Contents
Free Trade
Introduction
Free Trade, interchange of commodities across political frontiers without restrictions such as tariffs, quotas, or foreign exchange controls. This economic policy contrasts with protectionist policies that use such restrictions to protect or stimulate domestic industries. See Tariff.
Early Trade Doctrines
Foreign trade doctrines began to develop during the 15th century. One early form of economic policy, known as mercantilism, dominated Western Europe from about 1500 to about 1800. Supporters of this policy worked to promote national unity and to increase the strength of the state. They considered wealth a necessary condition of power, and the accumulation of gold and silver specie, or coins, a necessary condition of wealth. Countries without gold or silver mines acquired specie by maintaining a surplus of exports over imports through strict governmental control of foreign trade.
A reaction against such control occurred in France in the 18th century. This led to the formulation of the first theory of free trade by a group of economic philosophers known as the physiocrats, who were followers of the economist Francois Quesnay. The physiocrats maintained that the free movement of goods was in accordance with the principles of natural liberty. Although their ideas had little effect in France, they influenced the British economist Adam Smith, whose free trade theories contributed to the later development of trade policy in Great Britain.
Smith decisively refuted the protectionist conclusions of mercantilist thought. He pointed out that wealth consisted not in specie itself but in the material that specie could purchase. Governmental regulation of trade actually reduced the wealth of nations, because it prevented them from purchasing the maximum amount of commodities at the lowest possible price. With free trade, each nation could increase its wealth by exporting the goods it produced most cheaply and importing goods that were produced cheaper elsewhere.
According to Smith, each country would specialize in the production and export of goods in which it had an absolute advantage—that is, it could produce the goods more cheaply than any of its trading partners. Another British economist, David Ricardo, extended that analysis early in the 19th century to encompass the more general case of comparative advantage. Ricardo noted that some nations lack an absolute advantage in the production of any commodity. However, even these nations could gain from free trade if they concentrated on producing commodities in which they had the smallest disadvantage. This enables the nation to trade goods that are easiest to produce for goods that are more difficult to produce. When nations practice the principle of comparative advantage, more goods are produced between the trading countries, and the wealth of both countries increases. The principle of comparative advantage forms the theoretical basis of the argument for free trade.
Ricardo assumed that all nations would share in the gains from free trade. The British philosopher and economist John Stuart Mill later demonstrated that such gains depend on the strength of reciprocal demand for imports and exports. The stronger the demand for the exports of a country relative to its demand for imports, the greater its gain from free trade. The gain would be reflected in an improvement in the international terms of trade for the country, as expressed by the ratio of its export prices to its import prices. (1)
Modern Trade Theory
The classical theory of trade developed by Smith, Ricardo, and Mill was concerned primarily with the analysis of the gains from trade. Modern trade theory, by contrast, takes the principle of comparative advantage for granted. It is mainly concerned with the analysis of the basis for trade and with accounting for differences in comparative advantage.
Classical theorists assumed that differences in comparative advantage resulted from differences in the productivity of resources, reflecting the unequal distribution of technologies and labor skills among nations. A more complete explanation was offered by several 20th-century economists, who noted that differences in the prices of final goods tend to reflect differences in the prices of resources used to produce the goods, and that these differences reflect differences in the availability of the resources. Countries specialize in the production and export of goods requiring relatively large amounts of those resources that they possess in abundance, and they import goods requiring relatively large amounts of resources that are scarce within their borders.(2)
Arguments for Protection
Despite the conclusions of classical theory, few countries have ever actually adopted a policy of free trade. The major exception was Great Britain, which, from the 1840s until the 1930s, levied no import duties of any kind. The historical prevalence of protectionist policies reflects in part the strength of industrial vested interests fearful of foreign competition, and in part the strength of various theoretical arguments for protection. Such arguments can be classified in three groups: those intended to influence the composition of production; those intended to influence the level of employment; and those intended to influence the distribution of income. Under appropriate circumstances all three groups of arguments have theoretical validity as well as limitations.
One of the oldest arguments for protection is the so-called infant-industry argument. According to this theory, when foreign competition is reduced or eliminated by import barriers, domestic industries can develop rapidly. After their development is complete, they should theoretically be able to hold their own in competition with industries of other nations, and protection should no longer be required. In practice, however, protection frequently cannot be removed, because the domestic industries never develop sufficient competitive strength. The limitation of the infant-industry argument is its inability to identify those industries that are capable of growing to genuine maturity.
The national defense argument for protection seeks to avoid dependence on foreign sources for supplies of essential materials or finished products that might be denied in time of war. The limitation of this argument is that identification of those industries indispensable for national defense is difficult.
A third instance in which protection is advocated is to counter dumping from abroad. Dumping occurs when products are made available as imports at prices lower than the prices prevailing in the exporting country. Protection may be justified in these circumstances, but only if the clear intention of foreign suppliers is to drive domestic suppliers out of business.
During periods of high unemployment, protection is often urged as a means of increasing employment. With imports reduced, demand for domestic substitutes will be stimulated, expanding production at home. Economists call this a “beggar-my-neighbor”policy: The improvement of employment at home is achieved entirely at the expense of employment elsewhere. The limitation of such a practice is that it invites retaliation from other nations suffering from similar problems of high unemployment.
