Trade Buys Goods, Services, and Time

While trade has liberalized, especially in the last 75 years, much work remains. The most basic trade restriction—a tariff (a tax on imports)—is ever present and needlessly raises the prices of goods and services. Today, although tariffs are a far cry from the prohibitive rates of the 19th century, policymakers instead craft complicated rules that people must navigate to buy and sell across borders. Domestic regulations can further stifle trade, far beyond what may be necessary to protect health, safety, or the environment.

Nonetheless, how trade raises peoples’ standards of living is unquestionable; in order to continue pulling people out of poverty, promoting innovation, and raising living standards for all, further liberalizing trade is imperative.

Before modern-day currency, people traded by bartering—or exchanging goods and services for other goods and services. However, this required people to have an array of things to offer as some goods and services were worth more than others, thus a “diversity” in “currency” was necessary. By 3000 BC, bartering developed into long-distance trade as people needed different materials for the development of civilization. Through this process, people began to discover what they could do and make well and began to exchange with each other, driving specialized production and laying the bedrock for today’s supply chains.

Adam Smith explores this phenomenon in An Inquiry into the Nature and Causes of the Wealth of Nations. Smith observes that “every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.” Simply put, a developed society and economy is borne of people specializing in what they are good at and exchanging with others.

The example of how we moved from growing our own food and making our own clothes to buying these products illustrates specialization’s benefits. Purchasing food and clothes from those better suited to make these goods (i.e., they have a comparative advantage) allows buyers to hone their skills in other sectors. Specialization also saves resources such as time and money. Fewer wasted resources means people can consume more leisure or invest in themselves so that they can better compete in their industry, contributing to entrepreneurialism and innovation, and overall economic growth.

Specialization also applies internationally: countries (like people) are better off producing the goods and services in which they have a comparative advantage and trading for everything else. Trade barriers make it more difficult for people to do this; thus, lowering trade restrictions helps to maximize national welfare.

Governments have long entered into international agreements to achieve this trade liberalization. In 1860, two significant world powers, Great Britain and France, signed the Cobden-Chevalier Treaty, which liberalized trade and is considered the first significant bilateral preferential trade agreement. It stipulated preferential tariffs (lower taxes on imports) for important traded goods between the two nations and included most-favored nation treatment—nondiscriminatory treatment for all other goods traded between the two countries. The Cobden-Chevalier Treaty was followed by 56 similar bilateral trade agreements in Europe, laying the foundation for multilateral trade liberalization. Though the network created by these agreements resembled multilateralism, the liberalization was not uniform and not convened by all parties. For example, Britain and France could freely trade, and France and Belgium could freely trade, but Britain did not have an agreement with Belgium. For Britain to receive preferential treatment for Belgian products, those goods would need to be traded through France, whereas in a multilateral system, Britain would be able to freely trade with Belgium because France, Belgium, and Britain would grant equal treatment to one another.

On the contrary, the United States teetered between increasing and decreasing tariffs from 1790 to the 1930s. The newly independent United States used tariffs to raise government revenue. US tariffs ranged from around 12 percent to over 60 percent between 1790 and 1830. As illustrated in Figure 1, tariffs fell to around 19 percent by 1861. However, as France and the United Kingdom liberalized trade through the Cobden-Chevalier Treaty, the United States returned to a protectionist agenda. As illustrated in Figure 2, while the United Kingdom and France lowered tariffs in the 1860s, the United States radically increased them. From 1862 to 1932, the average US tariff on dutiable imports reached almost 60 percent and remained high for several decades. In fact, during this period, US tariffs were among the highest in the world.

However, after World War II, trade liberalization was recognized as the pathway to peace and prosperity and expanded by multiple rounds of multilateral trade negotiations. In 1948, the General Agreement on Tariffs and Trade (the GATT) entered into force. The agreement was founded by 23 countries that agreed to reduce tariffs and create rules against members implementing other restrictive trade measures. Between 1948 and 1994, the GATT attracted 128 members and completed seven rounds of negotiations to increase tariff concessions and establish global trading rules. In 1995, the GATT was absorbed into the World Trade Organization (WTO) which continues negotiations to establish new trade rules and attract new members. Today, the WTO is comprised of 164 members, and the average tariff rate between member countries is 9 percent. As a result of the GATT and the WTO, world trade grew exponentially. From 1950 to 2022, trade volumes increased by almost 45 times, as shown in Figure 3.

Liberalizing trade on a multilateral level brought immense benefits to global welfare, particularly those living in extreme poverty (defined today as living on less than $2.15 per day). According to the World Bank, in 1820, more than half of the world lived in extremely impoverished conditions. In 1995, after the establishment of the WTO, 32.8 percent of the global population lived in poverty, but by 2019, that share dropped to 8.5 percent (Figure 4).

