HOME

TheInfoList




Free trade is a
trade policy A commercial policy (also referred to as a trade policy or international trade policy) is a government's policy governing international trade International trade is the exchange of capital, goods, and services across international borders ...
that does not restrict
imports An import is the receiving country in an export An export in international trade International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of go ...
or
exports An export in international trade International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services. In most countries, such trade rep ...
. It can also be understood as the
free market In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goo ...
idea applied to
international trade International trade is the exchange of capital Capital most commonly refers to: * Capital letter Letter case (or just case) is the distinction between the letters that are in larger uppercase or capitals (or more formally ''majuscul ...
. In government, free trade is predominantly advocated by political parties that hold economic liberal positions, while economic nationalist and
left-wing Left-wing politics supports social equality and egalitarianism Egalitarianism (), or equalitarianism, is a school of thought within political philosophy that builds from the concept of social equality, prioritizing it for all people. ...
political parties generally support
protectionism Protectionism is the economic policy The economic policy of governments covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, nationalization, national o ...
, the opposite of free trade. Most nations are today members of the
World Trade Organization The World Trade Organization (WTO) is an intergovernmental organization that regulates and facilitates international trade between nations. Governments use the organization to establish, revise, and enforce the rules that govern international ...
multilateral trade Bilateral trade or clearing trade is trade exclusively between two states, particularly, barter trade based on bilateral deals between governments, and without using hard currency In macroeconomics Macroeconomics (from the Greek prefix ''mak ...
agreements. Free trade was best exemplified by the unilateral stance of Great Britain who reduced regulations and duties on imports and exports from the mid-nineteenth century to the 1920s. An alternative approach, of creating free trade areas between groups of countries by agreement, such as that of the
European Economic Area The European Economic Area (EEA) was established via the ''Agreement on the European Economic Area'', an international agreement which enables the extension of the European Union The European Union (EU) is a political and economic un ...

European Economic Area
and the
Mercosur Mercosur (in Spanish), Mercosul (in Portuguese), or Ñemby Ñemuha (in Guarani), officially Southern Common Market,, pt, link=no, Mercado Comum do Sul, gn, link=no, Ñemby Ñemuha is a South American South America is a continent ...

Mercosur
open market The term open market is used generally to refer to an economic situation close to free trade Free trade is a trade policy A commercial policy (also referred to as a trade policy or international trade policy) is a government's policy governin ...

open market
s, creates a protectionist barrier between that free trade area and the rest of the world. Most governments still impose some protectionist policies that are intended to support local employment, such as applying
tariff A tariff is a imposed by a of a country or of a on or of goods. Besides being a source of for the government, import duties can also be a form of regulation of and policy that taxes foreign products to encourage or safeguard domestic indu ...
s to imports or
subsidies A subsidy or government incentive is a form of financial aid or support extended to an economic sector (business, or individual) generally with the aim of promoting economic and social policy. Although commonly extended from the government, the term ...

subsidies
to exports. Governments may also restrict free trade to limit exports of natural resources. Other barriers that may hinder trade include import quotas, taxes and
non-tariff barrier Non-tariff barriers to trade (NTBs; also called non-tariff measures, NTMs) are trade barrier Trade barriers are government-induced restrictions on international trade. Economists generally agree that trade barriers are detrimental and decrease o ...
s, such as regulatory
legislation Legislation is the process or product of enrolling, enacting, or promulgating Promulgation is the formal proclamation or the declaration that a new statute, statutory or administrative law is enacted after its final Enactment of a bill, approv ...
. Historically, openness to free trade substantially increased from 1815 to the outbreak of World War I. Trade openness increased again during the 1920s, but collapsed (in particular in Europe and North America) during the Great Depression. Trade openness increased substantially again from the 1950s onwards (albeit with a slowdown during the 1973 oil crisis). Economists and economic historians contend that current levels of trade openness are the highest they have ever been. Economists are generally supportive of free trade. There is a broad consensus among economists that protectionism has a negative effect on economic growth and economic welfare while free trade and the reduction of
trade barrier Trade barriers are government-induced restrictions on international trade International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services ...
s has a positive effect on economic growthSee P.Krugman, «The Narrow and Broad Arguments for Free Trade», American Economic Review, Papers and Proceedings, 83(3), 1993 ; and P.Krugman, Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations, New York, W.W. Norton & Company, 1994. and economic stability. However, in the short run,
liberalization of trade Economic liberalization (or economic liberalisation) is the lessening of government regulations and restrictions in an economy An economy (from Greek language, Greek οίκος – "household" and νέμoμαι – "manage") is an area of the ...
can cause significant and unequally distributed losses and the economic dislocation of workers in import-competing sectors.


