Should the U.S. Restrict Free Trade?

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One of the most important sources of economic growth is the reduction of firms' real costs through increases in the productivity of labor and capital used to produce goods. Free trade can be a major catalyst for real cost reduction. Consider, for example, American investment in a manufacturing operation in China. Rather than further lowering China 's already-low manufacturing costs, the investment allows the American firm to take advantage of those low costs.

This increase in investment due to trade liberalization helps China 's growth rate by contributing capital. The benefit for the American economy is more subtle. The deepest principle underlying the economics of international trade is that a country pays for its imports with its exports. So when production is shifted from the United States to China, the same U.S. consumption of the product can be obtained at a lower real cost to the economy. Instead of using $10 million worth of resources to produce one million units at a $10 cost per unit at home, the American economy can now obtain the same million units from China at $5 per unit, cutting the costs in half. This frees up the other $5 million in the United States to be used for producing other goods.