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International Trade Series
International trade
History of international trade
Political views
Fair trade
Trade justice
Free trade
Protectionism
Economic integration
Preferential trading area
Free trade area
Customs union
Single market
Economic and monetary union
Complete economic integration
Other
Trade pact
Trade bloc
Trade creation
Trade diversion

Free trade is a system of trade policy that allows traders to act and transact without interference from government. According to the law of comparative advantage the policy permits trading partners mutual gains from trade of goods and services.

Under a free trade policy, prices are a reflection of true supply and demand, and are the sole determinant of resource allocation. Free trade differs from other forms of trade policy where the allocation of goods and services amongst trading countries are determined by artificial prices that may or may not reflect the true nature of supply and demand. These artificial prices are the result of protectionist trade policies, whereby governments intervene in the market through price adjustments and supply restrictions. Such government interventions can increase as well as decrease the cost of goods and services to both consumers and producers.

Interventions include subsidies, 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) and any governmental market intervention resulting in artificial prices.

Most states conduct trade polices that are to a lesser or greater degree protectionist.[1] One ubiquitous protectionist policy employed by states comes in the form of agricultural subsidies whereby countries attempt to protect their agricultural industries from outside competition by creating artificial low prices for their agricultural goods.[2]

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.

Contents

In literature

The value of free trade was first observed and documented by Adam Smith in his magnum opus, The Wealth of Nations, in 1776.[3] Later, David Ricardo made a case for free trade by presenting specialized an economic proof featuring a single factor of production with constant productivity of labor in two goods, but with relative productivity between the goods different across two countries.[3] Ricardo's model demonstrated the benefits of trading via specialization—states could acquire more than their labor alone would permit them to produce. This basic model ultimately led to the formation of one of the fundamental laws of economics: The Law of Comparative Advantage. The Law of Comparative Advantage states that each member in a group of trading partners should specialize in and produce the goods in which they possess lowest opportunity costs relative to other trading partners. This specialization permits trading partners to then exchange their goods produced as a function of specialization. Under a policy of free trade, trade via specialization maximizes labor, wealth and quantity of goods produce, exceeding what an equal number of autarkic states could produce.

Features of free trade

Free trade implies the following features[citation needed]:

  • 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.
A South Korean container ship approaching the Bay Bridge in San Francisco Bay.

History of free trade

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, especially in Europe, and especially in Britain, over the past five centuries. Before the appearance of Free Trade doctrine, 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 civilizations 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 due to an interest in raising revenues, protecting infant industries, special interest pressure, and, prior to the 19th century, a belief in mercantilism.

Many classical liberals, especially in 19th and early 20th century Britain (e.g. John Stuart Mill) and in the United States for much of the 20th century (e.g. Cordell Hull), believed that free trade promoted peace. The British economist John Maynard Keynes (1883–1946) was brought up on this belief, which underpinned his criticism of the Treaty of Versailles in 1919 for the damage it did to the interdependent European economy. After a brief flirtation with protectionism in the early 1930s, he came again to favour free trade so long as it was combined with internationally coordinated domestic economic policies to promote high levels of employment, and international economic institutions that meant that the interests of countries were not pitted against each other. In these circumstances, 'the wisdom of Adam Smith' again applied, he said.

Some degree of Protectionism is nevertheless the norm throughout the world. In most developed nations, controversial agricultural tariffs are maintained. From 1820 to 1980, the average tariffs on manufactures in twelve industrial countries ranged from 11 to 32%. In the developing world, average tariffs on manufactured goods are approximately 34%.[4]:66

Currently, the World Bank believes that, at most, rates of 20% can be allowed by developing nations; but Ha-Joon Chang believes higher levels may be justified because the productivity gap between developing and developed nations is much higher than the productivity gap which industrial countries faced. (A general feature is that the underdeveloped nations of today are not in the same position that the developed nations were in when they had a similar level of technology, because they are weak players in a competitive system; the developed nations have always been strong players, although formerly at an overall lower level.) If the main defense of tariffs is to stimulate infant industries, a tariff must be high enough to allow domestic manufactured goods to compete for the tariff to be possibly successful. This theory, known as import substitution industrialization, is largely considered to be ineffective for currently developing nations,[5]:311 and studies by the World Bank have determined that export-oriented industrialization policies correlate with higher economic growth as observed with the Four Asian Tigers. These assessments are based mainly on theory and observational study of correlations, and thus suffer from a number of weaknesses such as small sample size and numerous confounding variables (see the critical review section below).

The United States and free trade

Trade in colonial America was regulated by the British mercantile system through the Acts of Trade and Navigation. Until the 1760s, few colonists openly advocated for free trade, in part because regulations were not strictly enforced—New England famous for smuggling—but also because colonial merchants did not want to compete with foreign goods and shipping. According to historian Oliver Dickerson, a desire for free trade was not one of the causes of the American Revolution. "The idea that the basic mercantile practices of the eighteenth century were wrong," wrote Dickerson, "was not a part of the thinking of the Revolutionary leaders".[6] Free trade came to what would become the United States as a result of American Revolutionary War, when the British Parliament issued the Prohibitory Act, blockading colonial ports. The Continental Congress responded by effectively declaring economic independence, opening American ports to foreign trade on April 6, 1776. According to historian John W. Tyler, "Free trade had been forced on the Americans, like it or not."[7]

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, though 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.[8] 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."[9]

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.