Much of this decline came from China’s shift toward a market economy in the 1980s and entrance into the global trading system. Almost 585 million or so Chinese people escaped extreme poverty between 1995 and 2021, but about 640 million other people worldwide did too.

The freedom to trade directly contributed to these improvements. When trade barriers are lowered, for example by reducing tariffs, imports become cheaper. Lower import prices provide multiple avenues to raise real incomes. Removing tariffs eliminates the tax burden imposed on those that consume imported products, and all taxes are regressive, which means that they disproportionately impact the poorest people. Thus, those in the lowest income brackets benefit most from the removal of tariffs.

It is not always the case that reducing or removing tariffs makes imports cheaper than domestic products that compete with imports. Rather, the benefit is that the market sees more price variety offered by both foreign and domestic sellers when trade barriers are lowered. The cheaper varieties—whether domestic or foreign—create price competition. This is when companies strive to provide lower prices to lure customers, creating pressure on competitors to lower prices so that prices overall fall in the long term.

Price competition occurs between both domestic and foreign competitors and increases accessibility to substitutes. Not all products have substitutes, particularly not good ones, but liberalizing trade opens pathways to individuals and businesses in other countries that produce alternatives. Therefore, people at all income levels and businesses of all sizes can consume more either because they can choose a cheaper option, thus extending the reach of their financial resources, or they can buy something that was previously not accessible. As a result, trade provides more product choice as well as price variety. Moreover, the competitive process pushes businesses to strive to offer the best of something; in some cases, it is prices, for others, it is quality, or other nonprice factors. During this process, firms often make strides in innovation. These opportunities help businesses grow and workers benefit from higher incomes, thus allowing all to increase consumption. The following examples illustrate how liberalized trade spurred the innovation of once unimaginable products that many of us take for granted but that undeniably contribute to improved living standards.

The television was invented in 1927 in the United States, but those TVs did not have remotes, the displays were black and white, and they were big, heavy, clunky pieces of furniture with small screens. Technological improvements made TVs more accessible to consumers by the 1950s, with prices ranging from $189 ($1,573 in 2022 dollars) for a 17-inch black and white tabletop TV to $1,000 ($8,325 in 2022 dollars) for a 15-inch color console in 1954, but they were a far cry from the sleek, detailed displays we have today. As discussed earlier, countries have comparative advantages, and Japan has a comparative advantage in producing televisions. By 1997, Sharp and Sony introduced the first 42-inch flatscreen TVs, which cost $15,000 each. These companies capitalized on demand for televisions and continued innovating, and now, a 43-inch liquid-crystal-display TV can be purchased for under $200.

As outlined in Superabundance, a book by Cato’s Marian Tupy and Gale Pooley, these price improvements, along with higher wages, mean that workers do not have to work as long in order to afford a television. The authors calculate that in 1997, a worker making $18.12 per hour would need to work 828 hours to afford the $15,000 flatscreen. That same worker made $32.36 an hour in 2019 and could buy a television for $148, meaning only 4.6 hours of work was needed to afford a flatscreen television.

Another example of the benefits of trade is evident in the produce section of the grocery store. The US Department of Agriculture (USDA) emphasizes the importance of trade not only for ensuring fresh produce year-round but for a wider range of consumers to be able to consume fresh produce:

As people became wealthier, demand for year-round fresh produce increased. In turn, companies invested in improvements in containerized shipping and storage. These technological advancements helped US produce imports soar starting in the 1980s. Now, people can purchase fruits and vegetables year-round instead of being limited by seasonal availability. In fact, one study from the USDA estimates that during the winter months, US imports of Chilean berries contributed to falling berry prices between 49 and 69 percent.

For the first time, in 1995, fresh fruit became the United States’ top agricultural import. This is an unsurprising change given the North American Free Trade Agreement (NAFTA) entered into force in 1994. Canada already had duty-free treatment through the US-Canada free trade agreement, but Mexico did not. However, even before NAFTA, Mexico was a top trading partner for the United States for fresh produce because its climate provides a better environment for quality produce year-round. After NAFTA entered into force and Mexican fruits and vegetables were no longer subject to high tariffs (e.g., Mexican asparagus was subject to a tariff between 5 and 25 percent depending on the time of year it was imported in 1993), fresh fruit and vegetable imports from Mexico soared, as shown in Figure 5.