Features

Free trade policies may promote the following features: * Trade of
goods In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
without taxes (including tariffs) or other
trade barrier Trade barriers are government-induced restrictions on international trade International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services ...
s (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,
regulation Regulation is the management of complex systems A complex system is a system composed of many components which may interaction, interact with each other. Examples of complex systems are Earth's global climate, organisms, the human brain, infras ...

regulation
s, or laws) that give some
firms Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a business name A trade ...
, households, or
factors of production In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
an advantage over others. * Unregulated access to
markets Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Sweden Art, entertainment, and media Films *Market (1965 film), ''Market'' (1965 ...
. * Unregulated access to market information. * Inability of firms to distort markets through government-imposed
monopoly A monopoly (from Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none) is as described by Irving Fisher, a market with the "absence of competition", creating a situation where a specific ...

monopoly
or
oligopoly An oligopoly (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. Its population is approximately 10.7 mi ...
power. *
Trade agreement A trade agreement (also known as trade pact) is a wide-ranging taxes, tariff and trade treaty that often includes investment guarantees. It exists when two or more countries agree on terms that help them trade with each other. The most common tra ...
s which encourage free trade.


Economics


Economic models

Two simple ways to understand the proposed benefits of free trade are through
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist, one of the most influential of the classical economists along with Thomas Malthus Thomas Robert Malthus (; 13/14 February 1766 – 23 December 1834) w ...

David Ricardo
's theory of
comparative advantage In an economic model, agent (economics), agents have a comparative advantage over others in producing a particular Goods (economics), good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative ...

comparative advantage
and by analyzing the impact of a tariff or import quota. An economic analysis using the law of supply and demand and the economic effects of a tax can be used to show the theoretical benefits and disadvantages of free trade.
Thom Hartmann The surname Thom is of Scotland, Scottish origin, from the city of Aberdeen, Aberdeenshire (historic), Aberdeenshire and Angus, Scotland, Angus, and is a sept of the Clan MacThomas. Thom is also a first name variant of the abbreviation "Tom (given ...
, ''Unequal Protection'', Second Edition, Chapter 20. p. 255
Most economists would recommend that even
developing nations 450px, Example of Older Classifications by the IMF and the United Nations, UN from 2008 A developing country is a country with a less developed industrial base and a low Human Development Index (HDI) relative to other countries. However, ...
should set their tariff rates quite low, but the economist
Ha-Joon Chang Ha-joon is a Korean masculine given name. Its meaning depends on the hanja Hanja (, , or Hancha) is the Korean name for a traditional writing system consisting mainly of Traditional Chinese characters () that was incorporated and used si ...
, a proponent of industrial policy, believes higher levels may be justified in developing nations because the productivity gap between them and developed nations today is much higher than what developed nations faced when they were at a similar level of technological development. Underdeveloped nations today, Chang believes, are weak players in a much more competitive system.Pugel (2007), ''International Economics'', pp. 311–312. Counterarguments to Chang's point of view are that the developing countries are able to adopt technologies from abroad whereas developed nations had to create new technologies themselves and that developing countries can sell to export markets far richer than any that existed in the 19th century. If the chief justification for a tariff is to stimulate infant industries, it must be high enough to allow domestic manufactured goods to compete with imported goods in order to be successful. This theory, known as
import substitution industrialization Import substitution industrialization (ISI) is a trade Trade involves the transfer of goods from one person or entity to another, often in exchange for money. Economists refer to a system A system is a group of Interaction, interacting ...
, is largely considered ineffective for currently developing nations.