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).

Current status

Current free trade areas with more than three member countries.
Status of WTO negotiations:      members (including dual-representation with the European Union)      Draft Working Party Report or Factual Summary adopted      Goods and/or Services offers submitted      Memorandum on Foreign Trade Regime submitted      observer, negotiations to start later or no Memorandum on FTR submitted      frozen procedures or no negotiations in the last 3 years      no official interaction with the WTO


Most (but not all) countries in the world are members of the World Trade Organization (see map), which limits in certain ways but does not eliminate tariffs and other trade barriers. Most countries are also members of regional free trade areas (see map) which lower trade barriers among participating countries.

Most countries prohibit foreign airlines from cabotage (transporting passengers between two domestic locations), and foreign landing rights are generally restricted, but open skies agreements have become more common.

Notable contemporary trade barriers include ongoing tariffs, import quotas, sanctions and embargoes, currency manipulation of the Chinese yuan with respect to the U.S. dollar, agricultural subsidies in developed countries, and buy American laws.

Economics of free trade

Economic models

Two simple ways to understand the potential benefits of free trade are through David Ricardo's theory of comparative advantage and by analyzing the impact of a tariff or import quota.

The pink regions are the net loss to society caused by the existence of the tariff.

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.[10]

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 Pworld. The tariff increases the domestic price to Ptariff. The higher price causes domestic production to increase from QS1 to QS2 and causes domestic consumption to decline from QC1 to QC2. 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.[11][12]

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.[10]

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.[10]

Opinion of economists

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.[13] [14] 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."[15] 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."[16] 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." [17] Most free traders would agree that there are winners and losers from free trade, but argue that this is not a reason to argue against free trade, because free trade is supposed to bring overall gain due to idea that the winners have gained enough to make up for the losses of the losers and then some. Chang argues otherwise, saying that the economy could shrink as a result, and that some people being worse off due to trade displacement without recourse to welfare assistance to find a better job (as might be expected in poor countries) is not acceptable.[18]

In an assessment of the literature on the theory and empirical research relating to the benefits of free trade, Sonali Deraniyagala and Ben Fine found that much of the work was flawed, and concluded that the extent to which free trade benefits economic development is unknown.[19] Theoretical arguments are largely dependent upon specific empirical assumptions which may or may not hold true. In the empirical literature, many studies suggest the relationship is ambiguous, and the data and econometrics underlying a set of empirical papers showing positive results have been critiqued. The best of these papers use a simplified model, and the worst involve the regression of an index of economic performance on an index of openness to trade, with a mix of these two approaches common. In some cases, Deraniyagala and Fine claim, these indexes of openness actually reflect trade volume rather than policy orientation. They also observe that it is difficult to disentangle the effects of reverse causality and numerous exogenous variables.

In Kicking Away the Ladder, Ha-Joon Chang reviews the history of free trade policies and economic growth, and notes that many of the now-industrialized countries had significant barriers to trade throughout their history. Protectionism under the auspices of the infant industry argument (related to import substitution industrialization), was first pursued by Alexander Hamilton in the 1790s in opposition to the admonition of Adam Smith, who advised that the United States focus on agriculture, where it had a comparative advantage. In the 1840s Friedrich List, known as the father of the infant industry argument,[4]:3 advocated the infant industry argument for Germany. Chang's research shows that the United States and Britain, sometimes considered to be the homes of free trade policy, were aggressive protectionists. Britain did end its protectionism when it achieved technological superiority in the late 1850s with the repeal of the Corn Laws, but tariffs on manufactured products had returned to 23% by 1950. The United States maintained weighted average tariffs on manufactured products of approximately 40-50% up until the 1950s, augmented by the natural protectionism of high transportation costs in the 1800s.[4]:17 The most consistent practitioners of free trade have been Switzerland, the Netherlands, and to a lesser degree Belgium.[4]:59

Chang describes the export-oriented industrialization policies of the Asian Tigers as "far more sophisticated and fine-tuned than their historical equivalents".[4]:50

Noam Chomsky argues that David Ricardo's theory of comparative advantage, often offered to promote free trade, assumes that capital is more or less immobile and labor highly mobile, but today these assumptions have been reversed in practice.[20] Chomsky also has detailed examples which underscore that, in practice, "free trade" is not about liberalization per se but rather a mixture of protectionism and liberalization with each contending party advocating a selective mixture of the two, designed to maximize advantages to its own economy, all while claiming these policies to lie under the rubric of "free trade"

"..every one of the Western powers, including the United States, is entering the GATT negotiations with a certain agenda, a mixture of liberalization and protectionism geared to the particular strengths and weaknesses of that economy..The U.S. is calling for a liberalization of services in the Third World..On the other hand, the U.S. is calling for more protection in other areas, particularly intellectual property rights, which includes anything from pop music to cinema to software to patents. Right now the U.S. is racing ahead in patenting what may turn out to be parts of genes. The idea is to patent the genes of corn, or for that matter humans, so that future biotechnology, which will involve various kinds of genetic engineering, will be in the hands of mainly U.S. private firms. They will control that field, and they want to make sure it's protected. So they want long patent rights and so on..The U.S. also demands product rather than only process patents, to insure, say, that India's pharmaceutical industry doesn't invent a cheaper way to produce some drug -- a barrier to efficiency and innovation, but a boon for profits.

