Trade between countries which takes place completely free of restrictions. Such trade allows specialization in member states of free trade areas, and lowers costs because, together with competition, the markets are increased. Within a free trade area there are no barriers, such as tariffs and quotas. However, there is not necessarily a common policy on trade with countries outside the free trade area. See efta, world trade organization.

Political Dictionary: free trade

The absence of barriers to international trade. Up to the nineteenth century, under the system of mercantilism, Europeans faced two main kinds of barriers to trade: first, there were duties, quotas, and prohibitions restricting the movement of goods from one customs area to another; second, controls on participation in particular trades imposed by corporations like the British or Dutch East India Companies.

1813 the British East India Company was deprived of its monopoly over trade between Britain and India. Following a prolonged public campaign, the repeal of the Corn Laws 1846 opened the British market to cheap foreign grain. The exemplary force of these events was all the greater because they appeared to be applications of the cogent and appealing liberal economic theories of Adam Smith and David Ricardo. Moreover, rapid growth in international trade, coinciding with increasing wealth and an extended period of general peace in Europe, at first appeared to confirm these theories. Ricardo had argued in his theory of comparative advantage that free trade between nations would bring gains to both parties to an exchange, even when one was the more efficient producer of every good they traded. This was because trade encouraged even an unproductive national economy to devote resources to those branches of production in which they would be least inefficiently employed.

But Ricardo never promised that the gains from trade would be evenly distributed, and a nationalist critique of free trade pioneered by Alexander Hamilton in the United States and Friedrich List in Germany gathered strength towards the end of the century. It even gained ground among traditionally liberal British businessmen, now buffeted by the trade cycle and threatened by new centres of manufacturing industry in continental Europe and North America.

The campaign for tariff reform in Britain was only one facet of a general drift away from free trade. By the 1930s not just the practice but even the ideology had been largely abandoned because it was held to provide disproportionate gains to established industrial economies and to lack a satisfactory mechanism for the realization of their potential comparative advantage by newly developing economies. In its place came bilateral systems of exchange within currency areas, the British system of imperial preference within the sterling area being only one example.

Because bilateralism coincided with a sharp fall in the volume of international trade and was held by powerful members of the Roosevelt administration to have contributed indirectly to the outbreak of the Second World War, the allied powers reinstated a limited form of free trade within a dollar-exchange monetary system in the later 1940s. Under the GATT (General Agreement on Tariffs and Trade) of 1947 (see World Trade Organization), successive rounds of multilateral trade negotiations (MTNs) outlawed quantitative restrictions on trade, such as quotas, and achieved greatly reduced tariffs on the principal classes of manufactured goods traded between leading industrialized economies. But although this contributed to a sharp increase in levels of trade and prosperity during the 1950s and 1960s, it steadily became more and more evident that many non-tariff barriers, including complex administrative procedures, ingeniously drafted health and safety regulations, and nationalistic public procurement policies, still impeded free exchange of goods and services. Moreover the GATT had permitted a number of exceptions to its general principles from the outset. Trade in temperate-zone agricultural goods was not covered, nor in textiles and clothing, and both became subject to extremely restrictive regimes devised by the United States, Japan, and the European Community to protect their own producers. The GATT also allowed discrimination in favour of each other by groups of countries pledged to the formation of a free trade area or customs union, such as the European Union.

Add to this the extent to which goods such as automotive components, oil, or aluminium are traded internationally within large multinational corporations at administered rather than market prices, together with the renewed prevalence of smuggling (especially of precious metals and illegal drugs), and it becomes hard to discern clearly any causal relation between prosperity and the imperfect contemporary implementation of liberal free trade theory. Be this as it may, the most impressive rates of economic growth achieved in recent years have without exception been achieved by export-oriented countries like Japan, Taiwan, or South Korea, that have relied very heavily on market access provided by this system of managed liberalism; and this has confirmed free trade once again as the effectively unchallenged ideal type of international commerce.