Tariffs

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.Alan C. Stockman, ''Introduction to Economics'', Second Edition, Chapter 9. N. Gregory Mankiw, ''Macroeconomics'', Fifth Edition, Chapter 7. This has three effects on societal welfare. Consumers are made worse off because the consumer surplus (green region) becomes smaller. Producers are better off because the producer surplus (yellow region) is made larger. The government also has additional tax revenue (blue region). However, the loss to consumers is greater than the gains by producers and the government. The magnitude of this societal loss is shown by the two pink triangles. Removing the tariff and having free trade would be a net gain for society. An almost identical analysis of this tariff from the perspective of a net producing country yields parallel results. From that country's perspective, the tariff leaves producers worse off and consumers better off, but the net loss to producers is larger than the benefit to consumers (there is no tax revenue in this case because the country being analyzed is not collecting the tariff). Under similar analysis, export tariffs, import quotas and export quotas all yield nearly identical results. Sometimes consumers are better off and producers worse off and sometimes consumers are worse off and producers are better off, but the imposition of trade restrictions causes a net loss to society because the losses from trade restrictions are larger than the gains from trade restrictions. Free trade creates winners and losers, but theory and empirical evidence show that the gains from free trade are larger than the losses. A 2021 study found that across 151 countries over the period 1963–2014, "tariff increases are associated with persistent, economically and statistically significant declines in domestic output and productivity, as well as higher unemployment and inequality, real exchange rate appreciation, and insignificant changes to the trade balance."


Technology and innovation

Economic models indicate that free trade leads to greater technology adoption and innovation.


Trade diversion

According to
mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also known as orthodox economics, it can be contrasted to he ...
theory, the selective application of free trade agreements to some countries and tariffs on others can lead to economic inefficiency through the process of
trade diversion Trade diversion is an economic An economy (from Greek language, Greek οίκος – "household" and νέμoμαι – "manage") is an area of the Production (economics), production, Distribution (economics), distribution and trade, as well as ...
. It is efficient for a good to be produced by the country which is the lowest cost producer, but this does 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 reason is why many economists place such high importance on negotiations for global tariff reductions, such as the Doha Round. Steven E. Landsburg. ''Price Theory and Applications'', Sixth Edition, Chapter 8.


Opinions


Economist opinions

The literature analysing the economics of free trade is rich. Economists have done extensive work on the theoretical and empirical effects of free trade. Although it creates winners and losers, the broad consensus among economists is that free trade provides a net gain for society. In a 2006 survey of American economists (83 responders), "87.5% agree that the U.S. should eliminate remaining tariffs and other barriers to trade" and "90.1% disagree with the suggestion that the U.S. should restrict employers from outsourcing work to foreign countries". Quoting Harvard economics professor N. Gregory Mankiw, " w propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards". In a survey of leading economists, none disagreed with the notion that "freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment". Most economists would agree that although
increasing returns to scale In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods an ...
might mean that a certain industry could settle in a particular geographical area without any strong economic reason derived from
comparative advantage In an economic model, agent (economics), agents have a comparative advantage over others in producing a particular Goods (economics), good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative ...

comparative advantage
, this is not a reason to argue against free trade because the absolute level of output enjoyed by both winner and loser will increase, with the winner gaining more than the loser, but both gaining more than before in an absolute level.


Public opinions

An overwhelming number of people internationally – both in developed and developing countries – support trade with other countries, but are more split when it comes to whether or not they believe trade creates jobs, increases wages, and decreases prices. The median belief in advanced economies is that trade increase increases wages, with 31 percent of people believing they do, compared to 27 percent who they decrease wages. In emerging economies, 47 percent of people believe trade increases wages, compared to 20 percent who says it lowers wages. There is a positive relationship of 0.66 between the average GDP growth rate for the years 2014 to 2017 and the percentage of people in a given country that says trade increases wages. Most people, in both advanced and emerging economies, believe that trade increases prices. 35 percent of people in advanced economies and 56 percent in emerging economies believe trade increases prices, and 29 percent and 18 percent, respectively, believe that trade lowers prices. Those with a higher level of education are more likely than those with less education to believe that trade lowers prices.