"Similarly, 'defense' expenditures are not considered subsidies under GATT rules. That's enormously important for the U.S., which spends more on its military system than the rest of the world combined, as has always used that as a cover for massive public subsidy to high-tech industry. The point is that there is a mixture of protectionism and liberalization geared to the interests of those who are designing the policies, which are the powerful economic forces within the state in question. That's not a great surprise, after all, but that's what GATT is all about, and that's what the negotiations are about."[21]

Chomsky argues that is it not merely "in practice" but also in abstract discussions of free trade that the term has been ideologically corrupted, with "intellectual property rights" taken for granted as being appropriate under "free trade" when the converse holds: "Intellectual property rights have to do with protectionism. The U.S., and in fact the rich countries generally, have led the insistence that the GATT agreement, like NAFTA, include strong intellectual property rights. That's protectionism. That means increasing the power of patents. Patents are protectionist devices. They are designed to insure that the technology of the future is in the hands of transnational corporations, most of which, incidentally, [tax-payers] pay for. Remember they don't believe in a free market. They want to be publicly subsidized in research and development and controlled markets and so on. The strength of intellectual property rights means longer patents.[22]"

Opposition

The relative costs, benefits and beneficiaries of free trade are debated by academics, governments and interest groups. A number of arguments for and against in the ongoing public debate can be seen in the free trade debate article.

Arguments for protectionism fall into the economic category (trade hurts the economy) or the moral category (the effects of trade might help the economy, but have ill effects in other areas); a general argument against free trade is that it is colonialism or imperialism in disguise. The moral category is wide, including concerns of income inequality, environmental degradation, supporting child labor and sweatshops, race to the bottom, wage slavery, accentuating poverty in poor countries, harming national defense, and forcing cultural change.[23]

Free trade is often opposed by domestic industries that would have their profits and market share reduced by lower prices for imported goods.[24][25] For example, if United States tariffs on imported sugar were reduced, U.S. sugar producers would receive lower prices and profits, while U.S. sugar consumers would spend less for the same amount of sugar because of those same lower prices. The economic theory of David Ricardo holds that consumers would necessarily gain more than producers would lose.[26][27] Since each of those few domestic sugar producers would lose a lot while each of a great number of consumers would gain only a little, domestic producers are more likely to mobilize against the lifting of tariffs.[25] 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.

Socialists frequently oppose free trade on the ground that it allows maximum exploitation of workers by capital. 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." Nonetheless, Marx favored free trade solely [28] because he felt that it would hasten the social revolution. To those who oppose socialism, this becomes an argument against free trade.

"Free trade" is opposed by many anti-globalization groups, based on their assertion that free trade agreements generally do not increase the economic freedom of the poor or the working class, and frequently make them poorer. Where the foreign supplier allows de facto exploitation of labor, domestic free-labor is unfairly forced to compete with the foreign exploited labor, and thus the domestic "working class would gradually be forced down to the level of helotry." [29] To this extent, free trade is seen as nothing more than an end-run around laws that protect individual liberty, such as the Thirteenth Amendment to the United States Constitution (outlawing slavery and indentured servitude). In this regard, protective trade policies are seen, not so much as protecting domestic producers, but rather, as protecting liberty itself. This argument actually comports with the the economic analysis of Free Trade to the extent that "slavery and perfect competition equilibria are Pareto optimal." [30] Thus, while admitting that some gain in efficiency might be realized in the short-term by implementation of free trade policies, the long-term question of the cost of that efficiency in terms of loss of liberty remains.

It is important to distinguish between arguments against free trade theory, and free trade agreements as applied. Some opponents of NAFTA see the agreement as being materially harmful to the common people, but some of the arguments are actually against the particulars of government-managed trade, rather than against free trade per se. For example, it is argued [31] that it would be wrong to let subsidized corn from the U.S. into Mexico freely under NAFTA at prices well below production cost (dumping) because of its ruinous effects to Mexican farmers. Of course, such subsidies violate free trade theory, so this argument is not actually against the principle of free trade, but rather its selective implementation.

Latin America performed poorly since tariff cuts in 1980s and 1990s, compared to protectionist China and Southeast Asia[citation needed]. According to Samuelson, it is wrong to assume a necessary surplus of winnings over losings. The paper, "Will inventions A or B lower or raise the new market-clearing real wage rates that sustain high-to-full employment"[citation needed] condemned "economists' over-simple complacency about globalization" and said that workers don't always win. Some economists try to emphasize that trade barriers should exist to help poor nations build domestic industries and give rich nations time to retrain workers.[32]

Colonialism

It has long been argued that free trade is a form of colonialism or imperialism, a position taken by various proponents of economic nationalism and the school of mercantilism. In the 19th century these criticized British calls for free trade as cover for British Empire, notably in the works of American Henry Clay, architect of the American System[33] and by German American economist Friedrich List.[34]

More recently, 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, written in part by Correa's current Energy Minister Alberto Acosta. Citing as his source the book Kicking Away the Ladder, written by 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." According to Correa, 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.