— Charles Jones

Britannica Concise Encyclopedia: free trade

Policy in which a government does not discriminate against imports or interfere with exports. A free-trade policy does not necessarily imply that the government abandons all control and taxation of imports and exports, but rather that it refrains from actions specifically designed to hinder international trade, such as tariff barriers, currency restrictions, and import quotas. The theoretical case for free trade is based on Adam Smith's argument that the division of labour among countries leads to specialization, greater efficiency, and higher aggregate production. The way to foster such a division of labour, Smith believed, is to allow nations to make and sell whatever products can compete successfully in an international market.

For more information on free trade, visit Britannica.com.

British History: free trade

The basic tenet of the theory is that free trade, which is the absence of any artificial restrictions on the level or composition of trade or the price at which commodities are exchanged, represents the best form of organization in international markets. Free trade assumes a state of perfect competition.

The fact remains that there are very few examples of any country following a complete free trade policy, Victorian Britain constituting a notable exception. The repeal of the Corn Laws in 1846 brought a shift in political perceptions by removing the protection traditionally given to agriculture in favour of securing cheap imported food for the industrial areas. (See protectionism.) The anomaly of the British adoption of free trade, by contemporary international standards, is a reflection of the unusual economic structure of the country. In the Victorian period the British economy was heavily dependent on international trade and finance, especially the latter. No other country, before or since, has diverted such a large share of national income to overseas investment. Furthermore, British industry depended heavily on export markets. It was thus in the interests of the British economy that international trade flourished.

The First World War severely undermined the British balance of payments as overseas investments were sold to pay for the war. The 1929-32 depression marked the end of free trade. In 1932 a general tariff was introduced imposing a 10 per cent import tax, but allowing preferential treatment to Commonwealth countries in return for concessions on British exports.

US History Encyclopedia: Free Trade

The economic rationale for free trade lies in the principle that if trade is free, certain goods and services can be obtained at lower cost abroad than if domestic substitutes are produced in their place. The concept has each country producing for export those goods in which production is relatively efficient, thereby financing the import of goods that would be inefficiently produced at home. This comparative advantage in production between nations is expected to shift over time with changes in such factors as resource endowments and rates of technological advance. Free trade is therefore thought to facilitate the optimal use of economic resources: each country commands a higher level of consumption for a given level of resource use than would be otherwise possible. Advocates of tariff protection take exception to the doctrine on two fundamental bases: at times national goals other than maximized consumption must be served (for example, national defense), and the interests of specific groups do not parallel those of the nation as a whole. Thus, the history of tariffs and other barriers to free trade is a chronicle of shifting economic interests between industries and geographic areas.

Until 1808 the export of American farm and forest products to foreign markets was so profitable and imports were so cheap that there was little incentive to engage in manufacturing. Existing duties were low and designed for revenue rather than protection. War and embargo in the years 1808–1815 stimulated manufacturing (wool, cotton, iron); restoration of peace caused a flood of imports. Free trade then became a sectional issue, a strong protectionist movement developing in the middle and western states. Depression in 1819 and 1820 convinced workers that protection was necessary to save jobs from foreign competition, whereas farmers felt that building strong American industry would create higher demand and prices for farm goods. New England was divided between the manufacturing and the commercial interests, while the South solidly favored free trade because of its desire for cheap imports and fear of English retaliation against raw cotton imported from the United States.

By 1833 free-trade sentiment revived, as northern farmers, believing that young industries no longer needed protection, joined forces with John C. Calhoun and the South in an alliance that kept tariffs low until 1860. After the Civil War the protectionists controlled tariff policy for many years. Continued southern devotion to free trade and persistent, although wavering, low-tariff sentiment in the West produced only the short-lived horizontal duty reduction of 1872 and a few haphazard reductions in 1883. In the campaign of 1888 free-traders rallied around Grover Cleveland as the tariff for the first time became strictly a party issue. But the protectionists won again and passed the Tariff Act of 1890.