History


Early era

The notion of a free trade system encompassing multiple sovereign states originated in a rudimentary form in 16th century Imperial Spain. American
jurist A jurist is a person with expert knowledge of law; someone who analyses and comments on law. This person is usually a specialist legal scholarnot necessarily with a formal qualification in law or a lawyer, legal practitioner, although in the U ...
noted that Spanish theologian
Francisco de Vitoria Francisco de Vitoria ( – 12 August 1546; also known as Francisco de Victoria) was a Spanish Roman Catholic philosopher A philosopher is someone who practices philosophy. The term ''philosopher'' comes from the grc, φιλόσοφος, , tr ...

Francisco de Vitoria
was "the first to set forth the notions (though not the terms) of freedom of commerce and freedom of the seas". Vitoria made the case under principles of ''
jus gentium The ''ius __NOTOC__ ''Ius'' or ''Jus'' (Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Throu ...
''. However, it was two early British economists
Adam Smith Adam Smith ( 1723 – 17 July 1790) was a Scottish economist, philosopher as well as a moral philosopher Ethics or moral philosophy is a branch of philosophy that "involves systematizing, defending, and recommending concepts of right and ...

Adam Smith
and
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist, one of the most influential of the classical economists along with Thomas Malthus Thomas Robert Malthus (; 13/14 February 1766 – 23 December 1834) w ...

David Ricardo
who later developed the idea of free trade into its modern and recognizable form. Economists who advocated free trade believed trade was the reason why certain civilizations prospered economically. For example, Smith pointed to increased trading as being the reason for the flourishing of not just
Mediterranean The Mediterranean Sea is a sea connected to the Atlantic Ocean, surrounded by the Mediterranean Basin and almost completely enclosed by land: on the north by Western Europe, Western and Southern Europe and Anatolia, on the south by North Africa ...
cultures such as
Egypt Egypt ( ar, مِصر, Miṣr), officially the Arab Republic of Egypt, is a spanning the and the of . It is bordered by the to , the () and to , the to the east, to , and to . In the northeast, the , which is the northern arm of the R ...
,
Greece Greece ( el, Ελλάδα, Elláda, ), officially the Hellenic Republic, is a country located in Southeast Europe, Southeastern Europe. Its population is approximately 10.7 million as of 2021; Athens is its largest and capital city, followed ...
and
Rome , established_title = Founded , established_date = 753 BC , founder = King Romulus , image_map = Map of comune of Rome (metropolitan city of Capital Rome, region Lazio, Italy).svg , map_caption = The te ...

Rome
, but also of
Bengal Bengal (; Bengali language, Bengali: ', ) is a geopolitical, cultural and historical region in South Asia, specifically in the eastern part of the Indian subcontinent at the apex of the Bay of Bengal, predominantly covering present-day Bang ...
(
East India East India is a region of India consisting of the Indian states of Bihar Bihar (; ) is a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department o ...
) and
China China (), officially the People's Republic of China (PRC; ), is a country in . It is the world's , with a of more than 1.4 billion. China spans five geographical and 14 different countries, the in the world after . Covering an area of ap ...
.
Netherlands ) , national_anthem = ( en, "William of Nassau") , image_map = EU-Netherlands.svg , map_caption = , image_map2 = BES islands location map.svg , map_caption2 = , image_map3 ...
prospered greatly after throwing off Spanish Imperial rule and pursuing a policy of free trade. This made the free trade/mercantilist dispute the most important question in economics for centuries. Free trade policies have battled with
mercantilist Mercantilism is an economic policy The economic policy of governments covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, nationalization, national owner ...