Alternatives

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

Promotors

On April 1, 2009, The Freedom to Trade Coalition [2] - an initiative of the International Policy Network and the Atlas Economic Research Foundation, comprising over 76 civil society organization from 48 countries - launched an open letter calling on all governments to eliminate trade barriers. Signatories include Nobel Prize winning economist Vernon Smith, former US Secretary of State George Shultz, former Prime Minste of Estonia Mart Laar, former Kremlin chief economist Andrei Illarionov and many other eminent economists, philosophers and other academics. In total, over 3,000 people have so far signed the letter including over 1,000 academics.

Warning of the dangers of resurgent protectionism, the letter observes : " Protectionism creates poverty, not prosperity. Protectionism doesn't even "protect" domestic jobs or industries; it destroy them, by harming export industries and industries that rely on imports to make their goods. Raising local prices of steel by "protecting" local steel companies just raises the cost of producing cars and the many other goods made with steel. Protectionism is a fool's game"

The Freedom to Trade coalition has also committed itself to monitoring the actions of government around the world.

See also

Concepts/topics

Trade organizations

References

  1. ^ http://www.export.gov/logistics/country_tariff_info.asp
  2. ^ http://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm
  3. ^ a b Bhagwati, Jagdish (2002). Free trade today. Princeton: Princeton Univ. Press. pp. 3. ISBN 0691091560. 
  4. ^ a b c d e Chang HJ. (2002). Kicking Away the Ladder. Anthem Press. ISBN 978-1843310273
  5. ^ Thomas A. Pugel. International Economics 13th edition
  6. ^ Oliver M. Dickerson, The Navigation Acts and the American Revolution (Philadelphia: University of Pennsylvania Press, 1951), 140.
  7. ^ John W. Tyler, Smugglers & Patriots: Boston Merchants and the Advent of the American Revolution (Boston: Northeastern University Press, 1986; ISBN 0-930350-76-6), 238.
  8. ^ [1] Lind, Michael. New America Foundation.
  9. ^ William McKinley speech, Oct. 4, 1892 in Boston, MA William McKinley Papers (Library of Congress)
  10. ^ a b c Steven E. Landsburg "Price Theory and Applications" Sixth Edition Chapter 8
  11. ^ ALan C. Stockamn "Introduction to Economics" Second Edition Chapter 9
  12. ^ N. Gregory Mankiw "Macroeconomics" Fifth Edition Chapter 7
  13. ^ Fuller, Dan; Geide-Stevenson (Fall 2003). "Consensus Among Economists: Revisited" (PDF). Journal of Economic Review 34 (4): 369–387. http://www.indiana.edu/~econed/pdffiles/fall03/fuller.pdf. 
  14. ^ Friedman, Milton. "The Case for Free Trade". Hoover Digest 1997 (4). http://www.hoover.org/publications/digest/3550727.html. 
  15. ^ Whaples, Robert (2006). "Do Economists Agree on Anything? Yes!". The Economists' Voice 3 (9). doi:10.2202/1553-3832.1156. 
  16. ^ Mankiw, Gregory (2006-05-07). "Outsourcing Redux". http://gregmankiw.blogspot.com/2006/05/outsourcing-redux.html. Retrieved 2007-01-22. 
  17. ^ Post-Autistic Economics Review, Sept 2007
  18. ^ Bad Samaritans. Bloomsberry Press, 2008.
  19. ^ Fine, Ben. (2006). The New Development Economics: After Washington Consensus, pp. 46-50. Zed Books.
  20. ^ Rollback, Z Magazine, January-May 1995
  21. ^ [http://economicdemocracy.org/chomsky.worldbank-gatt-freetrade.html The World Bank, GATT and Free Trade by Noam Chomsky ]
  22. ^ Noam Chomsky on India, GATT and Pharmaceutal Patents, and 3rd World
  23. ^ Boudreaux, Don Globalization, 2007
  24. ^ William Baumol and Alan Blinder, Economics: Principles and Policy, p. 722.
  25. ^ a b Brakman, Steven; Harry Garretsen, Charles Van Marrewijk, Arjen Van Witteloostuijn (2006). Nations and Firms in the Global Economy : An Introduction to International Economics and Business. Cambridge: Cambridge University Press. ISBN 9780521832984. 
  26. ^ Richard L. Stroup, James D. Gwartney, Russell S. Sobel, Economics: Private and Public Choice, p. 46.
  27. ^ Pugel, Thomas A. (2003). International economics. Boston: McGraw-Hill. ISBN 007119875X. 
  28. ^ "It is in this revolutionary sense alone, gentlemen, that I vote in favor of free trade." Marx, Karl On the Question of Free Trade Speech to the Democratic Association of Brussels at its public meeting of January 9, 1848
  29. ^ Marx, Karl The Civil War in the United States, ¶ 23.
  30. ^ Haluk, Serdar, A Microeconomic Analysis of Slavery in Comparison to Free Labor Bilkent University, Ankara, Turkey
  31. ^ Institute for Agricultural and Trade Policy NAFTA Truth and Consequences: Corn
  32. ^ Job prospects: Pain from free trade spurs second thoughts; Mr. Blinder's shift spotlights warnings of deeper downside, David Wessel and Bob Davis. Wall Street Journal, 28 Mar 2007, p. A1
  33. ^ "Gentlemen deceive themselves. It is not free trade that they are recommending to our acceptance. It is, in effect, the British colonial system that we are invited to adopt; and, if their policy prevail, it will lead, substantially, to the recolonization of these States, under the commercial dominion of Great Britain.", "In Defense of the American System, Against the British Colonial System." 1832, Feb 2, 3, and 6, Clay, Henry (1843), The Life and Speeches of Henry Clay, II, pp. pp. 23–24 
  34. ^ "Had the English left everything to itself—'Laissez faire, laissez aller', as the popular economical school recommends—the [German] merchants of the Steelyard would be still carrying on their trade in London, the Belgians would be still manufacturing cloth for the English, England would have still continued to be the sheep-farm of the Hansards, just as Portugal became the vineyard of England, and has remained so till our days, owing to the stratagem of a cunning diplomatist."

