The United States is a party to many free trade agreements around the world. It is not surprising that voters on the right and left are dissatisfied with American trade policy – and they have every right to be. For years, the United States has had much larger trade deficits than other industrialized countries, which has led to an increase in trade-related job losses. While increased exports tend to support domestic employment, increased imports cost jobs and reduce domestic production. As a result, the size and growth of trade deficits are strongly correlated with trade-related job losses. This view became popular for the first time in 1817 by the economist David Ricardo in his book On the Principles of Political Economy and Taxation. He argued that free trade broadens diversity and reduces the prices of goods available in a nation, while making a better exploit of its own resources, knowledge and specialized skills. Not so long ago, it did not seem that globalization would be a major theme of the presidential campaign. But now Donald Trump and Bernie Sanders, right and left, have won supporters of their attacks on free trade agreements, which they say have cost working-class Americans good paid jobs. Proponents of agreements such as Nafta promised that they would lead to broader economic development that would more than offset American jobs relocated abroad. But do these pacts help or harm average Americans? Governments with free trade policies or agreements do not necessarily abandon import and export controls or eliminate all protectionist policies.
In modern international trade, few free trade agreements lead to completely free trade. A free trade agreement is a pact between two or more nations to reduce barriers to trade between imports and exports. Under a free trade policy, goods and services can be bought and sold across international borders without government tariffs, quotas, subsidies or bans. There are currently a number of free trade agreements in the United States. These include multi-nation agreements such as the North American Free Trade Agreement (NAFTA), which includes the United States, Canada and Mexico, and the Central American Free Trade Agreement (CAFTA), which includes most Central American nations. There are also separate trade agreements with nations, from Australia to Peru. Unsurprisingly, financial markets see the other side of the coin. Free trade is an opportunity to open up another part of the world to local producers. The United States is a member of the World Trade Organization (WTO) and the Marrakesh Agreement establishing the World Trade Organization (WTO) contains rules for trade among the 154 members of the WTO.