other questions about trade and immigration? Submit your questions to our trade scholars HERE (faq-freetrade@cato.org). Select questions will be answered by a Center for Trade Policy Studies scholar and will be posted below. |
Why does agriculture get so much attention, and cause so much conflict, within the WTO?
Agriculture makes up only about 10 percent of world merchandise trade. However, agricultural markets are by far the most distorted, with high tariffs (some in excess of 1000 percent) and large subsidies given to farmers, especially in developed countries. Because agriculture was brought into negotiations under the General Agreement on Tariffs and Trade (or GATT, the predecessor to the WTO) only in the Uruguay Round (1986-1994), liberalization efforts in agriculture are far behind those in manufactured goods. Thus, much work remains to be done. Agriculture is also a highly politicized issue: many agricultural subsidies in developed countries encourage overproduction and thus depress world prices for certain commodities, causing damage to the exporting interests of other agricultural producers abroad. For the most part, developing countries have a comparative advantage in agricultural goods, so trade barriers prevent them from being able to access markets for their goods. This puts them at odds with powerful agricultural lobbies in some developed countries, who jealously guard the special attention their industry receives and make reform politically difficult.
Related Works:
Also see the CTPS issue page, "Agriculture."
Does free trade lead to a "race to the bottom" in global labor and environmental standards?
While this is a frequently heard complaint, there is no evidence of such a "race to the bottom." In fact, the opposite is true: expanding trade and rising incomes tend to promote higher social standards. As incomes rise in developing countries, their people and governments are able to devote more resources to protecting the environment and lifting labor standards, while an expanding middle class begins to expect and demand improvements in the environment and working conditions. Empirical evidence shows that as nations reach middle and upper income levels, their environmental policies and indicators improve. Working conditions also improve and rates of child labor fall. Foreign investment in developing countries contributes to this "race to the top" by creating better paying jobs and by "importing" better business practices and work rules. Contrary to the "race to the bottom" myth, low wages and lax environmental rules are not an irresistible magnet for foreign investment. Foreign investors seek property rights protection, a functioning legal system, a well-educated workforce, profitable markets, and sufficient infrastructure. That is why most of the world's foreign investment flows between rich, high-standard economies.
Related Works:
Also see the CTPS issue page, "The Benefits of Globalization."
What are the benefits of free trade for the average person?
The historical record is very clear that free trade bestows many benefits to the average person. Those countries that lower trade barriers and open their markets enjoy higher economic standards of living. Consumers have access to a wider range of higher quality products at prices lower than they would otherwise pay. The average person also benefits in terms of wages and job opportunities. When labor and capital flow freely to the most productive areas of the economy, workers are employed in better, higher quality jobs with higher wages. While there are inevitable short-term transition costs in some sectors of the economy, the long-term benefits of free trade for all far outweigh such costs..
Related Works:
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Also see the CTPS issue page, "The Benefits of Globalization."
Does the trade deficit harm domestic economic performance?
A trade deficit is not a threat to America's economic well-being. By virtually every measure--GDP growth, employment, industrial production, and poverty reduction--the US economy performs better when the trade deficit is rising than when it is falling. Trade deficits do not arise from unfair trade barriers abroad or uncompetitive industries at home, but from a net inflow of foreign capital. Foreign capital lowers domestic interest rates and funds new investment while imports lower prices and expand the choice and quality of products for consumers and producers. America's net international investment position, negative $1.5 trillion in 2000, is not unduly large when compared to the nation's GDP or net wealth. Seeking to cure the deficit with new trade barriers would only harm the economy without reducing the deficit.
Related Works:
Also see the CTPS issue page, "The Trade Deficit and Imports."
Imports do not cause a net loss of jobs in a nation's economy. Imports may displace some workers in less competitive industries, but the overall level of employment is determined by monetary policy, labor market flexibility and other non-trade factors. Thus, trade benefits an economy in the same way as technology, causing resources to shift to more productive sectors, raising overall living standards. For the overwhelming majority of American workers, imports raise real compensation by keeping prices down and stimulating domestic competition. Research shows that a rising level of imports to the United States usually signals the creation of more jobs, not the loss of jobs. Imports benefit American producers as well, providing capital equipment to make workers more productive and lower-cost inputs, such as steel, electronic components, and raw materials, that make their products more price-competitive in world markets.