International Trade Series
International trade
History of international trade
Political views
Fair trade
Trade justice
Free trade
Protectionism
Economic integration
Preferential trading area
Free trade area
Customs union
Single market
Monetary union
Customs and monetary union
Economic union
Economic and monetary union
Fiscal union
Complete economic integration
Other
Trade pact
Trade bloc
Trade creation
Trade diversion

Free trade is a system of trade policy that allows traders to act and or transact without interference from government. According to the law of comparative advantage the policy permits trading partners mutual gains from trade of goods and services.

Under a free trade policy, prices are a reflection of true supply and demand, and are the sole determinant of resource allocation. Free trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by artificial prices that may or may not reflect the true nature of supply and demand. These artificial prices are the result of protectionist trade policies, whereby governments intervene in the market through price adjustments and supply restrictions. Such government interventions can increase as well as decrease the cost of goods and services to both consumers and producers.

Interventions include subsidies, 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) and any governmental market intervention resulting in artificial prices.

Most states conduct trade policies that are to a lesser or greater degree protectionist.[1] One ubiquitous protectionist policy employed by states comes in the form of agricultural subsidies whereby countries attempt to protect their agricultural industries from outside competition by creating artificial low prices for their agricultural goods.[2]

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.

Contents

In literature

The value of free trade was first observed and documented by Adam Smith in his magnum opus, The Wealth of Nations, in 1776.[3] Later, David Ricardo made a case for free trade by presenting specialized an economic proof featuring a single factor of production with constant productivity of labor in two goods, but with relative productivity between the goods different across two countries.[3] Ricardo's model demonstrated the benefits of trading via specialization—states could acquire more than their labor alone would permit them to produce. This basic model ultimately led to the formation of one of the fundamental laws of economics: The Law of Comparative Advantage. The Law of Comparative Advantage states that each member in a group of trading partners should specialize in and produce the goods in which they possess lowest opportunity costs relative to other trading partners. This specialization permits trading partners to then exchange their goods produced as a function of specialization. Under a policy of free trade, trade via specialization maximizes labor, wealth and quantity of goods produce, exceeding what an equal number of autarkic states could produce.

Features of free trade

Free trade implies the following features[citation needed]:

  • 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.
approaching the Bay Bridge in San Francisco Bay.]]

History of free trade

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, especially in Europe, and especially in Britain, over the past five centuries. Before the appearance of Free Trade doctrine, and continuing in opposition to it to this day, the policy of mercantilism had developed in Europe in the 16th century. Early economists opposed to mercantilism were David Ricardo and Adam Smith.

Economists that advocated free trade believed trade was the reason why certain civilizations 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[citation needed], made the free trade/mercantilist dispute the most important question in economics for centuries. Free trade policies have battled with mercantilist, protectionist, isolationist, communist, populist, 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 due to an interest in raising revenues, protecting infant industries, special interest pressure, and, prior to the 19th century, a belief in mercantilism.

Many classical liberals, especially in 19th and early 20th century Britain (e.g. John Stuart Mill) and in the United States for much of the 20th century (e.g. Cordell Hull), believed that free trade promoted peace. The British economist John Maynard Keynes (1883–1946) was brought up on this belief, which underpinned his criticism of the Treaty of Versailles in 1919 for the damage it did to the interdependent European economy. After a brief flirtation with protectionism in the early 1930s, he came again to favour free trade so long as it was combined with internationally coordinated domestic economic policies to promote high levels of employment, and international economic institutions that meant that the interests of countries were not pitted against each other. In these circumstances, 'the wisdom of Adam Smith' again applied, he said.

