Oct 22 2008

McCain vs. Obama on the costs and benefits of free trade

Published by at 9:42 pm under Barriers to trade,Free Trade,Protection,Trade

YouTube – Obama / McCain 3rd Debate, Part 10 – Free Trade

Below is a clip from the third and final presidential debate, in which the candidates discuss the benefits of free trade.

Both candidates support the principles of free trade, one more enthusiastically and with fewer conditions than the other. Only Obama speaks of “fair trade”, which he seems to think means trade that does not encourage the violation of human rights abroad.

Notice how towards the end of the discussion of free trade, McCain attempts to wrap up the conversation when he claims:

“I don’t think there is any doubt that Senator Obama wants to restrict trade and to raise taxes; and the last president of the United States who tried that was Herbert Hoover, and we went from a deep recession into a depression…”

Hoover, of course, was the US president at the time of the Great Depression, when the government’s response to a financial crisis on Wall Street worsened the economic meltdown, throwing the US into its deepest and longest slowdown in history.

Discussion questions:

  1. How would a free trade agreement with Columbia help “create jobs in America”? What are the “billion dollars or more that (America) has already paid” through its trade with Columbia?
  2. What is the source of Obama’s lack of enthusiasm for the Columbia Free Trade Agreement? Do you agree with his position on the importance of limiting free trade in order to stand for human rights? Why or why not? Is his view a protectionist one?
  3. One of Obama’s highest priorities is to hold auto makers responsible for improving the fuel efficiency of American-made automobiles. How does he plan to create “five million new jobs all across America, including in the heartland”? Does Obama’s plan to invest in a clean energy economy sounds remotely protectionist? Why or why not?


About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

10 responses so far

10 Responses to “McCain vs. Obama on the costs and benefits of free trade”

  1. Jonathan R.on 24 Oct 2008 at 8:53 pm

    One of Obama’s highest priorities is to hold auto makers responsible for improving the fuel efficiency of American-made automobiles. How does he plan to create “five million new jobs all across America, including in the heartland”? Does Obama’s plan to invest in a clean energy economy sounds remotely protectionist? Why or why not?

    The idea may come across sounding protectionist – Obama wants to invest in clean energy within the US in order to relieve dependence on foreign oil and energy; however, I find that in reality, it is not protectionist in that it does not limit consumers to using clean energy specifically from America, it is merely expanding the availability and types of clean energy produced in America. Obama wants to develop the American industry to offer more clean energy, including fuel-efficient cars; consumers, even in the US, however, will still be left with the choice of buying American cars or foreign-produced cars. Let's continue looking at the car example: today, many Japanese cars are hugely popular in the US because they are so much more fuel efficient. Obama wants to equip the automobile industry to produce more efficient cars, in order to relieve America's demand for energy, and, more specifically, allow American cars to be competitive on a larger scale, including outside America. Therefore, Obama's policies are not necessarily protectionist, because consumers are still left with a valid choice of buying American or foreign cars; instead, he is merely helping the American auto industry develop to be consistently competitive (especially in terms of efficiency) in the global auto market.

  2. Alex Svenssonon 28 Oct 2008 at 3:53 am

    Although I to a large extent agree with Jonathan, I think that a protectionist method like the one Obama is proposing is actually needed in the United States right now. As seen in a more recent addition on this blog, discussing the fact that many Americans actually spend more than they earn, it is important to realize that this way of living cannot continue forever. It is impossible to live off someone else's money for a longer period of time, and only with a more protectionist method is it possible to stop future problems.

    Obama's proposal is ultimately designed so that both the auto-makers and American citizens will benefit. The auto-makers will produce more fuel-efficient cars, lowering the foreign oil dependency and relieving environmental strain. The American consumers will be able to rely on the American-produced, fuel-efficient cars, and everyone should be happy – at least in theory. This is where Jonathan's point comes in; no matter how much the American auto-industry grows or improves, there will always be foreign competitors offering better solutions for a better price. However, this is not bad. With more competition in the auto market, developments will hopefully occur faster, and prices will be lowered. It is of course impossible to tell what exactly Obama really wants to gain from his proposal, but looking at the situation it looks as if he is pulling a very smart move. Understanding that many Americans want to rid themselves of too much reliance on foreign oil, Obama is saying that he will focus on only making the American system more efficient. Although this seems very protectionist, which is probably liked by many Americans, Obama is at the same time building up a bigger market for the auto-industry, moving technological advances forward, and lowering prices. In the end – if the plan actually works that is -, Obama will seem to have made America less reliant on foreign-oil, will have forced auto-makers to develop their cars to relieve environmental pressure and ultimately offered more jobs and better prices. Only the future can tell what will really happen to the auto-industry, but it is certain that Obama's plan is appealing to both the minds and wallets of a very large group of Americans.

  3. Liviaon 30 Oct 2008 at 4:14 am

    Like Svensson said, the United States are running a trade deficit, and for this reason, between the two American candidates, i would agree more with Obama. I reckon that having some trade reluctant in this period could potentially help in the long run. However, McCain does have a point when he said that a trade agreement with Columbia could create jobs in America because, according to the basic principle of comparative advantage, if the countries specialize in the production of the good which they can produce with the least oppoirtunity cost, they could both benefit. And say for example that before the US was stuck in the production of a certain good or service that Columbia had comparative advantage over, if a free trade agreement were made, then the US would be able to shift those resources into the production of another industry for which it is more suited – therefore restoring allocative efficiency, that would benefit both the States and Columbia.

  4. Steve Latteron 30 Oct 2008 at 6:22 pm

    Alex,

    Americans spending more than they earn has little to do with trade. They are separate matters. If there were no trade at all any American family could still spend more than they earn through borrowing from banks or liquidating their savings.

    The trade deficits are really not economic problems per se since that "trade deficit money" is immediately spent back into the U.S. economy but for things other than goods & services. Foreigners, on the whole, are currently electing to spend those "trade deficit" US dollars back into the US economy by building plants in America (Burker Kings and car dealerships, for example), investing in American companies (stock purchases) to fund their expansions, and by providing temporary USD loans to our government (bond purchases), since the US Government is spending way more than they are collecting in tax revenue.

    The best way to "clear up" or eradicate the US trade deficits is for the US Government to align their spending with their tax revenue, NOT to eradicate trade. If the Government curtails deficit spending (national debt), foreigners will be forced to either spend the money on our products and services or throw their worthless USD into the sea (ie, they cannot use our currency in their economy!).

    Thanks for a great post!

  5. gottlanderon 31 Oct 2008 at 2:24 am

    By imposing a free trade agreement (-no tariffs can be put on the goods or services between the two) with Columbia would mean that the both markets would get a variation of goods, and because of that the countries would be able to specialize in the production of the good which they can produce with the lowest opportunity cost (Comparative advantage)it would stimulate both markets.

    The markets would become more competitive and it would benefit the consumers because of the lower price which will be put on the goods.

  6. Nicholas s.on 07 Nov 2008 at 6:56 am

    The free trade agreement with Columbia is yet another example of the age long battle of economical gain over humanitarian concerns. An economist would lean towards the singing of the free trade agreement as he/she would weigh the cost and benefits associated with it and would realize that in a purely economical context America and Columbia would benefit greatly though increased jobs, exports/imports, and producer revenue. The future American president cannot turn his back on the humanitarian concerns, and can not sign the agreement as it would appear that he advocates the killings. Is it possible for a president to focus on economical prosperity while taking environmental and social aspects into consideration?

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