How Free Trade and Trade Liberalization Help Out the Poor Domestically and Globally

Last month, the White House released its annual Economic Report of the President. In the report, there was a chapter on International Trade (Ch. 5, p. 173). One of the interesting admissions in the report is how trade with China has improved the purchasing power, especially of lower-income Americans (p. 203). As a matter of fact, the report calculated that 68 percent of those benefits went to low-income Americans. This finding is echoed in a report from the Federal Reserve Bank of Minneapolis that was released just last week (Horwich, 2024).

The author of the Minneapolis Fed report, Jeff Horwich, says that much of the research of international trade on consumer welfare looks at the effects on a national level. Rarely is it done to see the effects of a certain demographic, such as the poor. Even so, the fact that international trade helps out low-income households both in the United States and globally does not surprise me in the least. Why is this the case? How does international trade help out the poor specifically? 

Improved quality of life with greater imports. As this article from the Houston Chrolinc brings up, it can be cheaper for a country to import goods or services than it can be to produce them. To quote the Australian Department of Foreign Affairs and Trade (DFAT), "trade expands the markets local producers can access, allowing them to produce at a more efficient scale to keep down costs." This ensures a constant flow of more goods, which can improve the quality of life and give options they otherwise would not have. 

Lower prices lead to greater purchasing power. To quote the International Monetary Fund (IMF) from 2001: "Trade liberalization helps the poor in the same way it helps most others, by lowering prices of imports and keeping prices of substitutes for imported goods low, thus increasing people's real incomes...An open trade regime also permits imports of technologies and processes that can help the poor." 

I was first criticizing Trump's obsession with tariffs in March 2016, which was before he was president. I pointed out that tariffs decreased economic welfare. Conversely, countries with fewer trade barriers had less poverty. To quote DFAT, "Removing tariffs on imports gives consumers access to cheaper products, increasing their purchasing power and living standards, and gives producers access to cheaper inputs, boosting their competitiveness by reducing their production costs."

Free trade improves innovation and efficiency. The Mercatus Center mentions a good point in its brief on the benefits of free trade: "Over time, free trade works with other market processes to shift workers and resources to more productive uses, allowing more efficient industries to thrive. The results are higher wages, investment in such things as infrastructure, and a more dynamic economy that continues to create new jobs and opportunities." Those wage increases help out the poor, as well. 

Postscript. As a 2015 report from the World Trade Organization illustrates, free trade creates new job opportunities for the poor, raises the real wages of unskilled labor, lowers prices of goods consumed by the poor (which means greater purchasing power), and improves access to external markets for the goods that the poor consume. All of these phenomenon aggregately improve the quality of life for the poor. 

Freer trade is vital for the poor because, as the World Economic Forum states, "Open trade is particularly beneficial to the poor, because it reduces the cost of what they buy and raises the price of what they sell." Farmers and manufacturers especially can reach a wider market when there is open trade (ibid.). As the World Bank has brought up, free trade has lifted over a billion people of poverty. The Heritage Foundation, amongst many others, has shown how greater economic freedom creates greater economic growth while lowering poverty (see below). This is a truth I detailed when showing how trade liberalization does a much better job than foreign aid at alleviating poverty. 

With the overwhelming evidence in favor of greater international trade, it does beg a question for the upcoming presidential elections. If the relatively lower tariffs from Trump's previous administration made items more expensive and made Americans poorer, what will Trump's proposed universal 10 percent tariff or 60 percent tariff on China will do to the poor both in the United States and abroad? This November's election is between a Republican whose tariffs will make Americans poorer and Bidenomics that has increased inflation in a way that has made life more expensive for the poor. And let's not forget that Biden has maintained many of Trump's tariffs. While it is clear that free trade helps out those in low-income households, it is also clear that we are in an age of protectionism, regardless of who gets elected this November. It is the everyday citizen, especially the poorer ones, that suffer because politicians on both sides of the political aisle ignore the fundamentals about the benefits of free trade.