mercantilist
,
protectionist Protectionism is the economic policy The economic policy of governments covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, nationalization, national o ...
,
isolationist Isolationism is a category of foreign policy, foreign policies institutionalized by leaders who assert that nations' best interests are best served by keeping the affairs of other countries at a distance. One possible motivation for limiting intern ...
,
socialist Socialism is a political Politics (from , ) is the set of activities that are associated with Decision-making, making decisions in Social group, groups, or other forms of Power (social and political), power relations between individuals, s ...
,
populist Populism refers to a range of political stances that emphasise the idea of "the people" and often juxtapose this group against "the elite". The term developed in the 19th century and has been applied to various politicians, parties, and moveme ...

populist
and other policies over the centuries. The
Ottoman Empire The Ottoman Empire (; ', ; or '; )info page on bookat Martin Luther University) // CITED: p. 36 (PDF p. 38/338). was an empire that controlled much of Southeastern Europe, Western Asia, and North Africa, Northern Africa between the 14th ...
had
liberal Liberal or liberalism may refer to: Politics *a supporter of liberalism, a political and moral philosophy **Liberalism by country *an adherent of a Liberal Party Arts, entertainment and media *''El Liberal'', a Spanish newspaper published betw ...
free trade policies by the 18th century, with origins in
capitulations of the Ottoman Empire and the Ottoman Empire The Ottoman Empire (; ota, دولت عليه عثمانيه ', literally "The Sublime Ottoman State"; Modern Turkish: ' or '; french: Empire ottoman) (''Osmanean Têrut´iwn'', meaning "Ottoman Authority/Governance/ ...
, dating back to the first commercial treaties signed with France in 1536 and taken further with capitulations in 1673, in 1740 which lowered
duties A duty (from "due" meaning "that which is owing"; fro, deu, did, past participle of ''devoir''; la, debere, debitum, whence "debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to anot ...
to only 3% for imports and exports and in 1790. Ottoman free trade policies were praised by British economists advocating free trade such as J. R. McCulloch in his ''Dictionary of Commerce'' (1834), but criticized by British politicians opposing free trade such as
Prime Minister A prime minister or a premier is the head of the cabinet Cabinet or The Cabinet may refer to: Furniture * Cabinetry, a box-shaped piece of furniture with doors and/or drawers * Display cabinet, a piece of furniture with one or more transpa ...
Benjamin Disraeli Benjamin Disraeli, 1st Earl of Beaconsfield, (21 December 1804 – 19 April 1881), was twice Prime Minister of the United Kingdom The prime minister of the United Kingdom is the head of government The head of government is e ...

Benjamin Disraeli
, who cited the Ottoman Empire as "an instance of the injury done by unrestrained competition" in the 1846
Corn Laws The Corn Laws were tariff A tariff is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law, a legal person is any person A person (plural people or per ...
debate, arguing that it destroyed what had been "some of the finest manufactures of the world" in 1812. Trade in
colonial America The colonial history of the United States covers the history of European colonization of North America from the early 17th century until the incorporation of the Thirteen Colonies into the United States of America, after the American Revolu ...

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 American Revolution was an ideological and political revolution which occurred in colonial North America between 1765 and 1783. The Americans in the Thirteen Colonies The Thirteen Colonies, also known as the Thirteen British Colo ...
. "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". Free trade came to what would become the United States as a result of the
American Revolution The American Revolution was an ideological and political revolution which occurred in colonial North America between 1765 and 1783. The Americans in the Thirteen Colonies The Thirteen Colonies, also known as the Thirteen British Colo ...
. After the British Parliament issued the
Prohibitory Act The Prohibitory Act was British legislation in late 1775 that cut off all trade between the Thirteen Colonies The Thirteen Colonies, also known as the Thirteen British Colonies or the Thirteen American Colonies, were a group of Kingdom of Grea ...
in 1775, blockading colonial ports, the
Continental Congress The Continental Congress was a series of legislative bodies A legislature is a deliberative assembly A deliberative assembly is a gathering of members (of any kind of collective) who use parliamentary procedure Parliamentary procedure is ...
responded by effectively declaring economic independence, opening American ports to foreign trade on 6 April 1776 - three months before declaring sovereign independence. According to historian John W. Tyler, " ee trade had been forced on the Americans, like it or not". In March 1801, the Pope
Pius VII Pope Pius VII (14 August 1742 – 20 August 1823), born Barnaba Niccolò Maria Luigi Chiaramonti, was head of the Catholic Church The Catholic Church, also known as the Roman Catholic Church, is the List of Christian denominations by numb ...

