The Panama Canal Project Facilitates World Trade.

The Fabric of Free Trade

by Elaine Schwartz    •    Oct 14, 2011    •    253 Views

The roof of the big-box store near your home could contain fabric that was made in Greensboro, N.C. Transported in rolls that are 12 feet wide and 5,000 yards long, this material is also made in South Korea.

Until now, U.S. textile firms could compete against a cheaper South Korean product through faster delivery and customer service. Explained by the NY Times, the U.S./South Korea free trade agreement that Congress just passed would eliminate any advantage U.S. firms had created because lower tariffs will mean even lower prices. 

Here in a past econlife post is more about KORUS (Korean-U.S. Free Trade Agreement). And here, the U.S. government presents the benefits of free trade and details our free trade pacts.

The Economic Lesson

Free trade always seems to take us to the visible and the invisible. We can easily identify the lost jobs. However, it is tougher to quantify the jobs created by exports and the money consumers and businesses save from cheaper imports.

Combining Adam Smith (1723-1790) and David Ricardo (1772-1823), we can see why most economists support free trade. In a factory, Adam Smith says specialize through division of labor. When each worker has a specific task, output multiplies. Increasing output requires bigger markets in order to sell what has been produced.  As mass production enables us to move from local markets to regional specialization to free world trade, as David Ricardo explained, the world benefits. Here is a great econtalk podcast that connects Smith, Ricardo and trade.

In a 2006 survey, 87.5% of all PH.D members of the American Economic Association said yes to free trade by agreeing that “the U.S. should eliminate remaining tariffs and other barriers to trade.”

An Economic Question: Would you support free trade if, by subsidizing its exports, a country made it impossible for U.S. firms to compete? Explain.

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