Popular hatred of monopoly—evidenced in the Sherman Antitrust Act of 1890—came to the support of free trade by implicating the tariff as "the mother of trusts." Cleveland won election in 1892 against the high-tariff Republicans, but the Democrats were torn over free silver and lost the opportunity to liberalize tariffs. However, continued antitrust feeling had bred such hostility to extreme protectionism that even the Republicans promised tariff reduction in the election of 1908. Sectional interests continued to thin the ranks of free-traders; the West and South demanded lower tariffs in general but supported the particular agricultural tariffs that served their interests in the Tariff Act of 1909.

Recurring economic crises, particularly the depressions of 1893–1897 and 1907–1908, further shook public confidence in the virtues of the "American system." Only the large industrial interests appeared to be consistently served by the cyclical pattern of economic growth (for example, Standard Oil's combining of small companies during depression, as indicated in the Sherman antitrust case of 1911). The height of tariffs, identified closely by the public with large industry, became a major political issue in 1912. The victorious Democrats promised reduction but held that no "legitimate" industry would be sacrificed. Although a considerable number of items were placed on the free list, rates were reduced, on an average, 10 percent only.

After World War I, with the Republicans in power, extreme protection held sway. Agriculture accepted any tariffs on farm products—although still grumbling about industrial tariffs—and the South found its former solid free-trade front broken by districts with a stake in tariffs on products of farm and factory. In the campaign of 1928 the tariff positions of the two major parties were scarcely distinguishable. Following a full year of debate in Congress, the Hawley-Smoot Tariff Act became law in 1930; the act constructed the highest tariff wall in the nation's history, and its contribution to the shrinkage of world trade and the severity of worldwide depression was considerable. Revulsion from the indiscriminate protectionism, distress with the worsening depression, and the leadership of Cordell Hull, an old-fashioned southern tariff liberal, again turned the country toward trade liberalization.

The Trade Agreements Act of 1934 and its twelve extensions through 1962 beat a steady retreat from the high-water mark of protection reached in 1930. Reacting to the severe decline in the volume of U.S. exports after 1930, the administration of Franklin D. Roosevelt conceived reciprocal trade concessions as an antidepression measure to generate recovery in export-related industries. Following World War II a political impetus was added; by opening its markets, the United States could assist the war-ravaged European economies in reconstruction and could similarly aid the development in poor nations. The economic implications of the Trade Agreements Act and its extensions were conflicting: there was a steady trend of tariff reduction, expedited after 1945 through the General Agreements on Tariffs and Trade (GATT) and the application of the unconditional most-favored-nation concept; but the reductions were tempered by a "no-injury" philosophy, adopted to minimize injury to domestic industry. Escape clauses, peril points, and national security regulations have hedged the U.S. commitment to agreed tariff reductions. The 1958 extension was notable in firmly establishing these concepts and the necessary enforcement machinery. Under the peril-point provision the U.S. tariff commission was to determine before negotiations the level to which a tariff rate could fall before seriously damaging the domestic industry; this estimate was to provide an effective limit to the authority extended negotiators. An industry experiencing severe injury from a tariff already reduced could petition for relief under the escape clause, which had appeared in U.S. trade agreements since 1943; if the U.S. Tariff Commission found sufficient injury, the concession could be withdrawn.

The Trade Expansion Act of 1962 made a significant departure from the reciprocal agreements in providing programs for alleviating injury caused by trade liberalization. Benefits and retraining for labor and special loans and tax treatment for industry were extended on the rationale of reallocating resources into more efficient uses. The reciprocal trade legislation had avoided this process by rescinding the tariff reduction when injury was inflicted. Administration of the provisions of the 1962 act has been difficult, however, because of the difficulty of distinguishing losses owing to increased imports from losses owing to the domestic industry's inefficiency. The 1962 act extended authority for sizable tariff reductions, to be negotiated through the offices of GATT during the five years following. Tariff reductions on items not excepted from this Kennedy Round of negotiations amounted to about 35 percent. As the U.S. trade balance worsened in the late 1960s, culminating in a trade deficit in 1971—the first in the twentieth century—the forces of protection threatened to reverse the forty-year trend of trade liberalization.

