WASHINGTON -- Contrary to political rhetoric, free trade does not cause economic downturns, but in fact it has helped ensure that recessions are "mercifully shorter, shallower, and less frequent" than in past decades, according to a Free Trade Bulletin released by the Cato Institute today.
"If the past is any guide, politicians on the campaign trail will be tempted to blame trade and globalization for the passing pain of the business cycle. But an analysis of previous recessions and expansions shows that international trade and investment are not to blame for downturns in the economy and may in fact be moderating the business cycle," writes Daniel Griswold, director of Cato's Center for Trade Policy Studies, in "Worried about a Recession? Don't Blame Free Trade."
Increased foreign trade and investment has helped bring about what economists call "The Great Moderation." A trend that began to appear in the mid-1980s, The Great Moderation has seen recessions become milder and less frequent. The Cato study finds that the U.S. economy was in recession 21 percent of the time from 1945 through 1982 compared to 5 percent in the more globalized era since then. This decreased volatility has not come at the expense of overall growth. Annual real GDP growth has been the same over the past 25 years that have experienced The Great Moderation as the 25 previous years that did not.
Combined with other factors, such as improved monetary policy, fewer external shocks and other structural changes in the economy, "expanding trade and globalization have helped to moderate swings in national output by blessing us with a more diversified and flexible economy," says Griswold. "Exports can take up slack when domestic demand sags, and imports can satisfy demand when domestic productive capacity is reaching its short-term limits. Access to foreign capital markets can allow domestic producers and consumers alike to more easily borrow to tide themselves over during difficult times."
The author concludes: "For the U.S. economy as a whole, the era of globalization has brought healthy long-term growth and a moderation of the business cycle. Expansions are longer if less spectacular than in eras past, and downturns are mercifully shorter, shallower, and less frequent. Moderation of the business cycle in recent decades is something to be thankful for, and expanding trade and globalization deserve a share of the credit."