Some degree of Protectionism is nevertheless the norm throughout the world. In most developed nations, controversial agricultural tariffs are maintained. From 1820 to 1980, the average tariffs on manufactures in twelve industrial countries ranged from 11 to 32%. In the developing world, average tariffs on manufactured goods are approximately 34%.[4]:66

Currently, the World Bank believes that, at most, rates of 20% can be allowed by developing nations; but Ha-Joon Chang believes higher levels may be justified because the productivity gap between developing and developed nations is much higher than the productivity gap which industrial countries faced. (A general feature is that the underdeveloped nations of today are not in the same position that the developed nations were in when they had a similar level of technology, because they are weak players in a competitive system; the developed nations have always been strong players, although formerly at an overall lower level.) If the main defense of tariffs is to stimulate infant industries, a tariff must be high enough to allow domestic manufactured goods to compete for the tariff to be possibly successful. This theory, known as import substitution industrialization, is largely considered to be ineffective for currently developing nations,[5]:311 and studies by the World Bank have determined that export-oriented industrialization policies correlate with higher economic growth as observed with the Four Asian Tigers. These assessments are based mainly on theory and observational study of correlations, and thus suffer from a number of weaknesses such as small sample size and numerous confounding variables (see the critical review section below).

The United States and free trade

]] Trade in colonial America was regulated by the British mercantile system through the Acts of Trade and Navigation. Until the 1760s, few colonists openly advocated for free trade, in part because regulations were not strictly enforced—New England was famous for smuggling—but also because colonial merchants did not want to compete with foreign goods and shipping. According to historian Oliver Dickerson, a desire for free trade was not one of the causes of the American Revolution. "The idea that the basic mercantile practices of the eighteenth century were wrong," wrote Dickerson, "was not a part of the thinking of the Revolutionary leaders".[6] Free trade came to what would become the United States as a result of American Revolutionary War, when the British Parliament issued the Prohibitory Act, blockading colonial ports. The Continental Congress responded by effectively declaring economic independence, opening American ports to foreign trade on April 6, 1776. According to historian John W. Tyler, "Free trade had been forced on the Americans, like it or not."[7]

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, though 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 a 44 percent tariff during the Civil War in part to pay for railroad subsidies, the war effort, and to protect favored industries.[8] 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."[9]

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.

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).

Current status

File:Free Trade
Current free trade areas with more than three member countries.

)}}      Draft Working Party Report or Factual Summary adopted      Goods and/or Services offers submitted      Memorandum on Foreign Trade Regime submitted      observer, negotiations to start later or no Memorandum on FTR submitted      frozen procedures or no negotiations in the last 3 years      no official interaction with the WTO]]
Most (but not all) countries in the world are members of the World Trade Organization (see map), which limits in certain ways but does not eliminate tariffs and other trade barriers. Most countries are also members of regional free trade areas (see map) which lower trade barriers among participating countries.

Most countries prohibit foreign airlines from cabotage (transporting passengers between two domestic locations), and foreign landing rights are generally restricted, but open skies agreements have become more common.

Notable contemporary trade barriers include ongoing tariffs, import quotas, sanctions and embargoes, currency manipulation of the Chinese yuan with respect to the U.S. dollar, agricultural subsidies in developed countries, and buy American laws.

Economics of free trade

Economic models

Two simple ways to understand the potential 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.[10]

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 Pworld. The tariff increases the domestic price to Ptariff. The higher price causes domestic production to increase from QS1 to QS2 and causes domestic consumption to decline from QC1 to QC2. 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.[11][12]

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.[10]

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.[10]

Opinion of economists

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.[13] [14] 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."[15]

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."[16] 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." [17]

Most free traders would agree that there are winners and losers from free trade, but argue that this is not a reason to argue against free trade, because free trade is supposed to bring overall gain due to idea that the winners have gained enough to make up for the losses of the losers and then some. Chang argues otherwise, saying that the economy could shrink as a result, and that some people being worse off due to trade displacement without recourse to welfare assistance to find a better job (as might be expected in poor countries) is not acceptable.[18]

In an assessment of the literature on the theory and empirical research relating to the benefits of free trade, Sonali Deraniyagala and Ben Fine found that much of the work was flawed, and concluded that the extent to which free trade benefits economic development is unknown.[19] Theoretical arguments are largely dependent upon specific empirical assumptions which may or may not hold true. In the empirical literature, many studies suggest the relationship is ambiguous, and the data and econometrics underlying a set of empirical papers showing positive results have been critiqued. The best of these papers use a simplified model, and the worst involve the regression of an index of economic performance on an index of openness to trade, with a mix of these two approaches common. In some cases, Deraniyagala and Fine claim, these indexes of openness actually reflect trade volume rather than policy orientation. They also observe that it is difficult to disentangle the effects of reverse causality and numerous exogenous variables.

In Kicking Away the Ladder, Ha-Joon Chang reviews the history of free trade policies and economic growth, and notes that many of the now-industrialized countries had significant barriers to trade throughout their history. Protectionism under the auspices of the infant industry argument (related to import substitution industrialization), was first pursued by Alexander Hamilton in the 1790s in opposition to the admonition of Adam Smith, who advised that the United States focus on agriculture, where it had a comparative advantage. In the 1840s Friedrich List, known as the father of the infant industry argument,[4]:3 advocated the infant industry argument for Germany. Chang's research shows that the United States and Britain, sometimes considered to be the homes of free trade policy, were aggressive protectionists. Britain did end its protectionism when it achieved technological superiority in the late 1850s with the repeal of the Corn Laws, but tariffs on manufactured products had returned to 23% by 1950. The United States maintained weighted average tariffs on manufactured products of approximately 40-50% up until the 1950s, augmented by the natural protectionism of high transportation costs in the 19th century.[4]:17 The most consistent practitioners of free trade have been Switzerland, the Netherlands, and to a lesser degree Belgium.[4]:59

Chang describes the export-oriented industrialization policies of the Asian Tigers as "far more sophisticated and fine-tuned than their historical equivalents".[4]:50

Opposition

The relative costs, benefits and beneficiaries of free trade are debated by academics, governments and interest groups. A number of arguments for and against in the ongoing public debate can be seen in the free trade debate article.