Moreover, US reductions in regulatory barriers also liberalized trade so that more fresh fruits and vegetables could enter the US market. For example, the USDA imposed strict standards on Peruvian peppers, Chinese apples, and Colombian avocados to caution against invasive pests and diseases. However, new systems managing those risks allow for the importation of these products. As a result, Americans can consume more fresh produce. In fact, in 2016, the proportion of fresh fruit consumed by Americans reached over 50 percent, compared to 23 percent in 1975. Trade also allows Americans to consume fruits and vegetables not native to the Americas. For example, more people can consume fruits like mangoes, limes, and artichokes because of agricultural trade liberalization.

Trade contributes to higher wages not only because we import lower-priced goods from trading partners but also because we then boost production in the industries in which US workers and companies have a comparative advantage (and thus specialize). The jobs in these industries tend to be better paying than the ones eliminated by competition. As a result, the time price of certain goods and services (e.g., the television) is even lower than the inflation-adjusted list price.

Looking at the changes in time price is significant, particularly for necessities such as food. A reduction in the time price of food means that an individual does not need to work a lot of hours simply to get food on the table, freeing resources for other things. According to page 167 in Superabundance, the average time price of 42 common food items consumed fell by an average of 91.2 percent for blue-collar workers and 87.8 percent for unskilled workers between 1919 and 2019. The average personal resource abundance multiplier (the quantity of items that one can buy for the same amount of labor at different points in time) for food increased by 1,032 percent and 722 percent for blue-collar and unskilled workers, respectively.

Once again, the benefits of import liberalization in the declining time price of food tells an important story for how living standards are improved, especially for those in the lowest income brackets. In fact, as trade increases the availability of other resources, like time, people are returning to growing food not for necessity but for fun. Overall, people can consume more financial and nonfinancial resources to live a more prosperous life.

Trade traditionally focuses on goods, but services trade—transportation, travel, insurance, finance, etc.—underpins globalization. Services are intangible and often embodied in products as intermediate inputs, for example in the design and engineering of a product, through trade facilitation such as transportation and logistics, or bundled with goods such as installation. Some services require physical proximity, such as transportation; without transportation, very little production and trade would exist as it physically connects suppliers and markets. On the other hand, some services do not require physical proximity and can be produced and consumed simultaneously, such as online tutoring.

The distinction between goods and services is increasingly blurred, making goods and services two parts of a whole. As a result, and as people become wealthier, they tend to consume more services, and as trade in services expands, choice and innovation boom. The COVID-19 pandemic accelerated demand for and supply of services: global exports of digital services, including remote learning, increased 37 percent between 2019 and 2022 alone. The United States is a net exporter of services, creating opportunities for American businesses and workers, but US consumers also greatly benefit from growing services trade. For example, Upwork, a jobs website, allowed an American father to interview and hire a PhD mathematician to tutor his son. This mathematician is based in Pakistan and asked for $4 an hour—a steal compared to the average $24 an hour for an American tutor but a well-paid opportunity for the mathematician as this rate far exceeds Pakistan’s less than $1 an hour minimum wage.

The pandemic demonstrated how much services-based work can be performed remotely. The benefits that remote work provides increase living standards and can even help with job retention. In fact, new data illustrates that US labor force participation for women with children under the age of five leapfrogged its pre-pandemic rate, and the flexibility that remote work offers, particularly to caregivers, is a compelling factor behind the trend. Moreover, the flexibility has pro-social benefits by making it easier to become parents or have more children.

However, remote work would not be possible without cheaper electronics. In 1996, the WTO signed the Information Technology Agreement that eliminated tariffs on hundreds of information and communications technology products. Such liberalized trade encouraged global supply chains that significantly contributed to the rise of accessible electronics. Not only can people carry mini computers in their pockets in the form of smartphones, but home offices are made more affordable. Indeed, as documented by Pooley, in 1991, Apple introduced its PowerBook 1000 priced at $2,500. At the same time, the average blue-collar worker made $14.93 an hour, so it took 168 hours to earn one of these laptops. Today, Apple’s 13-inch MacBook Air costs $999, and the average blue-collar worker makes $36.50 an hour, so it only takes a little over 27 hours to earn a laptop. Put differently, today the average blue-collar worker can buy six MacBook Airs for the time price of one PowerBook 1000 in 1991.

Further, cheaper electronic equipment combined with the invention of cloud services created more location options for starting a business. As these entrepreneurs take advantage of remote work and hire workers from anywhere in the world, a feedback loop is created of improved living standards, increased innovation, and higher economic growth—not only domestically but globally.