Pius VII
ordered some liberalization of trade to face the economic crisis in the
Papal States The Papal States ( ; it, Stato Pontificio), officially the State of the Church ( it, Stato della Chiesa, ; la, Status Ecclesiasticus; also '), were a series of territories in the Italian Peninsula The Italian Peninsula (Italian Ital ...
with the ''
motu proprio In law, ''motu proprio'' (Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power o ...
'' '' Le più colte''. Despite this, the export of national corn was forbidden to ensure the food for the
Papal States The Papal States ( ; it, Stato Pontificio), officially the State of the Church ( it, Stato della Chiesa, ; la, Status Ecclesiasticus; also '), were a series of territories in the Italian Peninsula The Italian Peninsula (Italian Ital ...
. In Britain, free trade became a central principle practiced by the repeal of the Corn Laws in 1846. Large-scale agitation was sponsored by the
Anti-Corn Law League The Anti-Corn Law League was a successful political movement in Great Britain aimed at the abolition of the unpopular Corn Laws, which protected landowners’ interests by levying taxes on imported wheat, thus raising the price of bread at a time wh ...
. Under the
Treaty of Nanking The Treaty of Nanking (Nanjing) was a peace treaty which ended the First Opium War (1839–1842) between the United Kingdom and China China, officially the People's Republic of China (PRC), is a country in East Asia. It is the List of ...
, China opened five
treaty ports Treaty ports (; ja, 条約港) were the port cities in China and Japan that were opened to foreign trade mainly by the unequal treaties Unequal treaty is the name given by the Chinese to a series of treaties signed between the Qing dynasty ...
to world trade in 1843. The first free trade agreement, the Cobden-Chevalier Treaty, was put in place in 1860 between Britain and France which led to successive agreements between other countries in Europe. Many
classical liberals Classical liberalism is a political ideology and a branch of liberalism that advocates civil liberties under the rule of law with an emphasis on economic freedom. Closely related to economic liberalism, it developed in the early 19th century, ...
, especially in 19th and early 20th century Britain (e.g.
John Stuart Mill John Stuart Mill (20 May 1806 – 7 May 1873), also cited as J. S. Mill, was an English philosopher, Political economy, political economist, Member of Parliament (United Kingdom), Member of Parliament (MP) and civil servant. One of the most i ...
) and in the United States for much of the 20th century (e.g.
Henry Ford Henry Ford (July 30, 1863 – April 7, 1947) was an American industrialist A business magnate is someone who has achieved great success and enormous wealth through the ownership of multiple lines of enterprise. The term characteristically ...

Henry Ford
and Secretary of State
Cordell Hull Cordell Hull (October 2, 1871July 23, 1955) was an American politician from Tennessee Tennessee (, ), officially the State of Tennessee, is a state in the Southeastern region of the United States The United States of America (USA), ...
), believed that free trade promoted peace.
Woodrow Wilson Thomas Woodrow Wilson (December 28, 1856February 3, 1924) was an American politician and academic who served as the 28th from 1913 to 1921. A member of the , Wilson served as the and as the before winning the . As President, Wilson chang ...

