Most of us pay more for sugar because of import quotas. But if that amount is an extra $21 a year for an entire household–as the Dallas Fed has estimated–no one notices. However we do notice when foreign competition makes a factory close down.
Commenting on how free trade has a visible and invisible impact, Nobel laureate Milton Friedman said that it was easy to identify the factory that foreign competition eliminated but not so simple to see the savings enjoyed by millions of consumers.
Where are we going? To how the consumer benefits from free trade.
The Consumer Side of Free Trade
More Income
When free trade increases competition because of cheaper imports, lower income consumers especially benefit. The reason? Households that earn less spend a higher proportion of their income on imported goods. One 2014 NBER paper even concluded that households in the 10th percentile have a whopping real income loss of 70 percent when trade is cut off.
Below you can see that while all consumers benefit from trade, lower income percentiles fare batter:
More Variety
Free trade can take what the world makes to our doorstep. After the North American Free Trade Agreement (NAFTA) was implemented in 1994, Mexican and Canadian fruit growers began to have free access to U.S. markets. As a result, by 2012 the amount of fruit we were eating from Mexico and Canada had doubled while we consumed three times as many of their vegetables. Or, thinking of a pre-NAFTA world, please just imagine supermarkets with many fewer Mexican avocados, cantaloupes, grapes, mangoes, papayas, limes, strawberries and watermelon.
Here are the overall stats:
Higher Living Standards
Consumers have enjoyed better health, a more nutritious diet, more bedrooms and household appliances because of U.S. economic growth during the past century. The question though is whether free trade boosts GDP growth and our living standards.The most convincing paper I could find said yes but that we still do not have the rigorous data to prove it.
So instead, I turned to the Peterson Institute for their indirect confirmation of the correlation between trade and growth:
Our Bottom Line: Comparative Advantage
First explained by 19th century economist David Ricardo (1772-1823) as the principle of comparative advantage, when nations do what they do best, specialization boosts worldwide productivity.
So yes, comparative advantage makes sense when we look at the big picture because it enables one generation to make life better for its children. However, as many U.S. apparel and furniture workers would tell us, in the shorter term, everyone does not necessarily benefit.
