Free trade's specialization is essential to wealth creation

By Alex Singleton | 10 May 2005

It is sometimes argued that America became rich without pursuing free trade, and that therefore poor countries ought not to follow free trade. This argument, however, shows a misunderstanding of both trade economics and of history.

Trade is beneficial because enables us to specialize in what we are best at. It makes us richer. While a subsistence farmer can only produce as much as his family will eat, through specialization we create a surplus. Trade makes us richer whether we do it just with our local community, with a number of communities, with our country, with a trade bloc or with the entire world. When Britain unilaterally followed free trade in the 19th Century, it was beneficial for the Brits even though there were far fewer people alive in the world than today. If only half of the world's countries existed, free trade would still be good. The point is that small zones of free trade create wealth - though bigger zones create even more wealth.

The GI's Daily Digest today featured a story from a US newspaper discussing a speech given by W. Michael Cox, a senior vice president of the Federal Reserve Bank in Dallas: "In the late 19th and early 20th centuries, with railroads leading the charge, people stopped producing most of what they needed in their immediate vicinity. At a cost of much disruption - "churning," he called it - America adjusted to the Railroad Age and the regional specializations that made possible, Cox said. Eventually, many cars began to be made in Detroit, Mich., because of this kind of specialization, he said."

The United States in effect it pursued bilateral free trade between all the States. The US free trade zone involve a huge land mass and a large number of people. It also brought in 20m immigrants. As Bruce Bartlett has said: "In effect, the United States was a giant, continental-size free-trade zone, from the Atlantic to the Pacific - the equivalent of the distance from Madrid to Moscow."