The Benefits of Free Trade
History has shown that trade can be a powerful engine for economic growth. Despite this, the number of protectionist policies enacted around the world has increased.
This is due to a rising tendency to view trade as a competition, rather than a cooperative endeavor. For evidence, consider the ongoing China-U.S. trade war, which has impacted everything from electronics to soybeans.
The economic costs of this dispute are well-documented. In 2019, Moody’s Analytics found that the trade war had cost America 300,000 jobs. In 2020, the Federal Reserve concluded that U.S. firms had lost $1.7 trillion in market capitalization due to the introduction of new tariffs.
In this infographic from the Hinrich Foundation—the first of a three-part series on global trade—we explain the theory behind free trade and explore a powerful dataset that disproves the rationale for protectionist policies.
Why Do We Trade?
The main reason countries trade is to specialize their production. This is when a country’s population is able to focus on what it does best. For example, consider Germany’s expertise in automobiles, or America’s leadership in tech.
These countries use their comparative advantages to generate a greater surplus than if they produced all of their needs on their own. Through exchange, they can trade their surplus output (exports) for the output of others (imports).
Imports are what facilitate the benefits of trade. These are goods that people consume without having (Read more...)