Free Trade encyclopedia topics

Internal Free Trade

Free trade within national borders is in some countries a comparatively recent development. Jean Baptiste Colbert tried to abolish internal trade barriers in France in the 17th cent., but that was not accomplished until the French Revolution, a hundred years later. In the German states Prussia took the lead in organizing the Zollverein movement after 1818. The desire to assure freedom from internal trade barriers in the United States was a factor in calling the Constitutional Convention. In Britain, the classic home of the free-trade movement, the term free trade was first used during the agitation for removal of the privileges of the chartered companies in the 17th cent.

International Free Trade

In 18th-century Britain, free trade eventually came to mean the desire for a moderate tariff policy in international trade, especially with France. The rapid growth of British industry in the late 1700s (see Industrial Revolution) gave added force to the attack on international trade restrictions (see mercantilism). Adam Smith's Wealth of Nations (1776) provided a powerful intellectual basis for the free trade movement, and the later work of David Ricardo was important in developing the notion of comparative advantage as an argument in its favor. The most important practical blow in favor of the free-trade movement came with the formation (1839) of the Anti-Corn-Law League, and the repeal (1846) of the corn laws. The Anglo-French commercial treaty of 1860 represented perhaps the high-water mark of free trade.

After World War I, Britain reintroduced protection and a system of imperial preference in an attempt to establish a greater measure of economic autonomy. France, along with other European nations, historically followed a policy of protection. In the period of international economic dislocation in the mid-1930s, the United States reversed earlier policy and signed reciprocal trade treaties with many foreign governments, embracing a policy of selective tariff reduction for economic and political reasons. At present the United States is a relatively low tariff nation, although it still maintains a fairly restrictive system of import quotas. Japan also has restrictive import quotas, as well as high tariffs and other trade restrictions.

After World War II, strong sentiment developed throughout the world against protection and high tariffs and in favor of freer trade. The results were new organizations and agreements on international trade such as the General Agreement on Tariffs and Trade (1948), the Benelux Economic Union (1948), the European Economic Community (Common Market, 1957), the European Free Trade Association (1959), Mercosur (1991), and the World Trade Organization (1995). In 1993 the North American Free Trade Agreement (NAFTA) was approved by the governments of Canada, Mexico, and the United States. In the early 1990s the nations of the European Union (the successor organization to the Common Market) undertook to remove all barriers to the free movement of trade and employment across their mutual borders.

Critics of free trade zones argue that such measures are detrimental to domestic economies. In the case of NAFTA, for example, opponents contended that the jobs of some American workers would be "exported" to Mexico, where labor costs are lower. Many have continued to oppose the international impetus toward freer trade, arguing the accords not only fail to protect jobs in more developed nations but also harm workers and the environment in less developed nations, where the laws are more lax or less enforced. Despite such objections, support for free trade has continued. In Apr., 2001, for example, 34 nations of the Western Hemisphere committed themselves to the development of a Free Trade Area of the Americas, though movement toward such an organization subsequently stalled. In May, 2004, the Central American Free Trade Agreement was finalized by the United States and five Central American nations; the Dominican Republic is also a member of the group. The United States, Japan, China, and other countries have also negotiated bilateral free-trade agreements with individual nations or regional trade associations; such agreements generally open trade in some areas while preserving the protection of politically sensitive economic sectors.

Bibliography

See G. B. Doern and B. W. Tomlin, Faith and the Free Trade Story (1991); D. B. Yoffie, Beyond Free Trade: Firms, Governments, and Global Competition (1993); A. E. Eckes, Jr., Opening America's Market (1995); J. J. Schott, The World Trading System (1997).

