Blog Post written by Policy Intern for the Wisconsin Institute for Law & Liberty, Elena Ramlow, on Paul Ryan’s advocacy for free trade agreements.
Against the backdrop of a stagnant economy, a recent Marquette University Law School poll showed that only 41% of Wisconsinites, of both political parties, believe free trade agreements have been good for the U.S.[1] So why, in the face of opposition from Republicans and Democrats, is Speaker of the House Paul Ryan advocating for them? In a recent speech at a WisPolitics forum, Speaker Ryan presented an economically sound argument that smarter trade can lead to innovative and engaging economic policy and leadership in today’s global economy.
The benefit of trade stems from the economic principles of specialization and comparative advantage. Specialization allows a producer of goods or services to focus on what it can produce most efficiently. In the current global economy, producers specialize “in tasks rather than in finished goods, with the result that trade in intermediate goods, such as components, parts or goods for further processing, has grown fast”[2]. This has expanded international trade and the global marketplace at an unprecedented level, outside of the terms of real GDP (which only accounts for finished products and services). Those nations whose resident firms, as a result of specialization, can perform tasks and make goods better or more inexpensively enjoy a “comparative advantage,” i.e., they provide superior value to consumers and use that advantage to attract business.
Therefore, raising tariffs, i.e. taxes on imports, actually hurts consumers, forcing people to pay higher prices and creating artificial monopolies for American producers. If American manufacturers are not producing their goods at a competitive price and quantity, raising tariffs only furthers economic inefficiency.
Lowering barriers to trade, on the other hand, increases economic efficiency and makes everyone better off[3]. It does not enrich us or “make America great” when we pay more for goods and services than we have to. To the contrary, it makes us poorer. Consumers who pay less for iPhones assembled in China have more money to spend on other goods and services, most of which will be provided by American firms and workers. Lower trade barriers also make overseas markets more open to us. As Speaker Ryan explained, “96% of the world’s consumers, they don’t live in America… they live in other countries”. Cutting off international trade denies the U.S. access to these consumers, shrinking the market for our products and services. He continued, “if we want to have a good, strong, mature, growing economy where we have faster growth and good wages we’ve got to sell our… [goods and services ] overseas”.
Current economic policy is not working for America, nor does it provide work for average Americans; economic growth is at its lowest since 1949[4]. Rather than closing our country off in response to these difficulties, it’s time to reform our tax laws, open up for business, and trade competitively. Although, trade may impose short and medium term costs on workers and communities whose firms are not internationally competitive, this is not a reason to forego the far greater benefits of trade. Legislators should instead consider re-training and relocation assistance and other measures to help displaced workers adjust.
In the words of Paul Ryan, “if we don’t engage we lose. But we need to engage intelligently”. To create more jobs in America, as well as a thriving economy, we have to “make America the place you want to manufacture in, the place you want to have your headquarters”, as pointed out by Ryan. Part of this includes ending taxes on exports. Most countries tax imports, meaning American manufacturers attempting to sell abroad are double taxed. As a solution, Ryan proposed, “[taking] the tax off our exports and [placing] it on our imports. That’s not tariff, that’s not trade wars, that’s exactly what our competitors do themselves”. It’s time to compete in the global economy, instead of taxing exports, which, realistically, “[shuts] down our ability to counter export, to sell our stuff”.
Critics of free trade wish to debate whether or not America should participate in the global economy; however, that question has long been answered by continued benefits accrued from international trade. Speaker Ryan challenged the audience to stop debating participation in a global economy, instead asking, “who is going to write the rules of the 21st century global economy?” Hopefully, it’s America.
[1] Marquette University Law School poll https://law.marquette.edu/poll/
[2] Taken from the United Nations Global Forum on International Trade Statistics and Economic Globalization “Measuring Global Trade—Do we have the right numbers?” http://unstats.un.org/unsd/trade/globalforum/measuring-global-trade.asp
[3] See The Economist, “Why trade is good for you” http://www.economist.com/node/605144
[4] Wall Street Journal “7 Years Later, Recovery Remains the Weakest of the Post-World War II Era” http://blogs.wsj.com/economics/2016/07/29/seven-years-later-recovery-remains-the-weakest-of-the-post-world-war-ii-era/