All advanced economies engage extensively in international trade and derive substantial benefits for their societies.  Trade promotes economic growth, efficiency, technological progress, and what ultimately matters the most, consumer welfare.  By lowering prices and increasing product variety available to consumers, trade especially benefits middle- and lower-income households.  It is important to keep these basic facts in mind during debates over specific trade agreements.

Among the world’s countries, the United States is the largest importer and the second largest exporter.  Over the last half century, international trade has raised the average American’s annual household income by $10,000 or more.  But relative to the size of the domestic economy, the United States trades much less internationally than its peers.  The ratio of imports-to-GDP at 16.5 percent for the United States is the lowest in the OECD.  Three-quarters of the 34 OECD member countries have imports exceeding 30 percent of their domestic output.

U.S. trade policy should serve the public interest, which means enhancing consumer welfare and economic efficiency.  

1)     Policymakers should guard very carefully the benefits of international trade, which are permanent and cumulative, and aim policy intervention narrowly at the costs of adjustment, which are temporary.

2)     Policymakers should remember that delaying trade liberalization is not costless.  Protected industries tend to become inefficient and fall behind technologically, and economies that trade less, grow less.

3)     Policymakers should recognize the freedom to buy and sell goods and services as a fundamental right in our market economy.  Citizens’ ability to purchase the goods and services they prefer presumptively is in their interest as long as trade is voluntary and should be their right as long as the objects of trade are legal.  Justifications to the contrary in the pursuit of specific aims should be viewed critically.

Key Findings

• Boosting economic growth.  Trade tends to raise GDP by as much as two percent for every percentage point increase in the ratio of trade-to-GDP, according to Frankel and Romer (1999).
• Increasing overall consumer welfare.  A 2005 study by Langenfeld and Nieberding estimated that consumer benefits from imports accounted for nearly six percent of median household income in 2002.
• Lowering prices for consumers.  Trade lowers domestic prices; improves resource allocation through specialization; lowers profit margins of domestic producers and increases operating efficiency of domestic firms through increased competition.
  • A study by the Bank for International Settlements (2008) found that producer prices decreased by 2.35 percent following a one percent increase in import market share.
  • An analysis by the CATO Institute (Mad About Trade, Daniel Griswold) found that the prices of many everyday products tend to rise in the non-tradable and fall in the tradable sector of the economy.
• Expanding product variety available to consumers.  Trade increases product variety particularly among trading countries with similar resource endowments and technologies.  Broda and Weinstein (2006) counted 71,420 import varieties in 1972 rising to 259,215 in 2001.  Consumers place significant value on variety.  Broda and Weinstein found consumers would have paid 2.6 percent of their income in 2001 to keep the larger number of varieties in 2001 over that in 1972.
• Benefiting lower-income households.    Big box retailers are among the largest import companies and confer substantial benefits on a wide range of the population [Hausman and Leibtag (2005) and Furman (2005)].
• Increasing overall employment.  An OECD study in 2011 found that trade liberalization can increase overall employment in the long run and during recessions, which is not surprising given that trade enhances economic growth and the damage increasing trade barriers did in the Great Depression.
• Adverse employment effects from trade liberalization often are exaggerated.  Lower consumer prices, lower domestic input costs, and increased foreign demand for domestic products all have employment expanding effects.  NAFTA was predicted to cause huge U.S. job losses, which did not occur, but it created U.S. export related jobs—paying 18% more on average (Office of Competition and Economic Analysis, International Trade Administration, U.S. Department of Commerce, July 2010).