Mendoza School of Business

Why free trade is critical … and so are global trade partnerships

Published: May 7, 2016 / Author: Jeffrey Bergstrand

With a glance back over the 20th century, it’s readily apparent that several policy decisions had extraordinary global impacts.

There were negative ones (the Poland Blitzkreig and the start of World War II by Germany) and positive ones (the post-WWII creation of a new international economic order resulting in cuts in tariffs globally). The human costs of WWII are well known: 15 million battle deaths and 45 million civilian deaths all told.

But the rhetoric of our 2016 U.S. presidential campaign appears to seriously underestimate the potential benefits of a world trading system that binds people, businesses and governments together.

Specifically, the statements made by candidates from both parties maligning global trade pacts ignores key economic history lessons. The now-infamous Smoot-Hawley tariff bill, for example, substantially raised U.S. tariffs on all imports and catapulted America’s severe recession of the early 1930s into a worldwide Great Depression for the entire decade.  Seven rounds of tariff cuts since WWII have restored a global exchange of goods and financial capital, and increased standards of living.

We take for granted that countries that trade together are not in wars together. To me, one of the greatest positive policy decisions of the previous century was the creation of the European Economic Community, the forerunner of the current European Union. At the core of the EU are two countries that warred for centuries: France and Germany. They may have their differences, but a war is extraordinarily unlikely between these two trading nations in the foreseeable future.

Just as the EU has cemented stable political relations and economic prosperity within Europe, the proposed Trans-Pacific Partnership (TPP) Agreement potentially can provide political stability and economic prosperity among Pacific Rim economies, including the United States. Essentially, the agreement adheres to the peace-through-commerce philosophy, which promotes commerce as the most powerful force for catalyzing widespread peace. Also, the proposed Trans-Atlantic Trade and Investment Partnership (TTIP), also much in the news recently, can have similar benefits.

In an ideal world, mutual tariff cuts by government representatives in lovely locales such as Annecy, France; Torquay, England; and Geneva, Switzerland, help the world’s economic order. But the world is not so generous anymore: Non-tariff barriers to trade and investment, as well as regulatory divergences, make negotiations more difficult, propelling regional – even bilateral – trade and investment agreements, such as TPP and TTIP, to the fore. And you can be sure that despite presidential campaign rhetoric of “bad trade deals,” the United States lays down on the table a template for trade liberalization that our foreign trading partners often have to accommodate during proposed free trade agreement negotiations.

Having researched in the area of international trade and investment for more than three decades, I’m continually perplexed by people’s misunderstanding of free trade. Think of technology. Americans embrace technology: the smart phone, the internet, revolutions in medical treatment and so on. Technology makes life better. Technology raises our standards of living. We are more productive with computers than without them!

Yes, technology advances are burdensome; we have to learn new software and apps. And, yes, people lose jobs because of technology advances.  For the sake of rhetoric, let’s say that an administrative assistant refuses to use a computer. In most office settings today, he or she would lose the job. But does that mean that, as a nation, we should prohibitively tax computers to eliminate them? Of course not. The answer lies in educating people to use computers, rather than in halting the advance of technology.

The economic impact of free trade is basically identical to technology advances. If we learn and embrace computers, our standards of living rise; if we reject them, they fall. If we open up our borders to free trade and work in industries and perform tasks where we have comparative productivity advantages, our standards of living rise; otherwise, they fall.

Free trade and technology advances are similar economic concepts for raising individuals’ incomes. TPP and TTIP can advance that. So can other proposed trade agreements. Yes, in the short run, more free trade – like better technology – is burdensome, and one of the many roles of government is to provide the resources to facilitate this adjustment. (It is known as Trade Adjustment Assistance, a concept that has been around, but under-utilized and under-funded, for decades.)

Globalization is not the problem; the problem is providing resources to help people adjust in a market-based economy. Free trade, TPP and TTIP are critical for our nation’s future.

Jeffrey Bergstrand is a professor of finance at the University of Notre Dame’s Mendoza College of Business. His research on international trade flows, free trade agreements, foreign direct investment, multinational firms, and exchange rates has been published in more than 50 articles in such journals as The American Economic Review and as chapters in books.  In 2008, Bergstrand was invited by a consortium of EU consulting firms to study the economic effects of reducing non-tariff barriers and regulatory divergences between the EU and U.S. He, along with three other international trade economists, created the methodology for the first EU economic study, which became the backbone for subsequent research about the impact of the Trans-Atlantic Trade and Investment Partnership. Bergstrand also is a concurrent professor of economics and a Kellogg Institute for International Studies faculty fellow at the University of Notre Dame.

This editorial was published in The South Bend Tribune.