Woodrow Wilson
included free-trade rhetoric in his "
Fourteen Points U.S. President Woodrow Wilson The Fourteen Points was a statement of principles for peace Peace is a concept of societal friendship and harmony in the absence of hostility and violence. In a social sense, peace is commonly used to mean a lack ...
" speech of 1918: According to economic historian Douglas Irwin, a common myth about United States trade policy is that low tariffs harmed American manufacturers in the early 19th century and then that high tariffs made the United States into a great industrial power in the late 19th century. A review by the ''Economist'' of Irwin's 2017 book ''Clashing over Commerce: A History of US Trade Policy'' notes:
Political dynamics would lead people to see a link between tariffs and the economic cycle that was not there. A boom would generate enough revenue for tariffs to fall, and when the bust came pressure would build to raise them again. By the time that happened, the economy would be recovering, giving the impression that tariff cuts caused the crash and the reverse generated the recovery. Mr Irwin also methodically debunks the idea that protectionism made America a great industrial power, a notion believed by some to offer lessons for developing countries today. As its share of global manufacturing powered from 23% in 1870 to 36% in 1913, the admittedly high tariffs of the time came with a cost, estimated at around 0.5% of GDP in the mid-1870s. In some industries, they might have sped up development by a few years. But American growth during its protectionist period was more to do with its abundant resources and openness to people and ideas.
According to
Paul Bairoch Paul Bairoch (24 July 1930 in Antwerp Antwerp (; nl, Antwerpen ; french: Anvers ) is a city in Belgium and the capital of Antwerp (province), Antwerp province in the Flemish Region. With a population of 520,504,Jeffersonians strongly opposed it. In the 19th century, statesmen such as Senator
Henry Clay Henry Clay Sr. (April 12, 1777June 29, 1852) was an American attorney Attorney may refer to: Roles * Attorney at law, an official title of lawyers in some jurisdictions * Attorney general, the principal legal officer of (or advisor to) a gove ...

Henry Clay
continued
Alexander Hamilton Alexander Hamilton (January 11, 1755 or 1757July 12, 1804) was an American statesman, politician, legal scholar, military commander, lawyer, banker, and economist. He was one of the Founding Fathers of the United States The Founding Fa ...

Alexander Hamilton
's themes within the Whig Party under the name American System. The opposition
Democratic PartyDemocratic Party most often refers to: *Democratic Party (United States) Democratic Party and similar terms may also refer to: Active parties Africa *Botswana Democratic Party *Democratic Party of Equatorial Guinea *Gabonese Democratic Party *Democ ...
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 Whigs favored higher protective tariffs to protect favored industries. The economist
Henry Charles Carey Henry Charles Carey (December 15, 1793 – October 13, 1879) was the leading 19th-century economist An economist is a practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and app ...

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 Andrew Jackson (March 15, 1767 – June 8, 1845) was an American lawyer, soldier, and statesman who served as the seventh president of the United States The president of the United States (POTUS) is the head of state and head of ...

Andrew Jackson
,
Martin Van Buren Martin Van Buren ( ; born Maarten van Buren (); December 5, 1782 – July 24, 1862) was an American lawyer and statesman who served as the 8th president of the United States The president of the United States (POTUS) is the and of t ...

Martin Van Buren
,
John Tyler John Tyler (March 29, 1790January 18, 1862) was the 10th president of the United States The president of the United States (POTUS) is the head of state and head of government of the United States of America. The president directs the F ...

John Tyler
,
James K. Polk James Knox Polk (November 2, 1795 – June 15, 1849) was the 11th president of the United States, serving from 1845 to 1849. He previously was Speaker of the House of Representatives (1835–1839) and Governor of Tennessee (1839–1841). ...

James K. Polk
,
Franklin Pierce Franklin Pierce (November 23, 1804October 8, 1869) was the 14th president of the United States The president of the United States (POTUS) is the and of the . The president directs the of the and is the of the . The power of the ...

Franklin Pierce
and
James Buchanan James Buchanan Jr. ( ; April 23, 1791June 1, 1868) was an American lawyer and politician who served as the 15th president of the United States The president of the United States (POTUS) is the and of the . The president directs the ...

James Buchanan
. The fledgling
Republican Party Republican Party is a name used by many political parties A political party is an organization that coordinates candidates to compete in a country's elections. It is common for the members of a political party to have similar ideas about polit ...
led by
Abraham Lincoln Abraham Lincoln (; February 12, 1809 – April 15, 1865) was an American statesman and lawyer who served as the 16th president of the United States The president of the United States (POTUS) is the head of state and head of governme ...

