Why free trade benefits everyone

Free trade is the system that results when there are no – or few – barriers to shipping goods from one place to another.  You can see that system within the United States. Oranges grow well in Florida. Potatoes grow well in Idaho.  Consumers in Idaho buy Florida oranges. They would be unhappy if they had to content themselves with Idaho oranges.  Consumers in all US states benefit from the massive free trade that goes on between our states.  Food and all products are cheaper and better because of this trade.  Millions of US jobs depend on the trade.  Thousands work in Florida growing oranges. Thousands work in Idaho growing potatoes.  If trade between all US states stopped, millions would be thrown out of work.

Everyone in America understands this. They get confused, however, when the principles are applied to foreign trade.  Let’s look at trade with China in 2007.  We exported $47 billion worth of products to China and imported $259.  Who won?  The US consumer won, and won big.

As a result of this trade, we received $212 Billion more of Chinese goods than they received from us. How did we pay for them?  We gave Chinese exporters credit – mainly in New York banks – for the $212 billion.  What did the Chinese merchants do with the money?  They invested it mainly in US treasury bonds.

Suppose the Chinese said that they wanted their money right now. How could they get it?  There are only two ways: They could buy more US products with the money, or they could sell their US treasury bonds to someone else – such as selling them to the Saudis to pay for Chinese oil imports.

If they sold the bonds to the Saudis, the money would still be here in the US, it would just have another owner.  If they bought more US products, this would be great for whoever sold them the products.

So, what is wrong with this imbalance in trade?  Nothing, really.

About Arthur Middleton Hughes

Arthur is currently Vice President of The Database Marketing Institute based in Fort Lauderdale, FL. Arthur is the author of 11 books, the latest of which is Strategic Database Marketing 4th Edition (McGraw-Hill 2012). A BA graduate of Princeton with an MPA in Economics and Public Affairs, Arthur taught economics at he University of Maryland for 32 years. He is an Austrian Economist.
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