Economists have looked at trade hundreds of different ways, but we keep coming to the conclusion that trade benefits everyone. Not always. It doesn't always help everyone. But for the most part trade is undeniably good. We find this in our study of wealth disparaties across countries and in our most mathematical economic models. Since the result of a study usually supports trade, let us look at the shortest and simplest demonstration available.
U.S. consumers pay twice as much for sugar than the rest of the world. It isn't because our sugar is of a higher quality, but because the U.S. restricts the amount of sugar imports into the U.S., thereby protecting U.S. sugar producers. There is no good reason for this. A few sugarcane producers in Florida take their large profits and donate part of it to U.S. politicians' campaigns, giving politicians little incentive to remove the trade barrier and allow consumers access to cheaper sugar.
What would happen if the trade barrier were removed. In the past the price of sugar in the U.S. was around $0.21 per lb, compared to $0.10 for the rest of the world.(S1) Let us assume that, after trade, the U.S. price dropped to $0.10 per lb.
Initial ImpactsAt first, U.S. sugar producers are harmed by $0.10 per pound, as they used to receive a price of $0.20 and now only receive $0.10. On the other hand, consumers benefit by $0.10, as they pay $0.10 per lb less for sugar. This makes it seem as if the benefits equal the costs of removing the trade barrier. Producers are harmed by $0.10 and consumers gain by $0.10. Overall, the U.S. is not made better off. We just distributed some money that belonged to U.S. sugar producers and gave it to consumers.
However, we cannot stop at these initial impacts. People respond to prices, and when we consider how they respond, we will find the benefits to trade outweight the costs.
Secondary ImpactsAs the price of sugar drops people buy more sugar. Before, when we said consumers gain by $0.20 per lb, that concerned the sugar they buy at both low and high prices. Americans consume about 70 lbs of cane sugar each year, and this trade barrier reduces their costs by $0.20*70 = $14.00. Now consumers take money that was spent on other things and spend it on sugar. Perhaps mothers are baking more cakes, and schools are hosting more parties to celebrate kids' birthdays. This new spending on sugar represents new benefits in addition to the $14.00. As a result, consumers benefit more than $0.10 per lb of sugar from free trade in sugar.
What do sugar producers do in the face of lower sugar prices? Initially they are harmed by $0.10 per lb of sugar because they cannot react instantaneously to free trade. Eventually, though, they find something else to do with their time and resources, something that reduces the harms from free trade. Perhaps they start growing organic sugar, or perhaps they decide it is a prudent time to retire. Regardless of how they react, they will choose an option that benefits them more than producing the same amount of sugar at the new, lower prices—if that wasn't the case they wouldn't choose that option in the first place. In the end, however they react, they will be harmed by less than $0.10 per lb of sugar.
All things consideredWhen free trade reduces the sugar price by $0.10 per lb, consumers benefit by more than $0.10 and producers are harmed by less than $0.10. Consequently, the benefits of trade outweigh the costs!(L1)
Who knows bestSome readers might observe that lower sugar prices could really harm consumers. Sugar is believed to lead to obesity and all the health problems associated with obesity, and the greater sugar consumption might cause so many health problems that people would be better off if sugar prices remained high. Indeed, research has found the sugar trade barrier to lead to lower caloric intake and lower obesity rates than would exist with free trade in sugar.(O1)
That is a paternalists' attitude, and economists try to avoid acting like a paternalist. For the most part, we assume people know what is best for them. Or, at least, we assume people know better than their government what is best for them. When economists give people the dignity of deciding for themselves, we find trade to provide more benefits than costs.
References(L1) Landsburg, Steven E. 2009. The Big Questions. Free Press: NY, NY. This general proof of trade's benefit is taken from this book.
(O1) Okrent, Abigail M. and Julian Alston. November, 2011. “The Effects of Farm Commodity and Retail Food Policies on Obesity and Economic Welfare in the United States.” American Journal of Agricultural Economics. 94(3):611-646.
(S1) Sweetener Users Association. Not dated. U.S. Sugar Prices: What's the Real Story? Article accessed November 5, 2012 at http://www.sweetenerusers.org/Sugar%20Price%20Paper.pdf.