Arguments for protectionism fall into the economic category (trade hurts the economy) or the moral category (the effects of trade might help the economy, but have ill effects in other areas); a general argument against free trade is that it is colonialism or imperialism in disguise. The moral category is wide, including concerns of income inequality, environmental degradation, supporting child labor and sweatshops, race to the bottom, wage slavery, accentuating poverty in poor countries, harming national defense, and forcing cultural change.[20]

Free trade is often opposed by domestic industries that would have their profits and market share reduced by lower prices for imported goods.[21][22] For example, if United States tariffs on imported sugar were reduced, U.S. sugar producers would receive lower prices and profits, while U.S. sugar consumers would spend less for the same amount of sugar because of those same lower prices. The economic theory of David Ricardo holds that consumers would necessarily gain more than producers would lose.[23][24] Since each of those few domestic sugar producers would lose a lot while each of a great number of consumers would gain only a little, domestic producers are more likely to mobilize against the lifting of tariffs.[22] 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.

Socialists frequently oppose free trade on the ground that it allows maximum exploitation of workers by capital. 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." Nonetheless, Marx favored free trade solely [25] because he felt that it would hasten the social revolution. To those who oppose socialism, this becomes an argument against free trade.

"Free trade" is opposed by many anti-globalization groups, based on their assertion that free trade agreements generally do not increase the economic freedom of the poor or the working class, and frequently make them poorer. Where the foreign supplier allows de facto exploitation of labor, domestic free-labor is unfairly forced to compete with the foreign exploited labor, and thus the domestic "working class would gradually be forced down to the level of helotry." [26] To this extent, free trade is seen as nothing more than an end-run around laws that protect individual liberty, such as the Thirteenth Amendment to the United States Constitution (outlawing slavery and indentured servitude). In this regard, protective trade policies are seen, not so much as protecting domestic producers, but rather, as protecting liberty itself. This argument actually comports with the economic analysis of Free Trade to the extent that "slavery and perfect competition equilibria are Pareto optimal." [27] Thus, while admitting that some gain in efficiency might be realized in the short term by implementation of free trade policies, the long-term question of the cost of that efficiency in terms of loss of liberty remains.

It is important to distinguish between arguments against free trade theory, and free trade agreements as applied. Some opponents of NAFTA see the agreement as being materially harmful to the common people, but some of the arguments are actually against the particulars of government-managed trade, rather than against free trade per se. For example, it is argued [28] that it would be wrong to let subsidized corn from the U.S. into Mexico freely under NAFTA at prices well below production cost (dumping) because of its ruinous effects to Mexican farmers. Of course, such subsidies violate free trade theory, so this argument is not actually against the principle of free trade, but rather its selective implementation.

Latin America performed poorly since tariff cuts in 1980s and 1990s, compared to protectionist China and Southeast Asia[citation needed]. According to Samuelson, it is wrong to assume a necessary surplus of winnings over losings.[cite this quote] The paper, "Will inventions A or B lower or raise the new market-clearing real wage rates that sustain high-to-full employment"[citation needed] condemned "economists' over-simple complacency about globalization" and said that workers don't always win.[vague] Some economists[who?] try to emphasize that trade barriers should exist to help poor nations build domestic industries and give rich nations time to retrain workers.[29]

Colonialism

It has long been argued that free trade is a form of colonialism or imperialism, a position taken by various proponents of economic nationalism and the school of mercantilism. In the 19th century these criticized British calls for free trade as cover for British Empire, notably in the works of American Henry Clay, architect of the American System[30] and by German American economist Friedrich List.[31]

More recently, 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, written in part by Correa's current Energy Minister Alberto Acosta. Citing as his source the book Kicking Away the Ladder, written by 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." According to Correa, 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.

Alternatives

The following alternatives for free trade are proposed[by whom?]: balanced trade, fair trade, protectionism and Tobin tax.

Promoters

On April 1, 2009, The Freedom to Trade Coalition - an initiative of the International Policy Network and the Atlas Economic Research Foundation, comprising over 76 civil society organization from 48 countries - launched an open letter calling on all governments to eliminate trade barriers.

Signatories include Nobel Prize winning economist Vernon L. Smith, former U.S. Secretary of State George P. Shultz, former Prime Minister of Estonia Mart Laar, former Kremlin chief economist Andrei Illarionov and many other eminent economists, philosophers and other academics. In total, over 3,000 people have so far signed the letter including over 1,000 academics.