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Wikipedia

Free trade is a system in which the trade of goods and services between or within countries flows unhindered by government-imposed restrictions. Such government interventions generally increase costs of goods and services to both consumers and producers. Interventions include taxes and tariffs, non-tariff barriers, such as regulatory legislation and quotas, and even inter-government managed trade agreements such as the North American Free Trade Agreement (NAFTA) and Central America Free Trade Agreement (CAFTA) (contrary to their formal titles.) Free trade opposes all such interventions. Trade liberalization entails reductions to these trade barriers in an effort for relatively unimpeded transactions

One of the strongest arguments for free trade was made by classical economist David Ricardo in his analysis of comparative advantage. Comparative advantage explains how trade will benefit both parties (countries, regions, or individuals) if they have different opportunity costs of production.

Free trade can be contrasted with protectionism, which is the economic policy of restricting trade between nations. Trade may be restricted by high tariffs on imported or exported goods, restrictive quotas, a variety of restrictive government regulations designed to discourage imports, and anti-dumping laws designed to protect domestic industries from foreign take-over or competition.

Free trade is a term in economics and government that includes:

trade of goods without taxes (including tariffs) or other trade barriers (e.g., quotas on imports or subsidies for producers)
trade in services without taxes or other trade barriers
The absence of trade-distorting policies (such as taxes, subsidies, regulations or laws) that give some firms, households or factors of production an advantage over others
Free access to markets
Free access to market information
Inability of firms to distort markets through government-imposed monopoly or oligopoly power
The free movement of labor between and within countries
The free movement of capital between and within countries

''For more detailed arguments in favor of and against free trade, see: Free trade debate.

History of free trade

The history of international trade is a focusing on the development of open markets. It is known that various prosperous world civilizations throughout history have engaged in trade. Based on this, theoretical rationalizations as to why a policy of free trade would be beneficial to nations developed over time. These theories were developed in its academic modern sense from the commercial culture of England, and more broadly Europe, over the past five centuries. Before the appearance of Free Trade, and continuing in opposition to it to this day, the policy of mercantilism had developed in Europe in the 1500s. Early economists opposed to mercantilism were David Ricardo and Adam Smith.

Economists that advocated free trade believed trade was the reason why certain civilisations prospered economically. Adam Smith, for example, pointed to increased trading as being the reason for the flourishing of not just Mediterranean cultures such as Egypt, Greece, and Rome, but also of Bengal (East India) and China. The great prosperity of the Netherlands after throwing off Spanish Imperial rule, and declaring Free Trade and Freedom of thought, made the Free Trade/Mercantilist dispute the most important question in economics for centuries. Free trade policies have battled with mercantilist, protectionist, isolationist, communist, and other policies over the centuries.

Wars have been fought over trade, such as the Peloponnesian War between Athens and Sparta, the Opium Wars between China and Great Britain, and other colonial wars. All developed countries have used protectionism at some time, due to special interest pressure or, prior to the 19th century, a belief in mercantilism, but usually reduced it as they gained more wealth.

The US and free trade

The colonies which became the United States generally supported free trade; indeed British restrictions on trade were a major factor in the war for secession. New England was famous for smuggling. However, the 1st U.S. Secretary of the Treasury, Alexander Hamilton, advocated tariffs to help protect infant industries in his "Report on Manufactures." This was a minority position, however, which the "Jeffersonians" strongly opposed for the most part. Later, in the 19th century, statesmen such as Senator Henry Clay continued Hamilton's themes within the Whig Party under the name "American System." The opposition Democratic Party contested several elections throughout the 1830s, 1840s, and 1850s in part over the issue of the tariff and protection of industry. The Democratic Party favored moderate tariffs used for government revenue only, while the Whig's favored higher protective tariffs to protect favored industries. The economist Henry Charles Carey became a leading proponent of the "American System" of economics. This mercantilist "American System" was opposed by the Democratic Party of Andrew Jackson, Martin Van Buren, James K. Polk, Franklin Pierce, and James Buchanan.