Related Works:
Also see the CTPS issue page, "The Trade Deficit and Imports."
Is free trade a threat to the US manufacturing base?
Free trade is a boon to the US manufacturing base, which is alive and thriving according to statistical evidence. Access to a greater supply of raw materials at lower prices enables US manufacturers to reduce costs and become competitive in markets around the world. Without such access, US manufacturers would have difficulty pricing competitively in markets with relatively lower incomes and currency values. The presence of foreign-produced finished manufactures in the US compels domestic industries to be innovative and efficient, both of which are keys to profitability and longevity. Statistically, in constant 1996 dollars, manufacturing's share of GDP has held steady at slightly over 17 percent between 1977 (a period of relatively high tariffs) and 1998. Between 1992 and 1999, when the overall economy grew by 29 percent, the Federal Reserve's index of manufacturing output increased by 42 percent!
Related Works:
Take the Manufacturing Quiz.
Also see the CTPS issue page, "The Trade Deficit and Imports."
Is immigration bad for average Americans?
Immigration has been good for the US economy and the average American worker. Foreign-born workers fill gaps in the labor force where demand is greatest, allowing US companies to produce more efficiently and to keep prices down. Immigrants increase the domestic demand for goods and services, creating employment opportunities for other American workers. Highly skilled immigrants have been especially important to America's high-tech sectors, creating new products and production methods, and allowing the industry to expand production and reach new markets abroad. Much of America's New Economy could not function without the contributions of foreign-born workers. According to a major study by the National Research Council, immigrants and their children pay more in taxes than they consume in government services. They contribute to the richness and wide appeal of American culture.
Related Works:
Also see the CTPS issue page, "Immigration."
Should the United States enact and enforce laws that aim to promote "fair trade" and create a "level playing field" for its workers and industries?
While "fair trade" sounds good in theory, in practice, the term is really code for protectionism. Fair trade, as the term is now used, usually means government intervention to direct, control, or restrict trade. Fair trade means government officials decide what Americans should be allowed to buy and what prices they should be forced to pay. Other countries often have a comparative advantage over the United States in a particular industry. Attempts to "level the playing field" by subsidizing the US industry is really a tax on US consumers and only prolongs the economic woes of the industry in question.
Related Works:
Also see the CTPS issue pages, "US Antidumping Law" and "Trade Politics."
Does the World Trade Organization undermine national sovereignty?
As sovereign nations, WTO members share a common recognition that open markets are superior to protected markets. The WTO was established as an extension of this ideal to arbitrate disputes within the context of a set of rules created and agreed to by sovereign member nations. Excluded from WTO perusal are broad categories of trade restrictions, including those related to national security, public health and safety, conservation of natural resources, and banning imports made with forced or prison labor. Member nations are encouraged to abide by WTO rulings, which are rendered in cases where an arbitrated dispute settlement does not obtain. However, the WTO has no authority to force member nations to pay fines, change laws, revoke sanctions or do anything. By contrast, national sovereignty is threatened in the absence of WTO rules, where market barriers or sanctions by one country against another are more likely.
Related Works:
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Also see the CTPS issue page, "The World Trade Organization."
Are unilateral sanctions effective foreign policy tools?
More often than not, unilateral sanctions end up achieving the opposite of what their authors intend by making the target country more self-sufficient and strengthening its resolve to continue objectionable policies. Examples abound: from Cuba to Iran to Burma, sanctions have failed to achieve the goal of changing the behavior or the nature of target regimes. At the same time, sanctions have deprived American companies of international business opportunities, punished domestic consumers, and hurt the poor and most vulnerable in the target countries. Given this record of failure, unilateral sanctions should be used sparingly by U.S. policymakers.
Related Works:
Also see the CTPS issue page, "Unilateral Sanctions."
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Do you have other questions about trade and immigration? Submit your questions to our trade scholars HERE (faq-freetrade@cato.org). Select questions will be answered by a Center for Trade Policy Studies scholar and will be posted below. |
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