CNBC Explains

Here's why everyone is arguing about free trade

UPS CFO: We support free trade agreements
UPS CFO: We support free trade agreements
Free trade: good or bad?
Free trade: good or bad?
Pro: Free trade rhetoric needs moderation
Pro: Free trade rhetoric needs moderation

As U.S. presidential hopefuls continue to battle through the primary season, America's trade policies have risen to the top of the political discourse.

Although there has always been opposition to free trade measures, recent decades have seen political leadership in the U.S. tending to push agendas focused on removing trade barriers between the U.S. and other countries. Both sides of the issue argue that jobs and the economy are at stake, but they disagree on the question of results and how domestic economic success is really defined.

To start with, free trade is the practice of removing restrictions on imports and exports between countries. Such restrictions can include bans, quotas and taxes among other measures. Many governments have sought to sign bi- or multilateral free trade agreements constituting an agreement to mutually lower these barriers. The U.S. currently has 14 agreements with 20 countries, according to the Commerce Department.

Republicans have often argued for such measures as an extension of their free market economic goals, and Democratic presidents such as Bill Clinton and Barack Obama have joined in supporting major international trade deals. Opposition has tended to come from the pro-labor quarters of American liberalism, as unions worry their constituencies won't be able to compete against cheap foreign workers.

This has played out prominently in recent debates over a proposed Pacific trade agreement, known as the Trans-Pacific Partnership (TPP), which would include 11 countries besides the United States — Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

The argument against unfettered trade

Some liberal politicians, including U.S. Sen. Elizabeth Warren of Massachusetts and presidential hopeful U.S. Sen. Bernie Sanders, argue that trade agreements frequently do more harm than good for America because they favor the well-being of businesses over workers — both in America and in poorer trading partners.

"These treaties have forced American workers to compete against desperate and low-wage labor around the world. The result has been massive job losses in the United States and the shutting down of tens of thousands of factories," a statement on Sanders' Senate webpage said.

"These corporately backed trade agreements have significantly contributed to the race to the bottom, the collapse of the American middle class and increased wealth and income inequality," he adds.

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Those critical of recent trade agreements also argue that labor standards are not enforced in other countries, so the U.S. is effectively rewarding those businesses abusing their workers.

Those are arguments against free trade when it is practiced perfectly, with both countries firmly dedicated to maintaining low barriers to trade, but many argue these agreements are bad for the U.S. because its partners often seek to subvert the relationship.

Opponents of the Trans Pacific Partnership (TPP) trade agreement protest outside of the White House in Washington February 3, 2016.
Gary Cameron | Reuters

The most common charges of "cheating" on free trade involve a country's keeping its currency artificially low (so its products are cheaper, and therefore more competitive, in the U.S.), subsidizing its domestic firms so they have better margins, or even levying protective tariffs without regard for prior agreements.

If the U.S. leaves its markets open to unfairly cheap foreign products while its own goods are stymied abroad, then the job-killing concerns about free trade are all the more pressing,

"Trade deals are absolutely killing our country — the devaluations of their currencies by China and Japan and many, many other countries, and we don't do it because we don't play the game," GOP front-runner Donald Trump said at a Thursday night debate, reiterating his call to employ threats of retaliatory tariffs. "And the only way we're going to be able to do it is we're going to have to do taxes unless they behave."

The argument for free trade

Despite a wide array of arguments in the field, economists have presented a uniquely united front on the benefits of free trade policies.

One early summary of that position can be found in Adam Smith's "Wealth of Nations."

"It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy," Smith wrote. "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished, no more than that of the above-mentioned artificers; but only left to find out the way in which it can be employed with the greatest advantage."

In other words, the money that the American economy saves on cheaper foreign products can be put to use for other economics means — thereby increasing overall well-being. (A philosophical debate could then arise about the inequality of wealth potentially resulting from this capital reallocation.)

In a 2015 open letter to House and Senate leadership, 14 major economists (including former Federal Reserve Chairmen Ben Bernanke and Alan Greenspan) presented the case for free trade deals.

"Expanded trade through these agreements will contribute to higher incomes and stronger productivity growth over time in both the United States and other countries," they wrote. "U.S. businesses will enjoy improved access to overseas markets, while the greater variety of choices and lower prices trade brings will allow household budgets to go further to the benefit of American families."

Acknowledging that the benefits of these agreements are "unevenly distributed," and some individuals may be negatively affected, those economists argued that "the economywide benefits resulting from increased trade provide resources to make progress on important social goals, including helping those who are adversely affected."

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A 2003 survey of economists found that more than 86 percent opposed the notion of tariffs to protect American industries, and another from 2007 found more than 83 percent of economist respondents thought the U.S. should eliminate its remaining tariffs and other barriers to trade.

And beyond the economic argument, some politicians — including the Obama administration — highlight the geopolitical benefits of multilateral international trade agreements.

For the pending Trans-Pacific Partnership, the White House has argued that it wants the U.S. to help set the global rules for labor and environmental practices. It's important not just to further American standards, but also to establish the country as a power broker in the Asia-Pacific region, many argued.