Throughout the 1970s, the executive branch resisted congressional initiatives to raise trade barriers. In 1980, Ronald Reagan's election to the presidency ushered in a new era of free trade in American foreign policy, one that would last for the remainder of the century and beyond. In the 1980s the Reagan Administration promoted a new round of GATT talks, and by the early 1990s the United States, Mexico, and Canada had agreed to create a continental free trade zone, known as the North American Free Trade Agreement (NAFTA).

The collapse of communism added momentum to the global trend toward free trade and free markets. During the 1990s governments across the world embraced free-trade policies, including countries that once belonged to the communist bloc, such as Russia, Poland, and China. By the early twenty-first century free trade had emerged as a cornerstone of the new global economy. Nevertheless, substantial opposition to free-trade policies remained an active force in global politics. In particular, environ-mental and labor groups condemned free trade policies on the grounds that they made it easier for multinational corporations to pollute the environment and to pay sweat-shop wages without fear of government regulation. The debate over free trade showed no signs of cooling off as the twenty-first century began.

Bibliography

LaFeber, Walter. The New Empire: An Interpretation of American Expansion, 1860–1898. Ithaca, N.Y.: Cornell University Press, 1963.

Lake, David A. Power, Protection, and Free Trade: International Sources of U.S. Commercial Strategy, 1887–1939. Ithaca, N.Y.: Cornell University Press, 1988.

Milner, Helen V. Resisting Protectionism: Global Industries and the Politics of International Trade. Princeton, N.J.: Princeton University Press, 1988.

Terrill, Thomas E. The Tariff, Politics, and American Foreign Policy, 1874–1901. Westport, Conn.: Greenwood Press, 1973.

—Thomas L. Edwards/A. G.

Columbia Encyclopedia: free trade,

in modern usage, trade or commerce carried on without such restrictions as import duties, export bounties, domestic production subsidies, trade quotas, or import licenses. The basic argument for free trade is based on the economic theory of comparative advantage: each region should concentrate on what it can produce most cheaply and efficiently and should exchange its products for those it is less able to produce economically.

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 signed 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.

Trade Series
International trade
History of international trade
Free trade
Protectionism
Trade pact
Trade bloc Preferential trading area
Free trade area
Customs union Trade creation Trade diversion
Monetary union
Common market
Economic and monetary union

History of free trade

The history of international free trade is a history of international trade focusing on the development of open markets. It is known that various prosperous world cultures 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 cultures 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, such as the Pelopponesian War between Athens and Sparta, the Opium Wars between China and Great Britain, and other colonial wars, have been fought over trade. 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 ^{[citation needed]}.

American opposition to free trade

Beginning with 1st U.S. Secretary of the Treasury Alexander Hamilton's "Report on Manufactures", in which he advocated tariffs to help protect infant industries, including bounties (subsidies) derived in part from those tariffs, the United States was the leading nation opposed to "free trade" theory. Throughout the 19th century, leading statesmen of U.S. including 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 1830's, 1840s, and 1850's in part over the issue of the tariff and protection of industry. The Democratic Party favored moderate tariffs and the Whig's favored higher protective tariffs which won the elections of 1840 and 1848 respectively. The leading economist in the United States at this time Henry Charles Carey became the leading proponent of the "American System" of economics as it had developed in opposition to the 'free trade' system which he called the "British System" as was proposed by Adam Smith and advocated by the British Empire. His book "Harmony of Interests" together with German-American economist Friedrich List in his scholarly work became widely read and disseminated in America and Germany leading the German Historic School economists to embrace a similar anti-free trade approach which was embraced by Chancellor Bismarck in the late 1800s. The fledgling Republican Party led by Abraham Lincoln who called himself a "Henry Clay tariff Whig" strongly opposed free trade when formed and implemented at 44 percent tariff during the Civil War in part to pay for the building of the Union-Pacific Railroad, the war effort, and to protect American industry.^[1] President William McKinley stated the United States' stance under the Republican Party (who had won every election for President except the two non-consecutive terms of Grover Cleveland until 1912 maintaining Lincoln's economic principles) 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."^[2]

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.