Warning of the dangers of resurgent protectionism, the letter observes: " Protectionism creates poverty, not prosperity. Protectionism doesn't even "protect" domestic jobs or industries; it destroys them, by harming export industries and industries that rely on imports to make their goods. Raising local prices of steel by "protecting" local steel companies just raises the cost of producing cars and the many other goods made with steel. Protectionism is a fool's game."

The Freedom to Trade coalition has also committed itself to monitoring the actions of government around the world.

See also

Concepts/topics:

Trade organizations:

References

  1. ^ http://www.export.gov/logistics/country_tariff_info.asp
  2. ^ http://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm
  3. ^ a b Bhagwati, Jagdish (2002). Free trade today. Princeton: Princeton Univ. Press. pp. 3. ISBN 0691091560. 
  4. ^ a b c d e Chang HJ. (2002). Kicking Away the Ladder. Anthem Press. ISBN 978-1843310273
  5. ^ Thomas A. Pugel. International Economics 13th edition
  6. ^ Oliver M. Dickerson, The Navigation Acts and the American Revolution (Philadelphia: University of Pennsylvania Press, 1951), 140.
  7. ^ John W. Tyler, Smugglers & Patriots: Boston Merchants and the Advent of the American Revolution (Boston: Northeastern University Press, 1986; ISBN 0-930350-76-6), 238.
  8. ^ [1] Lind, Michael. New America Foundation.
  9. ^ William McKinley speech, Oct. 4, 1892 in Boston, MA William McKinley Papers (Library of Congress)
  10. ^ a b c Steven E. Landsburg "Price Theory and Applications" Sixth Edition Chapter 8
  11. ^ ALan C. Stockamn "Introduction to Economics" Second Edition Chapter 9
  12. ^ N. Gregory Mankiw "Macroeconomics" Fifth Edition Chapter 7
  13. ^ Fuller, Dan; Geide-Stevenson (Fall 2003). "Consensus Among Economists: Revisited" (PDF). Journal of Economic Review 34 (4): 369–387. http://www.indiana.edu/~econed/pdffiles/fall03/fuller.pdf. 
  14. ^ Friedman, Milton. "The Case for Free Trade". Hoover Digest 1997 (4). http://www.hoover.org/publications/digest/3550727.html. 
  15. ^ Whaples, Robert (2006). [Expression error: Unexpected < operator "Do Economists Agree on Anything? Yes!"]. The Economists' Voice 3 (9). doi:10.2202/1553-3832.1156. 
  16. ^ Mankiw, Gregory (2006-05-07). "Outsourcing Redux". http://gregmankiw.blogspot.com/2006/05/outsourcing-redux.html. Retrieved 2007-01-22. 
  17. ^ Post-Autistic Economics Review, Sept 2007
  18. ^ Bad Samaritans. Bloomsberry Press, 2008.
  19. ^ Fine, Ben. (2006). The New Development Economics: After Washington Consensus, pp. 46-50. Zed Books.
  20. ^ Boudreaux, Don Globalization, 2007
  21. ^ William Baumol and Alan Blinder, Economics: Principles and Policy, p. 722.
  22. ^ a b Brakman, Steven; Harry Garretsen, Charles Van Marrewijk, Arjen Van Witteloostuijn (2006). Nations and Firms in the Global Economy : An Introduction to International Economics and Business. Cambridge: Cambridge University Press. ISBN 9780521832984. 
  23. ^ Richard L. Stroup, James D. Gwartney, Russell S. Sobel, Economics: Private and Public Choice, p. 46.
  24. ^ Pugel, Thomas A. (2003). International economics. Boston: McGraw-Hill. ISBN 007119875X. 
  25. ^ "It is in this revolutionary sense alone, gentlemen, that I vote in favor of free trade." Marx, Karl On the Question of Free Trade Speech to the Democratic Association of Brussels at its public meeting of January 9, 1848
  26. ^ Marx, Karl The Civil War in the United States, ¶ 23.
  27. ^ Haluk, Serdar, A Microeconomic Analysis of Slavery in Comparison to Free Labor Bilkent University, Ankara, Turkey
  28. ^ Institute for Agricultural and Trade Policy NAFTA Truth and Consequences: Corn
  29. ^ Job prospects: Pain from free trade spurs second thoughts; Mr. Blinder's shift spotlights warnings of deeper downside, David Wessel and Bob Davis. Wall Street Journal, 28 March 2007, p. A1
  30. ^ "Gentlemen deceive themselves. It is not free trade that they are recommending to our acceptance. It is, in effect, the British colonial system that we are invited to adopt; and, if their policy prevail, it will lead, substantially, to the recolonization of these States, under the commercial dominion of Great Britain.", "In Defense of the American System, Against the British Colonial System." 1832, Feb 2, 3, and 6, Clay, Henry (1843). [Expression error: Unexpected < operator The Life and Speeches of Henry Clay]. II. pp. pp. 23–24 
  31. ^ "Had the English left everything to itself—'Laissez faire, laissez aller', as the popular economical school recommends—the [German] merchants of the Steelyard would be still carrying on their trade in London, the Belgians would be still manufacturing cloth for the English, England would have still continued to be the sheep-farm of the Hansards, just as Portugal became the vineyard of England, and has remained so till our days, owing to the stratagem of a cunning diplomatist."


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