The fledgling Republican Party led by Abraham Lincoln, who called himself a "Henry Clay tariff Whig," strongly opposed free trade and implemented at 44 percent tariff during the Civil War in part to pay for railroad subsidies, the war effort, and to protect favored industries. President William McKinley stated the United States' stance under the Republican Party (which won every election for President until 1912, except the two non-consecutive terms of Grover Cleveland) as thus:

"Under free trade the trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man. [It is said] that protection is immoral…. Why, if protection builds up and elevates 63,000,000 [the U.S. population] of people, the influence of those 63,000,000 of people elevates the rest of the world. We cannot take a step in the pathway of progress without benefitting mankind everywhere. Well, they say, ‘Buy where you can buy the cheapest'…. Of course, that applies to labor as to everything else. Let me give you a maxim that is a thousand times better than that, and it is the protection maxim: ‘Buy where you can pay the easiest.' And that spot of earth is where labor wins its highest rewards.

On the other side:

The growing Free Trade Movement sought an end to the tariffs and corruption in state and federal governments by every means available to them, leading to several outcomes. The first and most important was the rise of the Democratic Party with Grover Cleveland at its helm. The next most important were the rise of the "Mugwumps" within the Republican party. For many Jeffersonian radicals, neither went far enough or sufficiently effective in their efforts and looked for alternatives.
The first major movement of the radical Jeffersonians evolved from the insights of a young journalist and firebrand, Henry George. - Kenneth R. Gregg, George Mason University History News Network

The tariff and support of protection to support the growth of infrastructure and industrialization of the nation became a leading tenet of the Republican Party thereafter until the Eisenhower administration and the onset of the Cold War, when the Democratic and Republican parties switched positions.

In the 1930s, the US adopted the protectionist Hawley-Smoot Tariff Act which raised rates to all time highs beyond the Lincoln levels, which many economists believe exacerbated the Great Depression. Europe, which had less protectionism at the time, had largely come out of the depression while the US remained mired in the depression. Franklin D. Roosevelt resorted to Hamilton's earlier formula of tariff Reciprocity coupled with subsidy to industry which went unbroken until the 1970s when protectionism was reduced after the Kennedy Round of trade talks in the late sixties.

In 2006 American Economic Association conducted a poll which revealed that 87,5 percent of its members with Ph.D. agreed that "the U.S. should eliminate remaining tariffs and other barriers to trade.

Present day (U.S. based)

Since the end of World War II, in part due to industrial supremacy and the onset of the Cold War, the U.S. government has become one of the most consistent proponents of reduced tariff barriers and free trade, having helped establish the General Agreement on Tariffs and Trade (GATT) and later the World Trade Organization (WTO); although it had rejected an earlier version in the 1950s (International Trade Organization or ITO). Since the 1970s U.S. government has negotiated numerous managed trade agreements, such as the North American Free Trade Agreement (NAFTA) in the 1990s, the Dominican Republic-Central America Free Trade Agreement (CAFTA) in 2006, and a number of bilateral agreements (such as with Jordan).

Economics of free trade

The literature analysing the economics of free trade is extremely rich with extensive work having been done on the theoretical and empirical effects. Though it creates winners and losers, the broad consensus among members of the economics profession in the U.S. is that free trade is a large and unambiguous net gain for society. In a 2006 survey of American economists (83 responders), "87.5% agree that the U.S. should eliminate remaining tariffs and other barriers to trade" and "90.1% disagree with the suggestion that the U.S. should restrict employers from outsourcing work to foreign countries. Quoting Harvard economics professor N. Gregory Mankiw, "Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards. Nonetheless, quoting Prof. Peter Soderbaum of Malardalen University, Sweden, "This neoclassical trade theory focuses on one dimension, i.e., the price at which a commodity can be delivered and is extremely narrow in cutting off a large number of other considerations about impacts on employment in different parts of the world, about environmental impacts and on culture." Two simple ways to understand the benefits of free trade are through David Ricardo's theory of comparative advantage and by analyzing the impact of a tariff or import quota.

A simple economic analysis using the law of supply and demand and the economic effects of a tax can be used to show the theoretical benefits of free trade.