In the 1930s, the US adopted the protectionist Hawley-Smoot Tariff Act which raise rates to all time highs beyond the Lincoln levels, which some economists believe exacerbated the Great Depression while others disagree. In response the Democratic Party under Franklin D. Roosevelt resorted to Hamilton's earlier formula of Reciprocity with moderate tariffs coupled with subsidy to industry which went unbroken until the 1970s when the Free Trade era began for the United States after the Kennedy Round of trade talks in the late sixties were complete.

Present day (US based)

Since the end of WWII, in part due to industrial supremacy and the onset of the Cold War, the US government has become one of the most consistent proponents of reduced tariff barriers and free 'managed' 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 US 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).

At the same time, the US government has consistently opposed free trade in agricultural goods, subsidizing exports to the point where foreign producers (often in developing countries) are unable to compete. It has also repeatedly failed to comply with the rulings of international trade tribunals (e.g. Canada US softwood lumber dispute). The US government has also made copyright and intellectual property legislation part of its free trade agreements.

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.^[3] ^[4] 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."^[5] Quoting Harvard economics professor Gregory Mankiw, "Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards."^[6] 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." ^[7] 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.

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.^[8]

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. ^[9]^[10]

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. ^[8]

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.^[8]

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 (see Dumping). 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. However, domestic sugar producers have large financial incentives to politically oppose the lifting of tariffs. 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"). E.g. 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 the observation 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 ^[11] that letting subsidized corn from the US into Mexico freely under NAFTA at prices well below production cost (dumping) is ruinous to Mexican farmers who then enter the US illegally.. 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^[12], 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 created a list of "Highly offshorable" jobs that could be lost in the next 20 years, for example, 1,815,340. bookkeeping, accounting and auditing clerks. ^[13]

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, [3] 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.)

Alternatives to free trade

Fair Trade

Main article: Fair Trade

Fair trade is an organized social movement which promotes standards for international labor, environmentalism, and social policy in areas related to production of Fairtrade labeled and unlabeled goods.

Tobin Tax

Main article: Tobin tax

A Tobin tax is the suggested tax on all trade of currency across borders. This is intended to put a penalty on short-term speculation in currencies. This policy is an alternative to the free flow of capital across borders. This policy has little or nothing to do with the free flow of goods and services.

Protectionism

Main article: Protectionism

Protectionism is the economic and political policy of isolating a country's economy through the imposition of tariffs, quotas, restrictions, border security, and other measures. Supporters of protectionism affirm that it prevents the distortion of the fragile wage and price structure by foreign dumping, unfair trade with undeveloped nations, labor arbitrage, illegal immigration, and other foreign interference in the domestic market.

Protectionism was a key tenet of Alexander Hamilton's economic program, which sought to protect the domestic economic system and wage and price structure from foreign competition. Some pro-administration newspapers called the Tariff Act of 1789, signed into law by President Washington on July 4 1789, the "second declaration of independence."

Balanced trade

Main article: Balanced trade

Balanced trade is an alternative economic model to free trade. Under balanced trade, nations are required to provide a fairly even reciprocal trade pattern. They cannot run large trade deficits. If deficits appear, the surplus nation must find a way to balance out trade or risk sanctions, fees, or quotas. Critics say this may discourage innovation as one country may reduce its efforts to produce products needed by the other.

