Are There Benefits from Free Trade?: DeLong FAQ
Q: Prominent economists and politicians often say that free trade will benefit America in the long run. Many Americans disagree strongly. What is your take on this situation?
A: Well, typically and roughly, the average import we buy from other countries we get for 30% off--we use foreign currency that costs us $1.40 to purchase goods and services made abroad that would cost us $2.00 worth of time, energy, resources and cash to make at home.
But there's more.
Typically and roughly, we sell the typical export to foreigners for about 40% more than we would get if we had to find a market for it at home: it costs us $1.00 worth of time, energy, resources and cash to make stuff that we can sell to foreigners for $1.40 worth of foreign currency. Thus for the country as a whole our foreign trade sector--exports and imports--is a way to get $2.00 worth of value for $1.00 worth of work. That's a very good deal. Our foreign trade sector takes advantage of this good deal on a mammoth scale: in the fourth quarter of 2016 we were trading goods and services at a rate of $2.8 trillion a year--17.5% of national income. That means that in a typical year we sell exports that we could get $2 trillion for if we had to sell them here at home and get imports that would cost us $4 trillion. That makes us $2 trillion per year--$25,000 per family each year--richer and more prosperous.
That is a big deal.
Now you can complain that the benefits from international trade are inequitably distributed. And they are. But they are less inequitably distributed than what we produce here at home: serous worriers about economic equity do not start with foreign trade, only non-serious worriers do.
If you ask me why many Americans "disagree strongly" that trade benefits America, my answer is that they have been successfully grifted by some of the many, many grifters we have at all levels of our society. Think of it: If international trade is bad--if we should be self-reliant at the national level--then the same argument applies at the state level. If interstate trade is bad----if we should be self-reliant at the state level--then the same argument applies at the municipality level. If inter-municipality trade is bad--if we should be self-reliant at the municipality level--then the same argument applies at the neighborhood level. And so we get all the way down to the basic bedrock of human society: the hamlet or band community of less than 100, say 75. How much could any 75 of us produce as a group if we couldn't trade with outsiders? About $1,000 a year per worker. A United States that tried to be self-sufficient at the hamlet or band level would be lucky to have a national income of $160 billion, one hundredth of the $16 trillion we have.
Now we certainly can manage our international trade account badly--the Reagan administration, in particular, was especially disastrous. But Americans who "disagree strongly" that trade has benefits have been misled. Perhaps "free" in your question is supposed to serve as a weasel-word escape hatch?
