International Trade

            Trade is essential in the world today. Government tariffs and quotas disrupt trade so that the world consumers have to pay more for their goods. Policies such as NAFTA and FTAA are set up to protect consumers from these tariffs and quotas by forming a free-trade agreement. This means that the tariffs and quotas on goods will be eliminated. Economic theory says that NAFTA and FTAA will have a positive effect on GDP, job opportunities, and consumer prices. The benefits, according to economic theory, will be that they will raise GDP, countries will be able to get the gains from trade by following their comparative advantage, and their will be a huge increase in jobs available. The harmful effects of NAFTA and FTAA will be that the once protected industries will lose income, the jobs for people in the once protected industry will be cut, and manufacturing will decrease.

            The CBO report states the facts about NAFTA from when it was put into effect. This report shows that NAFTA did have a positive effect on GDP. However, it is stated that it is a very small increase. Also, using simulated projections, it is stated there probably would have been the same increase even if NAFTA hadn’t been put into effect. As for trade, NAFTA did increase exports to Mexico by about eight percent and increased imports by about six percent. Because of NAFTA, when Mexico had its peso crisis they did not put barriers to trade against U.S and Canada as it did against other countries, keeping prices on goods coming from Mexico low. As for the free-trade agreement between U.S and Canada, Daniel Trefler has an article about the effects of this agreement. He states that in the industries in Canada that used to be protected by tariffs and quotas, employment fell by twelve percent and manufacturing as a whole decreased by five percent. However, he found that these loses were only temporary. This is because the industries that were getting hurt by tariffs increased there productivity and that opened up new job opportunities for everyone. Sheltered business’ productivity picked up fifteen percent after tariffs were lifted. After the initial blow to jobs, annual earnings in Canada increased by three percent. So, the new job opportunities far outweigh the loses at first. In his article he states that free-trade agreements have a much bigger on less developed countries, not for highly developed countries such as the United States or Canada.

            After examining the evidence, I have found the economic theory about free-trade agreements is both right and wrong. NAFTA and FTAA do raise national GDP, but only by a small amount. Also, it increases trade among countries and increases jobs. The harmful effects are justified too by the evidence. Manufacturers that used to be protected by tariffs and quotas were hurt tremendously by the free-trade agreements. Productivity dropped and there were a lot of lost jobs. As a result of the free-trade agreements, the economy was made better off as a whole. The loss of jobs was off-set by the new ones created and productivity as a whole increased substantially. Based on the evidence given, I think that the U.S should join the Free Trade Area of the Americas. The main reason behind it is because it will lower prices for consumers. Without tariffs and quotas, prices will drop substantially. Also, productivity will increase because there are more businesses that weren’t protected by tariffs then ones that were. Another reason to join is because GDP will rise. Now, countries can follow their comparative advantage and get the gains from trade which will lead to a higher GDP. Overall I believe that the U.S will gain by joining the FTAA.