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2002 Annual Report—Federal Reserve Bank of DallasThe Fruits of Free TradeProsperity or Poison?The 1930s taught a painful lesson—one that for the most part has been heeded. Despite lapses into protectionism, freer trade has been a theme of both Democratic and Republican administrations since Truman. Under American leadership, a half-dozen rounds of global negotiations stripped away trade barriers and, in 1995, created the World Trade Organization, a 144-nation forum for opening markets. We've enlarged our market by entering into an economic alliance with Canada and Mexico under the nine-year-old North American Free Trade Agreement. Policymakers are opening free trade talks with five Central American nations in an effort to forge a hemispheric free trade zone stretching from Alaska to Tierra del Fuego. Consumers aren't getting the benefits of trade at the expense of the overall economy. Between 1980 and 2001, world trade more than tripled, to $12.5 trillion. At the same time, the U.S. economy doubled and the Dow Jones Industrial Average rose ninefold, even after taking into account the past three years' declines. (See Exhibit 14.) Was our expanding trade bad for workers? Hardly. The United States has added 35 million jobs in the past two decades. Despite a sluggish economy, unemployment is still lower than it was in 1980. Our wages buy more. The past two decades disprove the idea that trade saps America's economy. The lesson of the marketplace hasn't been lost on Europe. By fits and starts, the continent has moved over the past five decades to create a single market, reducing barriers to the movement of goods, money and people. At the start of 2002, a dozen European nations embraced a single currency. Last December, the European Union invited 10 additional countries to join by 2004, laying the foundation for what could become a 25-nation market of 475 million consumers. Existing EU nations are well-off. The countries joining the enlarged market realize they'll face new competition, but they're eager to open their economies so they can heed the Oracle's wisdom:
Like Estonians, Czechs and other potential EU members, Americans have a large stake in a free trade future—internationally, of course, but at home as well. If we open markets, specialization and trade will work their magic for American consumers, just as they have for most of our history. American consumers will get better goods and services and lower prices. American companies will thrive in the crucible of global competition. Our economy will flourish and innovate. Trade leads to prosperity. Just look at the past six decades of relatively open trade. Protectionism leads to stagnation and decline. It's a lesson learned decades ago from the Great Depression and more recently from the economic development gap between open West Germany and closed East Germany. Despite the World Trade Organization, NAFTA and other advances, trade policy continues to be a contest between free trade advocates and protectionist forces, between consumers' broad interest in abundance and producers' narrow interest in scarcity. The producers will win if Main Street Americans don't comprehend their stake in open trade and aren't vigilant against protectionist poison.
It's our choice. —W. Michael Cox and Richard Alm Acknowledgments"The Fruits of Free Trade" was written by W. Michael Cox and Richard Alm. The essay is based on research conducted by Cox, senior vice president and chief economist, Federal Reserve Bank of Dallas. Julia Kedrova and Steve Brown provided important research assistance. Also helping with research was Charlene Howell. Exhibit Notes and Data SourcesAll dollar amounts in text and exhibits are in 2002 U.S. dollars except where noted. Exhibit 1. Exhibit 2. Exhibit 3. Exhibit 4. Exhibit 5. Exhibit 6. Exhibit 7. Exhibit 8. Exhibit 9. Exhibit 10. Exhibit 11. Exhibit 12. Exhibit 13. Exhibit 14. Photo CreditsAl Crespo, p. 4 upper. |
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The passage of the General Agreement on Tariffs and Trade, the North American Free Trade Agreement and GATT's successor, the World Trade Organization, ushered in an era of freer trade that's been applauded by stock markets worldwide. Smoot–Hawley taught us trade's lesson the hard way—protect and destroy. Today, we're relearning it the right way—compete and prosper. 
Do we harvest the fruits of free trade or suffer the spoils of special interests?