The chart at the right analyzes the effect of the imposition of an import tariff on some imaginary good. Prior to the tariff, the price of the good in the world market (and hence in the domestic market) is P^world. The tariff increases the domestic price to P^tariff. The higher price causes domestic production to increase from Q^S1 to Q^S2 and causes domestic consumption to decline from Q^C1 to Q^C2. This has three main effects on societal welfare. Consumers are made worse off because the consumer surplus (green region) becomes smaller. Producers are better off because the producer surplus (yellow region) is made larger. The government also has additional tax revenue (blue region). However, the loss to consumers is greater than the gains by producers and the government. The magnitude of this societal loss is shown by the two pink triangles. Removing the tariff and having free trade would be a net gain for society.

An almost identical analysis of this tariff from the perspective of a net producing country yields parallel results. From that country's perspective, the tariff leaves producers worse off and consumers better off, but the net loss to producers is larger than the benefit to consumers (there is no tax revenue in this case because the country being analyzed is not collecting the tariff). Under similar analysis, export tariffs, import quotas, and export quotas all yield nearly identical results. Sometimes consumers are better off and producers worse off, and sometimes consumers are worse off and producers are better off, but the imposition of trade restrictions causes a net loss to society because the losses from trade restrictions are larger than the gains from trade restrictions. Free trade creates winners and losers, but theory and empirical evidence show that the size of the winnings from free trade are larger than the losses.

Trade diversion

According to mainstream economic theory, global free trade is a net benefit to society, but the selective application of free trade agreements to some countries and tariffs on others can sometimes lead to economic inefficiency through the process of trade diversion. It is economically efficient for a good to be produced by the country which is the lowest cost producer, but this will not always take place if a high cost producer has a free trade agreement while the low cost producer faces a high tariff. Applying free trade to the high cost producer (and not the low cost producer as well) can lead to trade diversion and a net economic loss. This is why many economists place such high importance on negotiations for global tariff reductions, such as the Doha Round.

Opponents of free trade

Free trade is often opposed by domestic industries that would have their profits and market share reduced by lower prices for imported goods. For example, if United States tariffs on imported sugar were reduced, US sugar producers would receive lower prices and profits, while US sugar consumers would spend less for the same amount of sugar because of those same lower prices. Economics says that consumers would necessarily gain more than producers would lose. Since each of those few domestic sugar producers would lose a lot as an individual while each of a much greater number of consumers would gain only a little, domestic producers are more likely to mobilize against the lifting of tarrifs. More generally, producers often favor domestic subsidies and tariffs on imports in their home countries, while objecting to subsidies and tariffs in their export markets.

Some socialists oppose free trade as a consequence of their exploitation theory and opposition to employment ("wage slavery"). For example, Karl Marx wrote in The Communist Manifesto, "The bourgeoisie... has set up that single, unconscionable freedom -- Free Trade. In one word, for exploitation, veiled by religious and political illusions, it has substituted naked, shameless, direct, brutal exploitation."

Others oppose government managed trade, erroneously calling it free trade. Thus, "free trade" is opposed by many anti-globalization groups, based on their assertion that so-called Free Trade agreements generally do not increase the economic freedom of the poor, and frequently make them poorer. See perfect competition for the basis for this view of how Free Trade should work. For example, it is argued that letting subsidized corn from the US into Mexico freely under NAFTA at prices well below production cost (dumping) is ruinous to Mexican farmers. Of course, such subsidies violate free trade, so this argument might better be seen as against subsides and for free trade, properly understood.

