The Theory and Practice of Free Trade - Economic Review, Fourth Quarter 1993 - Dallas Fed

S ince the end of World War II the U.S. share of world income has fallen, while U.S. trade with the rest of the world has increased. Many believe that these two trends are not coincidental. U.S. firms that once dominated automobile, steel, and consumer electronics industries face stiff competition from Japan and increasing competition from South Korea and other industrializing countries. In response to the changing pattern of world trade, the automobile, steel, semiconductor, and other industries have requested and received increased trade protection in the form of voluntary export restraints, countervailing duties, and antidumping lawsuits. The trend toward trade liberalization, beginning with the Generalized Agreement on Tariffs and Trade (GATT) in 1947, appears to be changing as the United States and other countries escalate their use of protection to limit imports— especially imports from developing countries. The perception that liberalized trade contributes to unemployment has been a primary cause of the rise in protection. Indeed, much of the debate surrounding the North American Free Trade Agreement (NAFTA) has focused on the question of whether free trade with Mexico will take jobs away from the United States. Does free trade cause unemployment, or does it enhance economic growth? In this article, we examine the case for free trade in theory and in the light of recent experience. Fortunately, there is now a good deal of data on trade and protection from numerous countries to use in assessing the role of trade in economic performance. Despite some theoretical exceptions to arguments for free trade, the data suggest that free trade has worked best in practice. Comparative advantage and international trade