Whether it’s China and industrial policy, supply chain “resiliency” proposals, “Buy American” mandates, or basically anything else trade-related coming out of Washington these days, it’s increasingly clear that the longstanding bipartisan consensus in favor of free trade in the United States has unraveled. (Don’t say we didn’t warn you.) As we explain in a new Cato paper out today, however, the United States’ inward turn is misguided: the economic, geopolitical, and moral case for free trade remains as strong today as when Adam Smith penned The Wealth of Nations almost 250 years ago. 

On the Economics:

  • Trade’s consumer benefits are far more significant than a few cents on the proverbial cheap t‑shirt. Studies find, for example, that Americans save billions of dollars each year due to U.S. free trade agreements, and that trade with China alone saves the average American family about a $1000 per year for the rest of their lives – or about $410,000 in annual “consumer surplus” for every U.S. job potentially displaced by Chinese imports. These consumer benefits are particularly tilted toward poor and the middle-class Americans, who spend more of their paychecks on tradable goods sold at “big box” retailers.
  • Trade also produces benefits for companies and workers, including in manufacturing. Exporters gain from selling into newly-opened markets, while importers benefit from moving or selling foreign-made items in the United States (e.g., FedEx or Gap) or from using imported inputs to produce other goods and services.
  • These transactions ultimately benefit American workers: New research finds that while only 6 percent of U.S. firms in manufacturing and services are goods traders, they account for half of economy-wide employment and supported 60 percent of all new net jobs created after 2008.
  • Finally, free trade is a cornerstone of the “creative destruction” that breeds innovation and improved living standards in America. This process is largely invisible but spurs American companies to improve their products and the U.S. economy to harness comparative advantages in advanced manufacturing and skilled services. The outcome: Not just “cheaper stuff” but better and once-unimaginable goods, better jobs, better companies, and better lives.

On the Geopolitics

  • Trade has long been a cornerstone of global peace and stability and national security. The multilateral trading system arose after World War II partly out of a desire to avoid another destructive global conflict. For all its fits and starts, the General Agreement on Tariffs and Trade and its successor, the World Trade Organization have met this aim reasonably well by providing an avenue for countries to resolve commercial disputes without resorting to armed conflict.
  • Studies also find that greater trade and economic interdependence promotes peace through a variety of channels. And while economic integration didn’t stop Russia from invading Ukraine, the international backlash has inflicted serious pain upon the Russian economy and sent a strong signal to other countries about the cost of armed conflict.
  • As trade promotes economic growth and better living standards in developing countries, it can temper the appeal of joining transnational criminal organizations or terrorist groups.

On the Moral Case for Trade

  • Adam Smith wrote that man is “an animal that bargains,” and on this basis, we have built entire communities, cultures, and societies around the principle of voluntary trade. When humans can freely pursue their self-interest through trade, we do so as equals, and the “invisible hand” yields economic and social outcomes that benefit society at large. Protectionism, by contrast, immorally elevates the welfare of a handful of politically important entities and individuals (e.g. steel workers) at the direct expense of everyone else (e.g., steel consumers).
  • The morality of trade doesn’t stop at the water’s edge: Trade has contributed significantly to lifting billions of people, especially women, out of abject poverty around the world. Trade also can help developing countries better afford environmental quality and increase access to and consumption of “green” goods and technologies.

On the Failed Protectionist Alternative

  • For all the problems that trade is accused of creating, the protectionist alternative has repeatedly proven to impose far higher costs, generate far fewer benefits, and foster far more political dysfunction. A vast repository of economic literature shows that protectionist policies—tariffs, quotas, buy-local mandates, etc.—harm the U.S. economy. More recently, studies show that American consumers (companies and individuals) have borne most of the burden of the Trump administration’s tariffs on home appliances, steel and aluminum, and Chinese-origin goods.
  • Protectionism also harms workers by reducing their purchasing power, increasing their companies’ production costs, or exposing their exports to foreign retaliation. Yet protectionism rarely boosts employment in protected industries.
  • Indeed, protectionism routinely fails to achieve its economic and geopolitical objectives. Firms in protected industries rarely emerge stronger—instead of innovating, they use their windfall profits to boost executive pay and lobby for greater protection. Meanwhile, tariffs and other trade restrictions rarely compel foreign countries to accede to U.S. economic or foreign policy demands (and in fact, often lead to costly retaliation), and protectionism rarely boosts national security.

On the “China Threat”

  • Concerns about the size of China’s economy, state capitalist model, role in the Asia-Pacific region, authoritarian governance, and increasingly aggressive foreign policy are legitimate. But none of these issues justifies an abandonment of free trade or international engagement more generally.
  • First, a comprehensive accounting of the last two decades of U.S.-China trade punctures the conventional wisdom. Fewer U.S. jobs were lost due Chinese import competition, while there were also significant economic benefits for the United States. The U.S. government also didn’t “go soft” on China when it joined the World Trade Organization out of some naïve hope that economic liberalization would surely lead to democratization.
  • Second, the last three years of U.S.-China policy have conclusively demonstrated that aggressive unilateralism toward China is a losing approach. Tariffs harmed the U.S. economy, including in manufacturing, without changing Chinese policy or repatriating American companies’ global supply chains (see figure 5 below). Aggressive U.S. unilateralism also led China to double-down on nationalism and industrial policy, while maintaining — if not expanding — its problematic human rights abuses and foreign adventurism.

Overall, free trade, while surely not painless, still provides far more – and far more widespread – benefits for the United States (and the rest of the world) than any realistic protectionist alternative. While today’s economic and geopolitical challenges are very real, the best approach remains an open American economy and active multilateral engagement.

You can read the whole paper here.