Some free trade economists have recently begun to express their own doubts concerning the concept and practice of free trade. Alan S. Blinder, for example, a professor of economics at Princeton University, and former Federal Reserve Board vice chairman and advisor to Democratic presidential candidates, had previously argued, along with most economists, that free trade enriches the U.S. and its trading partners. However, he now says new communication technology will put 30-40 million American jobs at risk in 10-20 years. Blinder has not completely rejected free trade or Ricardo's ideas about comparative advantage, but he advocates greater protection for displaced workers and an improved education system. Blinder opposed steel, aluminum and farming export subsidies and protection, and pushed for the passage of NAFTA, though he did not agree that it would create jobs in the US. Trade changes types of jobs, not the number, he said. Technology allowed Indians in call centers to do the work of Americans at lower wages. "Tens of millions of additional American workers will start to experience an element of job insecurity that has heretofore been reserved for manufacturing workers," said Blinder. Democrats and Republicans are becoming skeptical. The debate is, "Should government encourage forces of globalization or try to restrain them?" Latin America performed poorly since tariff cuts in 1980s and 1990s, compared to protectionist China and Southeast Asia. Paul Samuelson, in his 2004 essay, condemned "economists' over-simple complacencies about globalization" and said that workers don't always win. Lawrence Summers, advocate for trade expansion as Clinton Treasury Secretary, said retraining is "pretty thin gruel" to the middle class. Ralph Gomory, former IBM chief scientist, says the rise of China and India could make the U.S. lose important industries. Harvard economist Dani Rodrik says trade barriers should help poor nations build domestic industries and give rich nations time to retrain workers. But Jagdish N. Bhagwati says jobs will grow in medicine, law and accounting. Blinder has created a list of "highly offshorable" jobs that could be lost in the next 20 years, which claims that 1,815,340 bookkeeping, accounting and auditing jobs could be lost.

Ecuadorian President Rafael Correa has denounced the "sophistry of free trade", in an introduction he wrote for a book titled The Hidden Face of Free Trade Accords. One of the authors of that book is today Correa's Energy Minister, Alberto Acosta. Citing as his source the book, Kicking Away the Ladder, written by a Korean economist based at Cambridge University, Ha-Joon Chang, Correa identified the difference between an "American system" opposed to "a British System" of free trade. The latter, he says, was explicitly viewed by the Americans as "part of the British imperialist system." Correa wrote that Chang showed that it was Treasury Secretary Alexander Hamilton, and not Friedrich List who was the first to present a systematic argument defending industrial protectionism. (Correa includes List's National System of Political Economy in his bibliographic references.)

Following alternatives for free trade are proposed: balanced trade, fair trade, protectionism and Tobin tax.

Miscellaneous

The relative costs, benefits and beneficiaries of free trade are debated by academics, governments and interest groups. While the academic debate is essentially settled in favor of free trade, a number of arguments for and against in the ongoing public debate can be seen in the free trade debate article.

Depending on the specific context, use of the term free trade can signify one or more of the above conditions. However, it is fundamental that only governments can restrict trade: they have the legal monopoly over the use of physical force to influence trade in a geographical area.

The term free trade has become very politically based, and it is not uncommon for so-called "free trade agreements" to impose additional trade restrictions. Such restrictions on trade are often due to domestic political pressure by powerful corporate, environmental or labor interest groups seeking special protections of their perceived interests.

Free trade agreements are a key element of customs unions and free trade areas. The details and differences of these agreements are covered in their respective articles.

The historical name for free trade is guilds.

References

Fair trade certification overview (2004). TransFair USA. February 18, 2007.

External links

The Expected Benefits of Trade Liberalization for World Income and Development: Opening the "Black Box" of Global Trade Modeling by Antoine Bouët (2008)
Foundation for Economic Education (FEE), one of the oldest free-market organizations in the United States.
Freetrade.org, Center for Trade Policy Studies, Cato Institute

Freedom to Trade: Refuting the New Protectionism edited by Edward L. Hudgins (online version of the book)

About.com's Pros & Cons of Free Trade Agreements
Embracing the Challenge of Free Trade: Competing and Prospering in a Global Economy speech by Federal Reserve chairman Ben Bernanke
Stop Calling It “Free Trade!”
BBC News - The argument for free trade
Guardian Unlimited - Food & Trade - Hunger in a world of plenty
Free Trade as Ideology, by Edward Luttwak, August 1 2001
Why developing countries should liberalise trade
Worried about a Recession? Don’t Blame Free Trade
An article on free trade issues involving Canada and the United States from The Canadian Encyclopedia

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