Protection can be used to redistribute income either within nations or between nations. For example, if a nation finds that the demand for its exports is relatively strong, it can gain income at the expense of other countries by imposing tariffs or other import barriers. Foreigners will then find it more difficult to earn the income to pay for the exports they desire. Consequently, they will be forced to reduce their prices, thus improving the terms of trade for the protectionist nation. Like the employment argument, this method invites retaliation from abroad.(3)
Recent Developments
Although most countries officially favor freer trade and deny protectionism, the achievement of this goal is somewhat difficult. When economies are booming and jobs seem secure, most people tend to support free trade. When recessions occur, however, many nations become more protectionist because of national interest and pressure from interest groups that are adversely affected by prolonged recessions.
Since World War II ended in 1945 the leading trading nations have generally made a concerted effort to promote freer trade and remove protection barriers. In 1948 the General Agreement on Tariffs and Trade (GATT) went into effect. GATT was a treaty and international trade organization that worked to reduce or eliminate tariffs and other barriers to trade. GATT was originally signed by 23 nations, including the United States, and is widely credited with significantly reducing tariffs on thousands of items during its existence. (GATT membership increased steadily until 1995, when the activities of GATT were taken over by the World Trade Organization (WTO), an international organization that promotes free trade. In 1996, 120 nations were members of the WTO. (4)
Free Trade in 1889
The following information about Dueling is from the Cyclopaedia of Political Science, Political Economy, and the Political History of the United States by the Best American and European Writers.
“One of the most curious illustrations under this head is to be found in the recent experience of the United States, which, in 1878, made obligatory by statute the purchase and coinage of silver bullion to the extent of not less than two millions of dollars per month. The ostensible reason for such an enactment, was to afford to the people and business of the country a larger measure of coin currency. The real reason was to create for the silver mining interests of Colorado and other sections, an artificial and larger market for their product. The result was, that the additional coinage being both unnecessary and inconvenient it remained to a great extent dormant in the public treasury: a large amount of what would otherwise have been useful merchandise, available for exchanges, was withdrawn from the channels of industry and commerce; and an unnecessary tax of two millions of dollars per month, amounting in the aggregate at present writing (1882), to more than one hundred millions of dollars, has been imposed on the people and other industries of the country for a comparatively small measure of benefit to certain sectional and private interests.”(5)
Notes
- “Free Trade”, Microsoft® Encarta® Online Encyclopedia.
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- Id.
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- Id.
See also
Commercial Treaties
European Free Trade Association
Monopoly
North American Free Trade Agreement
Trade Dispute
World Trade Organization
General Agreement on Tariffs and Trade resources
General Agreement on Tariffs and Trade
List of international trade topics
International trade law
International Trade Law Resources
Free Trade and International Trade Economy
In relation to international trade economy, Christopher Mark (1993) provided the following definition of Free Trade: International trade that is unhampered by restrictive measures such as tariffs or non-tariff barriers. An ideal concept that plays a role in economic theory similar to that of the “perfect vacuum” in physics, since, except within economic unions, virtually no international trade is genuinely free of governmental interference. In practical terms, trade policy deliberations in all countries do not normally concern questions of whether free trade should be pursued, but rather of how much and what kind of government intervention is needed to serve the national interest. See also fair trade.
Zero-For-Zero and the GATT Policy Negotiations
In relation to the GATT Policy Negotiations, Christopher Mark (1993) provided the following explanation and/or definition of Zero-For-Zero: A term used in the market access negotiations in the Uruguay Round to denote a sectoral free-trade initiative that would essentially eliminate tariffs on an entire category of goods. Meeting in Tokyo in July 1993, the Quad trade ministers announced plans to negotiate zero-for-zero agreements in eight industrial areas including pharmaceuticals, medical equipment, steel, construction equipment, farm equipment, furniture, beer, and distilled spirits.
United States-Israel Free Trade Area Agreement
Compact of Free Association
Free Trade in International Trade
Meaning of Free Trade, according to the Dictionary of International Trade (Global Negotiator): System in which goods, capital, and labour flow freely between nations, without barriers that could hinder the trade process. Many nations have free trade agreements, like NAFTA (North America Free Trade Agreement, between Canada, United States and Mexico) and several international organizations promote free trade between their members. A number of barriers to trade are struck down in a free trade agreement. Taxes, tariffs, and import quotas are all eliminated, as are subsidies, tax breaks, and other forms of support to domestic producers. Restrictions on the flow of currency are also lifted, as are regulations that could be considered a barrier to free trade. In conclusion, free trade enables foreign companies to trade just as efficiently, easily, and effectively as domestic producers. See economic integration.
Free Trade in International Trade
Meaning of Free Trade, according to the Dictionary of International Trade (Global Negotiator): System in which goods, capital, and labor flow freely between nations, without barriers which could hinder the trade process. Many nations have free trade agreements, like NAFTA (North America Free Trade Agreement, between Canada, United States and Mexico) and several international organizations promote free trade between their members. A number of barriers to trade are struck down in a free trade agreement. Taxes, tariffs, and import quotas are all eliminated, as are subsidies, tax breaks, and other forms of support to domestic producers. Restrictions on the flow of currency are also lifted, as are regulations which could be considered a barrier to free trade. In conclusion, free trade enables foreign companies to trade just as efficiently, easily, and effectively as domestic producers. See economic integration.
Concept of Free Trade
An introductory definition of Free Trade is provided here: means the buying or selling of goods and services across international borders with few or no restrictions (see also protectionism)
Resources
See Also
- Foregin Policy
- Foreign Affairs
Resources
See Also
- International Trade
- Trade Regulation
- International Economic Law
- Export License
- International Trade Law
- Foreign Trade
- Safeguard
Resources
See Also
Further Reading
- Information about Free Trade in the Encyclopedia of World Trade: from Ancient Times to the Present (Cynthia Clark Northrup)