CBO on Trade

How Preferential Trade Agreements Affect the U.S. Economy

The Congressional Budget Office (CBO) released a new report in September titled “How Preferential Trade Agreements Affect the U.S. Economy.” The report is timely given rising hostility toward trade among voters and presidential candidates. The report states the following:

International trade yields several benefits for the U.S. economy. Trade increases competition between foreign and domestic producers. That increase in competition causes the least productive U.S. businesses and industries to shrink; it also enables the most productive businesses and industries in the United States to expand to take advantage of profitable new opportunities to sell abroad and obtain cost savings from greater economies of scale. As a result, trade encourages a more efficient allocation of resources in the economy and raises the average productivity of businesses and industries in the United States. Through that increase in productivity, trade can boost economic output and workers’ average real (inflation-adjusted) wage. In addition, U.S. consumers and businesses benefit because trade lowers prices for some goods and services and increases the variety of products available for purchase.

Not everyone benefits from trade expansion, however. Although increases in trade probably do not significantly affect total employment, trade can affect different workers in different ways. Workers in occupations, businesses, and industries that expand because of trade may make more money, whereas workers in occupations, businesses, and industries that shrink may make less money or experience longer-than-average unemployment. Such losses can be temporary or permanent. Nevertheless, economic theory and historical evidence suggest that the diffuse and long-term benefits of international trade have outweighed the concentrated short-term costs.1 That conclusion has consistently received strong support from the economics profession.

The rhetorical war on trade needs to stop.