The Fruits Of Free Trade Essay

A lot of produce Americans buy comes from Mexico, and it's the result of the North American Free Trade Agreement — NAFTA — which took effect 20 years ago this month. Amy Sussman/AP hide caption

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Amy Sussman/AP

A lot of produce Americans buy comes from Mexico, and it's the result of the North American Free Trade Agreement — NAFTA — which took effect 20 years ago this month.

Amy Sussman/AP

Walk through the produce section of your supermarket and you'll see things you'd never have seen years ago — like fresh raspberries or green beans in the dead of winter.

Much of that produce comes from Mexico, and it's the result of the North American Free Trade Agreement — NAFTA — which took effect 20 years ago this month.

In the years since, NAFTA radically changed the way we get our fruits and vegetables. For starters, the volume of produce from Mexico to the U.S. has tripled since 1994.

There are several reasons why, explains Jaime Chamberlain, president of J-C Distributing Inc., a large produce importer and distributorship in Nogales, Ariz.

First, NAFTA eliminated tariffs. Cantaloupes, for instance, used to have a 35 percent tax on them when they crossed the border. No tariffs meant lower prices.

Second, NAFTA encouraged investment. So companies like Chamberlain's have invested hundreds of millions of dollars in Mexican farms. That has helped create year-round supply and demand for U.S. and Canadian customers.

"Twenty years ago, in tomato items alone, you did not have 365-day distribution from Mexico to the United States," he says. "And now ... every single day of the year, you will find Mexican tomatoes in the U.S. market."

Availability is what seems to matter to shoppers like Garrett Larriba, whom I encountered at a Tucson, Ariz., Safeway.

I asked him if he knows where his produce comes from.

"No, no I don't," he said.

Does he care? "No, not really."

But a number of other people I spoke with at the same Tucson Safeway do care — including Larribas' companion, Christine Peterson.

"I try to eat local as frequently as possible," she told me, "and I do care where it comes from."

Peterson said she wants to support local farmers — and justified or not, she worries about food safety.

Of course, for consumers fully committed to buying local, that also means buying only what's in season.

"I don't have much fruit in the winter — bluntly," says Joan Gussow, a nutritionist and author who has been called the "matriarch of the eat-locally-think-globally food movement."

Gussow eats mostly dried fruit in winter and whatever vegetables grow near her home in New York's Hudson Valley. By selling fruits and vegetables bred to travel long distances, she says, NAFTA has helped train people to value convenience over flavor.

"It's meant that people don't know anything about where their food comes from, and they don't know anything about seasons," Gussow says. "And so they really have settled — as they have with tomatoes — for something that is really like a giant orange golf ball."

Jaime Chamberlain disagrees. He says the produce industry has made great strides in packaging and shipping more flavorful fruits and vegetables from Mexico. Don't knock availability — celebrate it, he says.

"We should be teaching our children that nowadays, you're able to enjoy strawberries even though you're in the dead of winter in January," he says.

Enjoy it or not, that's what Americans got from NAFTA. As for getting your children to eat more fruits and vegetables — that's another issue altogether.

The political circus of the 2016 presidential election has revived and reinvigorated popular belief in age-old protectionist fallacies. Currently both Donald Trump and Bernie Sanders, are both in favor of expanding protectionist trade policy, with both of them arguing that free trade “destroys” jobs and hurts domestic workers and producers by exposing them to foreign competition. Both candidates espouse an utterly misguided zero-sum view of economics, in which one side to an exchange wins only when the other side loses. Both men are, of course, completely wrong.

Free Trade Does Not Destroy Jobs

It is true that greater competition between domestic and foreign workers can lead to a decline in wage rates and possibly unemployment in some sectors of the economy. But this is only a short-term effect. Free competition between foreign and domestic producers also naturally leads to lower prices for the goods and services which can now be freely imported from abroad. So, while nominal wage rates are pushed down in some sectors, real wage rates rise overall for everyone in the economy because of the decline in prices.

Thanks to free trade consumers spend less money on certain goods and services and this allows them to spend more money on others, which leads to rising demand and thus profits in the sectors providing the latter, and consequently leads also to more investment by entrepreneurs. This higher rate of investment naturally leads to the creation of more jobs in these sectors and thus offsets any original rise in unemployment that might have occurred.

Alternatively, the consumers may choose to save the extra disposable income that was freed up by the decline in prices. This rise in the savings rate will lead to a decline in interest rates, which makes profitable certain long-term capital-intensive projects which were not profitable beforehand. Seizing the opportunity presented by this increase in savings, entrepreneurs will start borrowing and investing in those long-term capital intensive projects, which on its own already creates more jobs, but it also leads to a rise in demand for capital goods, which raises profits in the capital goods industries and consequently leads to more investment and job openings in those sectors.

Free Trade Is Win-Win

Free trade not only doesn’t “destroy” jobs, but it also promotes specialization between nations, which improves the efficiency and productivity of workers, and leads to a rise in living standards for all. Trade is not some kind of a zero-sum game in which if one side wins, the other has to lose.

When two countries such as the United States and China, for example, trade freely with one another, their citizens are incentivized to specialize in those lines of production in which they have a comparative advantage. Due to the difference in factors of production endowments it is best for different countries to specialize in producing those types of goods and services which they can produce most efficiently in comparative terms. A higher level of specialization, through the effect of economies of scale, makes production more cost-efficient.

By specializing in a certain line of production and then exchanging the goods and services produced for those that others are specialized in producing, the people of a given country can substantially raise their living standards because the gains in productivity are naturally followed by an increasing supply of goods and services and thus rising real incomes. This way free trade allows for the flourishing of what can be called an “international” division of labor. Just like a greater degree of division of labor can lead to big gains in productivity and thus real incomes on an intra-national (i.e., internal for a given country) level it can also do so on an international level.

Protectionism Makes You Poor

When international trade is restricted, for example, by protectionist legislation which places tariffs on certain imports, this process of specialization is hindered and thus the gains in productive efficiency are diminished. By artificially raising the price of imports, tariffs allow otherwise uncompetitive and inefficient domestic businesses to remain in operation. Consumers are forced to pay higher prices for the goods the importation of which is penalized by tariffs, and this effectively constitutes a redistribution of resources from the consumers to the domestic producers.

More importantly, protectionism hinders the process of specialization described in the previous section and thus prevents living standards from rising in the long-term, or worse — it can even lead to their decline. By propping up the profits of comparatively inefficient domestic producers and keeping in business, tariffs prevent the labor shift from those inefficient sectors, to more comparatively efficient ones. Consequently, because this prevents a higher degree of specialization from taking place, or even reverses it, the benefits that specialization leads to cannot be obtained. Productivity does not increase (or at least not to the same degree as it could) and thus real incomes do not rise.

Contrary to the popular political rhetoric nowadays, free trade does not “destroy jobs.” It can only lead to a shift of resources (labor, capital, and other factors) from one comparatively inefficient sector or group of sectors in the domestic economy to another more comparatively efficient one. This process of specialization in the comparatively advantageous lines of production not only does not destroy jobs, but it also enables big gains in efficiency and productivity to take place, which leads to a rise in real incomes. This is how, far from somehow hurting the domestic workers, free trade actually does the opposite — it makes them richer. It is, in fact, protectionism which makes us all poorer, workers included, by artificially propping up inefficient businesses, leading to a misallocation of resources and a decline in standards of living for us all.

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Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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Martin Abegglen via Flickr https://www.flickr.com/photos/twicepix/

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