If asked, most Americans would say they favor a government policy that increases their own prosperity as well as helping those who live in other countries, especially poorer countries. There is such a policy, but many Americans oppose it because they don't understand basic economics. The policy is free international trade. Through international trade, Americans are free to exchange goods and services with people in other countries. Free international trade increases wages in all countries, especially low wage countries, by creating more productive jobs everywhere. The advantages of international trade are based on the theory of comparative advantage, which is one of the best-established and widely accepted (by economists) theories in economics.
This lesson will help you understand that international trade does not destroy job opportunities in America, as some people fear. As a result, you will understand that voluntary exchange between countries is a good policy because it creates more productive jobs that pay higher wages by motivating workers to specialize in producing the goods in which they have a comparative advantage. It is true that international trade will eliminate some jobs, which harms some workers, at least in the short-run. But even those workers who are harmed because they lose their jobs and have to find new ones would be worse off if everyone's job was protected against the competition of international trade.
In this lesson your task is to gather information on why trade, or voluntary exchange, with people in other countries creates more productive jobs everywhere. You will also become familiar with the concept of comparative advantage and learn why it's so important in increasing productivity. Finally, you and a group of classmates will debate opposing views on an international trade issue.
Read this lesson on international trade. It is available as a handout should you want to read the lesson material in advance.
QUESTION FOR DEBATE: Can the U.S. government improve job opportunities for Americans by passing legislation that restricts Brazilian car imports, or subsidizes domestic car production?
You will be divided into two groups and explain your opposing views. Group 1 represents the American car manufacturers who are losing sales to Brazil. These American manufacturers will go out of business without restrictions on car imports, and they are lobbying their U.S. government representatives for more trade restrictions against Brazil. Group 2 represents American computer manufacturers who want to sell more computers and hire more workers; they are lobbying their U.S. government representatives for less trade restrictions with Brazil.
Assign one person from your group to keep a written record of your groups discussion over International Trade, and as a group present your views to the class.
Americans realize enormous benefits from voluntary exchange, or trade with other countries; and the fewer restrictions on that trade, the greater the benefits. Trade is even better for small countries that, unlike America, don’t have a large internal market and a diverse and abundant resource base. They can produce efficiently only by specializing in a very few goods, and that is impossible without trade with other countries. So we can greatly help people in small, and often poor, countries with international trade, while improving our own well being at the same time.
International trade directs workers into jobs in which they have a comparative advantage—in which they are most productive. Because greater productivity means higher pay, the result of international trade is higher pay for American workers, not lower pay, which many fear.
Answer the following questions and turn them in when you have finished.
If a country imposes a barrier (such as tariffs) against imports what is likely to happen to the price and amount of imported goods?
Is anyone made worse off as a result of tariffs on imports?
What are some arguments in favor of imposing trade tariffs?
- Why are industries (a relatively small group of people compared to the group of consumers affected by trade barriers) so effective in lobbying for trade restrictions?
Extra discussion question: If the price of the imported good rises when a barrier (such as a tariff) is erected, what is likely to happen to the output of competing domestic firms, or of domestic firms that produce goods which can be substituted for the imports?
For additional reading, see The Fruits of Free Trade: 2002 Annual Report Federal Reserve Bank of Dallas (click on The Fruits of Free Trade, a pdf report).