International barter

Some nations have prohibited trade under monetary terms of trade. For example, Hjalmar Schacht arranged barter for Nazi Germany to bypass the free market which he thought was rigged by Anglo-American capitalists.^[14] The former Soviet Union occasionally arranged bilateral barter within its sphere of influence. See Comprehensive Program for Socialist Economic Integration or Comecon. Arab League nations have also occasionally replaced monetary trade with barter.

Increase the credit risk to international loans

George Soros and others argue that some of the most destructive free trade, such as developing world agricultural monoculture, is driven by export-oriented production targets set by the International Monetary Fund (IMF) and the governments it supports. He suggests that the volume of this trade would be lower if the lending banks were liable for credit default instead of receiving IMF bail-outs. If banks were responsible for default, the levels of lending would be lower and lead to more sustainable export programs due to the discipline of the free market, he believes.

International price floors

Some argue that free trade is responsible for the decline in international commodity prices. One reason for these low prices is the over-production of subsidized commodities in the developed world. Rather than removing the production subsidy for farmers in the rich world some suggest extending them to farmers in the developing world. For instance, producers in Poland lobbied to be included in the Common Agriculture Policy. The reason that rich-country farmers need subsidies to thrive is the comparative advantage of cheap land and labour enjoyed by their poor-country competitors.

Separating world prices from domestic prices

Foreign trade of Communist Czechoslovakia was conducted at "free trade" import prices, with the Ministry of Foreign Trade selling the goods on, into the internal market, at pre-determined prices for each good. In this way, Czechoslovakian consumers were insulated from shifts in world prices whilst having some access to foreign products.

It is difficult for governments to sustain different internal prices over the long term. If the internal price is set below world prices, smugglers try to profit from the differential by illegally exporting the product to nations where they can sell it at a higher price. To the extent smugglers succeed, the domestic government is indirectly subsidizing foreign consumers. This problem has been vividly illustrated in nations where fuel prices are subsidized below world prices; domestic shortages frequently occur as a significant portion of the good is illegally smuggled out of the country. Rationing and black markets are stimulated by artificially low prices; in Iraq the famously long petrol pump queues for petrol at 50 dinars/litre can be bypassed by buying on the black market at 250 dinars/litre. Unofficial markets are a common problem wherever the "official" price is below (or above) the free trade price.^[15]

Despite the difficulties of maintaining fixed commodity prices, many Governments that attempt it claim that doing so "immunizes" their economies against destabilizing price shocks. It is sometimes argued that the social and economic benefits alone, outweigh the disadvantages (of import-price stability).

On the other hand, international prices tell the costs of producing certain products and the benefits of consuming them. By separating the prices this flow of information is halted and therefore the local decisions are decoupled from the global needs and possibilities, thus hindering the producers in the country to produce the products where they have a comparative advantage and the consumers to consume the products that can elsewhere be produced so cheaply that they would like to consume them at those prices instead of consuming some other kind of products or less products (or services).

Regional trading blocs

James Goldsmith advocated free trade within regional trading blocs, but not between blocs (such as European Community countries). If countries within the "customs union" had similar living standards and norms of social and environmental policy they would not race to the bottom. He also proposed protectionism in the goods market, whilst allowing free trade in technology and capital.

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.

