Free Trade is Bad for the U.S. Economy?

If you think free trade is bad for the economy, you must either think taxes on imports are good for the economy, or taxes on imports are even worse for the economy than having free trade, which is bad. If you take position #1, you either believe that 4000% taxes (in effect, no trade at all) are better than no taxes, or that there is some tax rate on trade, between 0 and 4000, that is “best.” Let’s examine each of these cases for a simple product, bananas.

No bananas are grown in the United States, because the climate isn’t right; they are grown in Ecuador and other countries, and then shipped here. Let’s say with free trade, everyone has to pay $1 for a banana from Ecuador, and there are 110 bananas sold every year. The government introduces a tax on trade, say 20 cents per banana, which raises the cost of bananas to, say, $1.10 (Half the tax is paid by the customer, and half eats into the banana farmer’s profits. In real life, the new price would be anywhere between $1 and $1.20, depending on how much consumers are still willing to buy bananas). In response, customers buy only 100 bananas from Ecuador this year. Wawa and Safeway and Wegman’s buy less bananas, because their customers are buying less bananas. This means they can’t make as much money, because they make a small margin on every sale. Not to mention, Jamba Juice charges more for smoothies, because bananas are more expensive. Ecuadorean farmers are also worse off – they can only charge 90 cents per banana as opposed to 1 dollar per banana, and in addition they’re selling fewer bananas – 100 vs. 110. To summarize, the consumer is worse off – he/she has to pay $1.10 as opposed to $1 for a banana. Grocery stores, food trucks, and smoothie makers are worse off – they don’t make as much money from selling bananas as they did before. And Ecuadorean farmers are worse off – they don’t sell as many bananas as before and they are forced to sell them for less money.

At this point, a Smart Joe decides to grow bananas in Florida. Because he has to pay each of his workers in Tampa more than the farmers in Quito, and because he needs a lot more fertilizer and irrigation to grow his bananas than the Ecuadoreans, the cheapest he can produce bananas for is $2. Seeing as he can only sell them for $1, Smart Joe isn’t doing very well; in fact, he’ll be out of business by the end of the week. But he gets a great idea. He rounds up three friends who pool their money to pay a lobbyist to turn Congress against Ecuadorean bananas, arguing that the Ecuadorians are getting rich at the expense of Americans who pay exorbitant amounts for their bananas, and that because the Ecuadoreans are doing so well selling bananas, they’re taking jobs away from his farm. Smart Joe goes on the floor of Congress, talking about how hard his life is as a farmer and how he’ll be out of business by the end of the week. Hillary Clinton, with her eye on the next nomination, gets up and talks about protecting American jobs. Congress passes a law to tax banana imports $400 per banana. Out of desperation, Ecuadorean farmers decide to give away their product for free. Even so, no one in America is willing to pay the $400 tax for bananas, the farmers are forced out of business by the end of the week, and there’s a severe shortage of bananas in the U.S. Jamba Juice, realizing bananas are an integral part of its smoothies, and wanting to make its supplies last a while, responds by charging $100 for every smoothie it makes. Let’s look at the results – the consumer is worse off, having to pay 100 dollars per banana and eventually not being able to buy bananas. Jamba Juice is worse off – it can only make smoothies if it has bananas, and its sales plummet, which hurts every person who owns shares of Jamba Juice, not to mention people who enjoy its smoothies. And Ecuadorean farmers are worse off – they’re all out of business and out of jobs, contributing to unemployment in Ecuador and depriving them of the ability to sell their signature export.

The winners are Smart Joe and his three friends, who quickly buy as much land as he can lay hands on and starts planting bananas, and he has enough trees to sell 20 bananas this year, the entire supply for the United States, which allows him to charge $10 per banana, and receive $8 in profit on every banana sale.

The American Revolution was originally a revolt against high taxes on imports and exports. I just don’t see what people are pointing to when they say free trade is bad for the economy. Maybe they think that we should have no trade, or maybe they think the prices they pay for iPods, or bananas, or gasoline, or sneakers or polo shirts, aren’t high enough as they are.

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4 thoughts on “Free Trade is Bad for the U.S. Economy?

  1. Pingback: Free Trade is Bad for the U.S. Economy? « frezarist’s Weblog

  2. Glen

    But if the government collects a revenue tariff on bananas, it can lower income taxes, placing more money in people’s pockets. Wouldn’t it be a wash?

    It seems that you’re failing to take into account that money collected from revenue tariffs–is not burned, it goes to the federal treasury, allowing for taxes to be reduced in other places. My view is that while a revenue tariff is indeed unpleasant, so are income taxes, property taxes, and sales taxes. I don’t see why the revenue tariff is much worse than the other three. If you accept the premise that the government needs $$$ to run, then we can discuss which combination of the four results in the lowest overall tax bill. (If I recall correctly, in the 19th century revenue tariffs did such an efficient job we didn’t even need an income tax.)

    There’s a difference between *protective* tariffs (where the goal is to halt the purchase of the foreign product) and *revenue* tariffs (where the goal is to fund government like it did 19th century)–the latter requires tariffs to be reasonable, so people buy lots of foreign products–“You need imports to pay the taxes.”

    Also, the high cost of products you mention in your closing sentence, I think that’s because of our incredible trade deficits–it is dropping the value of our dollar. Also, dropping the value of the dollar is our federal budget deficits because not many people are working and paying taxes anymore, plus they are requiring lots of government handouts because there is not much manufacturing left to hire them.

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  3. Don

    The problem is that say China, Japan, Micronesia ect ,ect, have their currencies pegged lower than the U.S. dollar they can invade our market and we cant compete in theirs. The U.S. doesnt have a level playing field. Free trade has hurt America, much like it wiped out Great Britain. The lowest Price isnt always whats best for American consumers. Look at the blue collar jobs America has lost. No American company can compete on a playing field that isnt level. Thats what the free traders havent told us. If I was ever elected President of the U.S. I would walk out of the W.T.O. And tarriff every import into the United States.. Including parts and manufacturing from U.S. companies building them overseas. I know that the world would respond inkind and we would have a few years of more economic hurt, but in the long run it would help the Ameican middle class, and since America is the worlds biggest market screw them, the power cards are in our hands
    America, before free trade, used to produce all but 4% of what this country needed here in America- paying Americans good wages to do it, who in turn spent their money on other American products, after 30 years of free trade we now produce only 60% of our own stuff. The biggest wealth redistribution is gioing right under our noses and we think its a good thing. America if you want to become a third rate power like Great Britain did in the early 20th century, then stay tally ho for free trade.

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