For Release: August 30, 2002

Contact: june.a.gates@clev.frb.org, 216/579-2048


Economic Gains of Free Trade Offset Its Costs

 

Earlier this year, the U.S. imposed tariffs on a variety of foreign steel products and certain lumber imports from Canada. Such attempts to "protect" U.S. industries are misguided, says Paul Gomme, an economic advisor at the Federal Reserve Bank of Cleveland.

Writing in the Bank's Economic Commentary, Gomme says that when barriers to free trade are erected, "countries typically lose overall." Tariffs to make imported goods more expensive or subsidies to make exported goods cheaper can spark countermeasures that are nearly as detrimental to the country imposing them as to the punished party. But, more importantly, says Paul Gomme, free trade generates substantial economic gains for all participating countries — gains that are greater than the costs. "International trade is not about dividing up a fixed pie, but rather making a bigger pie."

Gomme writes that when countries specialize in goods or services in which they are relatively more efficient, and trade with other countries for goods in which they are relatively more efficient, both sets of goods can be produced less expensively. The gains from trade are thus widespread, helping each trading partner by lowering the price of goods and possibly providing a greater variety of them. Tariffs, on the other hand, introduce a distortion that leads to losses to society as a whole, says Gomme.

That is not to say that free trade is without costs. Free trade can cause workers in affected industries to lose their jobs or have to train for new occupations. But the benefits from free trade can be redistributed in a way that can help those who have suffered from the reallocation of production, says Gomme. He notes that the federal government has programs, like Trade Adjustment Assistance, to help workers by extending their unemployment insurance benefits, paying for their retraining, and helping in their job searches.
"It is by no means clear that tariffs or subsidies save jobs," says Gomme. "And the obvious costs of opening up to free trade-the loss of specific jobs-must be weighed against the benefits of free trade-lower prices and greater varieties of products-that can be enjoyed by all the citizenry."

 

News releases and publications from the Federal Reserve Bank of Cleveland can be found at http://www.clevelandfed.org/ccca/pressrel.cfm.

 

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