Free Trade's Next Frontier

"New" Democrats have made a name for themselves as proponents of free trade. Their reign gave rise to NAFTA and the World Trade Organization, which, despite their flaws, are likely to raise the standard of living for both Americans and foreigners alike. Despite much progress on the issue of free trade between nations, however, the Democrats still can't seem to shake their opposition to free trade between the rich and the poor. This bifurcated stance on trade has recently reared its ugly head in the form of the Democratic Party's opposition to the Bush tax cut. The Democrats' latest machinations are both saddening and logically absurd; the best way to help the poor, whether they live in poor nations or rich nations, is to allow them to trade with the rich of all nations.

Amidst the rush of our workaday lives, many of us lack the time to ponder exactly what trade is and why it benefits us. Yet, the answer is short and sweet. Trade means voluntary exchange between human beings, where "exchange" is meant in the broadest possible sense. Economists are usually interested in the kind of exchange that involves goods, services, currency and financial assets. Nonetheless, the logic of these "economic" exchanges is identical to the logic of every kind of nonviolent social interaction.

For example, every time you have a conversation with a friend, you are exchanging conversational "services" for an important but immeasurable kind of mutual benefit. You expend some time and effort because you place more value on the joys of friendship than you place on the resultant time and energy lost. Similarly, in each and every case, those who exchange goods and services value the things they are receiving more than they value the things they are giving up. As a result, all parties are enriched as different kinds of property flow from those who value them less to those who value them more.

The trade surpluses and deficits that pop up from time to time in the financial press are often misinterpreted as demonstrating that one party or nation can benefit from trade at the expense of another. This is emphatically not the case. It is one of the soundest and oldest conclusions of economics that people prosper when they are free to improve their welfare through voluntary exchange. Rising real wages and technological advancement are just two of the most visible examples of the vast, mind-shattering benefits of this process. Unfortunately, the progressive tax rates that Democrats are now defending are depriving both the rich and the poor of countless opportunities to improve their well being through trade.

Consider this: A poor individual faces a whole universe of opportunities to improve his well being by trading his property (for instance, labor services or currency) for the goods, services or money claims of rich individuals. However, due to the high income taxes that are levied on the rich, many trades that would be beneficial from the standpoint of a poor individual are simply too costly from the standpoint of the rich. As a result, the transactions simply don't happen. In fact, the 40 percent tax rate levied on those with higher incomes means that a dollar used to purchase goods produced by high-income labor is only worth sixty cents to its high-income recipient. As a result, it costs a poor individual a dollar and sixty-seven cents to pay a rich individual for an hour's worth of labor.

Why is this anti-trade policy seen as social justice while the tariffs of Sudan and Nigeria are seen as backward and protectionist?

Over the last decade, China has seen the wisdom in substantially reducing tariffs on American goods, even though poor Americans are insanely rich by the standards of most Chinese. While the Chinese government is probably tempted to tax American goods, it seems to understand that high tariffs will hurt the relatively impoverished Chinese people more than it will help them. As so many developing nations have found, it is better to allow trade to flourish than to try to milk trade for all of the tax revenue it is worth. As a result, the Chinese people will be more likely to see their living standards rise to the levels of Hong Kong or Singapore.

Just as China is opening trade to the United States, the party of America's poor should move in the direction of freer trade with the rich of their own country. It is time for the Democratic Party to support the income tax rate reductions proposed by the Bush administration.

Stephen R. Piraino '02 is an economics concentrator in Leverett House.