Insurance is a less considered service but is vital for trade facilitation and comprises a significant part of trade cost by itself (included in the import, cost, insurance, and freight price). Doing business comes with risks, and those risks can be heightened when using suppliers in different countries with different legal systems. Insurance enables businesses to mitigate risk and thus operate more cost-effectively. For example, importers benefit from product liability insurance; importers are responsible for ensuring that the products they import are compliant with domestic law, but product liability insurance protects them if a foreign supplier provides an inadequate product that requires legal action or if the foreign supplier does not have insurance coverage with protection in the importer’s jurisdiction. On the other side, exporters benefit from cargo (or freight) insurance, which protects shipments from loss, damage, or theft during transportation.

More broadly, global insurance protects companies with global operations from a variety of claims, such as property damage, cyber hacks, data breaches, or even personal injury. This risk mitigation streamlines the trading process by ensuring businesses are protected from unforeseen complications while providing resources for navigating what UnitedHealthcare Global calls “a complicated maze of red tape due to language barriers, local laws, customs, and norms that differ from country to country.” Finally, companies based in foreign countries also help communities by providing opportunities for local workers, facilitating trade, enabling foreign direct investment, reinforcing integration, and contributing to global economic growth.

For consumers, services trade further improves living standards by providing more choice. For example, streaming services (bundled in many televisions nowadays) have a breadth of options available that is largely a result of increased digital trade. In fact, 45 percent of Netflix’s library is made up of foreign-language titles. The Korean television show Squid Game became Netflix’s most watched show in 2021 and maintains that record—a testament to not only Americans’ enjoyment of the show but also the benefits of services trade.

As consumers become familiar with foreign services, they often crave more of them. And South Korean services, which have gained popularity around the world starting in the 1990s, are again a good example. After the US-South Korea trade agreement went into effect in 2012, South Korean media exports to the United States surged. The COVID-19 pandemic particularly vitalized US demand for Korean media exports. Moreover, the popularity of Korean media products spills over to other Korean products. In fact, one study of Korean cultural good exports from 2001 to 2007 found “that the export creation of cultural goods led to the export of consumer goods, the trade creation effect that the export of cultural goods drives the export of consumer goods was significantly found.” The authors found that a 1 percent increase in South Korean cultural exports led to a 0.136 percent increase in exports of consumer goods, including information technology products, cosmetics, clothing, and processed foods. Put differently, a $100 increase in Korean cultural goods exports created an average $2,244 increase in Korean exports of other consumer goods. Therefore, the benefits of US-South Korea trade multiply, allowing Americans to consume more varieties of Korean products. The same goes for services from other countries (and, of course, for foreigners’ consumption of American services).

Quantifying the effects of trade on consumers is difficult, and thus few studies have tried. However, one study by James Langenfeld and James Nieberding finds that US households gained around $2,500 in 2002 ($3,806 adjusted for inflation in 2022; however, this is an unsophisticated estimate and likely conservative compared to the results of an updated analysis) as a result of increased trade. Specifically, the expanded availability of imports from trade liberalization and increased trade is estimated to have had a cumulative total benefit of around $2.3 trillion between 1992 and 2002 (around $3.5 trillion in 2022 dollars). More importantly, it is estimated that the real disposable income per US household increased by $10,387 each year between 1992 and 2002. Put differently, increased trade during this period accounted for 12–20 percent of the increase in US real disposable household income.

More recent estimates from the Peterson Institute for International Economics show even greater gains from trade liberalization and improvements in transportation and communications technology. The authors estimate that between 1950 and 2016, the payoff to the United States was roughly $2.1 trillion (in 2016 dollars), amounting to around $18,131 per household with disproportionate gains probably accruing to poorer households. Meanwhile, several other studies have found that US trade with just China saved American consumers hundreds of dollars per year, with disproportionate benefits for middle- and low-income households that shop at “big-box” retailers like Walmart.

In the United States, disposable income has generally increased as a result of improved tax, regulatory, and trade policy, helping offset increases in particular consumer expenditure categories, thus translating into higher overall living standards. Yet, policymakers often resort to income-based approaches such as transfers, minimum wage laws, and subsidies to financially assist poor households. However, prices for highly government-controlled services, such as health care, have increased. On the contrary, largely as a result of trade liberalization, prices of highly traded products, such as clothing, have fallen. This demonstrates that a cost-based approach to reform existing government interventions—including trade barriers—that artificially raise the prices of essential goods is much more effective.