Footnotes

^ [1] Lind, Michael. New America Foundation.
^ William McKinley speech, Oct. 4, 1892 in Boston, MA William McKinley Papers (Library of Congress)
^ Fuller, Dan; Geide-Stevenson (Fall 2003). "Consensus Among Economists: Revisited". Journal of Economic Review 34 (4): 369-387.
^ Friedman, Milton. "The Case for Free Trade". Hoover Digest 1997 No. 4.
^ Whaples, Robert (2006). "Do Economists Agree on Anything? Yes!". The Economists' Voice 3 (9).
^ Mankiw, Gregory (May 7, 2006). Outsourcing Redux. Retrieved on January 22, 2007.
^ Post-Autistic Economics Review, Sept 2007
^ ^a ^b ^c Steven E. Landsburg "Price Theory and Applications" Sixth Edition Chapter 8
^ ALan C. Stockamn "Introduction to Economics" Second Edition Chapter 9
^ N. Gregory Mankiw "Macroeconomics" Fifth Edition Chapter 7
^ Institute for Agricultural and Trade Policy NAFTA Truth and Consequences: Corn
^ Journal of Economic Perspectives, 18(3):135-46, Summer 2004, Where Ricardo and Mill rebut and confirm arguments of mainstream economists supporting globalization, Paul A. Samuelson. Mainstream economists have argued for globalization. Good jobs may be lost here in the short run, they say, but the total U.S. net national product must, by the economic laws of comparative advantage, be raised in the long run. The gains of the winners exceed the losses of the losers. Schumpeter called this "creative capitalist destruction." But Samuelson says it is wrong to assume a necessary surplus of winnings over losings. This paper asks, "Will inventions A or B lower or raise the new market-clearing real wage rates that sustain high-to-full employment" in China and America?
^ 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
^ Officially, the 1933 bilateral-barter policy was designed to ensure that foreign countries bought as much from industrial Germany as she bought from them. However, Milton Friedman has argued ([2]) that Hjalmar Schacht's exchange controls were primarily designed to restrict capital flight.
^ See The Economist’s review of fuel subsidy's effects The Economist online.

External links

Freedom to Trade: Refuting the New Protectionism edited by Edward L. Hudgins (online version of the book)
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
In Defence of Globalization, Free Trade and Free Market
The Blessings of Free Trade
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!”
Free-Trade Agreements: Steppingstones to a More Open World
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
Free Trade and Human Rights: The Moral Case for Engagement
Why developing countries should liberalise trade
Freedom to Work, to Earn, & to Buy by Harry Browne

International trade
Definitions	Balance of payments · Current account (Balance of trade) · Capital account · Foreign exchange reserves · Sovereign wealth funds · Net Capital Outflow · Comparative advantage · Absolute advantage · Import substitution · International trade
Organizations and policies	World Trade Organization · International Monetary Fund · World Bank Group · International Trade Centre · Trade bloc · Free trade zone · Trade barrier · Import quota · Tariff
Schools of thought	Free trade · Balanced trade · Mercantilism · Protectionism
Related issues	Globalization · Outsourcing · Trade justice · Fair trade

This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have been reviewed by professional editors (see full disclaimer)

Donate to Wikimedia

Join the WikiAnswers Q&A community. Post a question or answer questions about "free trade" at WikiAnswers.

Copyrights:

		Dictionary. The American Heritage® Dictionary of the English Language, Fourth Edition Copyright © 2007, 2000 by Houghton Mifflin Company. Updated in 2007. Published by Houghton Mifflin Company. All rights reserved. Read more
		Geography Dictionary. A Dictionary of Geography. Copyright © Susan Mayhew 1992, 1997, 2004. All rights reserved. Read more
		Political Dictionary. The Concise Oxford Dictionary of Politics. Copyright © 1996, 2003 by Oxford University Press. All rights reserved. Read more
		Britannica Concise Encyclopedia. Britannica Concise Encyclopedia. © 2006 Encyclopædia Britannica, Inc. All rights reserved. Read more
		British History. A Dictionary of British History. Copyright © 2001, 2004 by Oxford University Press. All rights reserved. Read more
		US History Encyclopedia. © 2006 through a partnership of Answers Corporation. All rights reserved. Read more
		Columbia Encyclopedia. The Columbia Electronic Encyclopedia, Sixth Edition Copyright © 2003, Columbia University Press. Licensed from Columbia University Press. All rights reserved. www.cc.columbia.edu/cu/cup/ Read more
		Economics Dictionary. The New Dictionary of Cultural Literacy, Third Edition Edited by E.D. Hirsch, Jr., Joseph F. Kett, and James Trefil. Copyright © 2002 by Houghton Mifflin Company. Published by Houghton Mifflin. All rights reserved. Read more
		Wikipedia. This article is licensed under

free trade