Contrary to the conventional wisdom, neither the United States nor the rest of the world embraced “neoliberal free trade” or “market fundamentalism” in recent decades. The average global tariff rate is still quite high at 9 percent, and many tariff schedules, particularly the US tariff schedule, are regressive. This means that the poor are disproportionately affected as tax burdens are higher on those in lower income brackets. However, many tariff schedules are also regressive in that cheap, mass-market goods tend to be taxed at a much higher rate. For example, in the United States, men’s leather dress shoes are subject to an 8.5 percent tariff whereas a pair of shoes valued at under $3 are subject to a 48 percent tariff. Therefore, policymakers would be remiss not to consider amending the tariff schedule at the very least by removing tariffs on these mass-market products that are mostly consumed by those in the lowest income brackets.

The costs of continued protectionism are disproportionately borne by families. Families in the lowest quintiles spend a greater share of their income on necessities, so lower prices provided by trade liberalization and import competition benefit those groups most. For example, in 2019, single-parent households devoted almost 5 percent of their annual spending to clothes, shoes, linens, and other miscellaneous houseware, totaling about $2,400 per family. However, the recent 2022 US infant formula crisis demonstrates the risks of protectionism. High tariffs and nontariff barriers prevented the necessary flexibility during a crisis. As domestic supplies dried up, imports could not fill the gap, and parents faced empty shelves and short supply for almost a year.

Further, as illustrated in Table 1, tariffs are highest on the baby products that parents need to buy most frequently—clothes and diapers—increasing the tax burden on parents. This regressive pattern is found throughout the US tariff schedule but hurts those in the lowest income brackets the most.

Moreover, as trade liberalization reduced or removed tariffs, many countries employed nontariff barriers—quotas, local content requirements, labeling regulations, assessment and conformity standards, etc.—to maintain some semblance of protectionism. The proliferation of nontariff barriers makes trading more complex. For example, paying a 17.5 percent tariff per kilogram of product is much simpler than a quota, which is often calculated based on some percentage of a previous year’s trade volume and may have time restrictions or be divided into units. A tariff is simpler still than an antidumping duty, which is essentially a tariff on goods allegedly sold at “less than fair value.” However, navigating the antidumping duty process is extremely complex, burdensome, and costly, and duties may be imposed retroactively. Indeed, a tariff is simpler to manage than complex regulatory schemes. Businesses and individuals must therefore spend unnecessary amounts of time navigating nontariff barriers or pay hefty attorneys’ fees to ensure compliance with the law.

These costs are not limited to incumbents but can hinder new entrants. These hindrances delay or even prevent future opportunities, growth, and price and choice variety. That is not to say that rules are unnecessary. Rules and enforcement mechanisms are vital for a well-functioning trading system; however, policymakers should be wary of the rise of nontariff barriers, particularly when lobbied for by special interests to protect specific industries or products.

Finally, services trade is in desperate need of liberalization. The Uruguay Round at the WTO is considered the largest trade negotiation to ever take place. However, efforts to liberalize services trade were lackluster. Since services are “invisible,” they are mostly subject to nontariff barriers (although new proposals such as digital services taxes increasingly threaten services). For example, domestic regulations such as certification requirements hinder financial services trade.

Regulatory barriers to services are complex to measure even more than measuring regulatory barriers to trade in goods. However, economists have estimated that the tariff equivalents (essentially turning a regulation into a tax rate) of barriers to services trade are high and significantly exceed tariff equivalents of barriers to trade in goods. For example, restrictions in transport are particularly important for trade performance. One study looks at time as a trade barrier by looking at transit and finds that each day in transit is equivalent to an ad valorem tariff of 0.6 percent to 2.1 percent.

Given that services are traded directly and indirectly through other services and goods, they are paramount to international trade. In fact, there is strong evidence that open services markets positively impact manufacturing productivity, particularly manufacturing sectors that intensely use services inputs. Overall, the relationship between goods trade and services is strongly interlinked, and therefore, restrictions on services trade—particularly barriers to transport, logistics, distribution, and computer services—negatively impact goods trade.

Policymakers continue to debate the benefits of trade liberalization, but the benefits are so dispersed that people often take them for granted. As Smith notes in The Wealth of Nations, “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer.” However, firms are also consumers, and the increasingly problematic barriers to both goods and services trade impact their ability to provide products that people desire to improve their lives.

There is no doubt that trade liberalization is key to raising living standards and to increasing peoples’ ability to consume more—more time, more goods, more services. Freer trade promotes channels for specialization through comparative advantage, increased business sales through access to new and larger markets, technological spillovers that spread innovation, and competition that helps increase variety to consumers and shift resources to more productive uses. These four channels expand trade flows and increase income. Centuries of evidence establish that trade improves peoples’ lives—providing us with not only more stuff to consume but with more free time to spend on family, friends, and the other things we most enjoy in life.