Abraham Lincoln
, who called himself a "Henry Clay tariff Whig", strongly opposed free trade and implemented a 44% tariff during the
Civil War A civil war, also known as an intrastate war in polemology, is a war between organized groups within the same Sovereign state, state (or country). The aim of one side may be to take control of the country or a region, to achieve independen ...
, in part to pay for railroad subsidies and for the war effort and in part to protect favored industries.
William McKinley William McKinley (January 29, 1843September 14, 1901) was the 25th president of the United States The president of the United States (POTUS) is the and of the . The president directs the of the and is the of the . The power of ...
(later to become President of the United States) stated the stance of the Republican Party (which won every election for president from 1868 until 1912, except the two non-consecutive terms of
Grover Cleveland Stephen Grover Cleveland (March 18, 1837June 24, 1908) was an American lawyer and politician who served as the 22nd and 24th president of the United States from 1885 to 1889 and from 1893 to 1897. Cleveland is the only president in American ...

Grover Cleveland
) as thus: During the interwar period, economic protectionism took hold in the United States, most famously in the form of the Smoot–Hawley Tariff Act which is credited by economists with the prolonging and worldwide propagation of the Great Depression. From 1934, trade liberalization began to take place through the Reciprocal Trade Agreements Act.


Post-World War II

Since the end of World War II, in part due to industrial size and the onset of the Cold War, the United States has often been a proponent of reduced tariff-barriers and free trade. The United States helped establish the General Agreement on Tariffs and Trade and later the
World Trade Organization The World Trade Organization (WTO) is an intergovernmental organization that regulates and facilitates international trade between nations. Governments use the organization to establish, revise, and enforce the rules that govern international ...
, although it had rejected an earlier version in the 1950s, the International Trade Organization. Since the 1970s, United States governments have negotiated managed-trade agreements, such as the North American Free Trade Agreement in the 1990s, the Dominican Republic-Central America Free Trade Agreement in 2006 and a number of bilateral agreements (such as with Jordan). In Europe, Inner Six, six countries formed the European Coal and Steel Community in 1951 which became the European Economic Community (EEC) in 1958. Two core objectives of the EEC were the development of a common market, subsequently renamed the single market, and establishing a customs union between its member states. After expanding its membership, the EEC became the European Union in 1993. The European Union, now the world's largest single market, has European Union free trade agreements, concluded free trade agreements with many countries around the world.


Modern era

Most countries in the world are members of the
World Trade Organization The World Trade Organization (WTO) is an intergovernmental organization that regulates and facilitates international trade between nations. Governments use the organization to establish, revise, and enforce the rules that govern international ...
which limits in certain ways but does not eliminate tariffs and other trade barriers. Most countries are also members of regional free trade areas that lower trade barriers among participating countries. The European Union and the United States are negotiating a Transatlantic Trade and Investment Partnership. in 2018, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership came into force, which includes eleven countries that have borders on the Pacific Ocean.


Degree of free trade policies

Free trade may apply to trade in goods and services. Non-economic considerations may inhibit free trade as a country may espouse free trade in principle but ban certain drugs, such as ethanol, or certain practices, such as prostitution, and limiting international free trade. Some degree of protectionism is nevertheless the norm throughout the world. Most developed nations maintain controversial agricultural tariffs. 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%. The American economist C. Fred Bergsten devised the bicycle theory to describe
trade policy A commercial policy (also referred to as a trade policy or international trade policy) is a government's policy governing international trade International trade is the exchange of capital, goods, and services across international borders ...
. According to this model, trade policy is dynamically unstable in that it constantly tends towards either liberalisation or protectionism. To prevent falling off the bike (the disadvantages of protectionism), trade policy and multilateral trade negotiations must constantly pedal towards greater liberalisation. To achieve greater liberalisation, decision makers must appeal to the greater welfare for consumers and the wider national economy over narrower parochial interests. However, Bergsten also posits that it is also necessary to compensate the losers in trade and help them find new work as this will both reduce the backlash against globalisation and the motives for trades unions and politicians to call for protection of trade. In ''Kicking Away the Ladder'', development economist
Ha-Joon Chang Ha-joon is a Korean masculine given name. Its meaning depends on the hanja Hanja (, , or Hancha) is the Korean name for a traditional writing system consisting mainly of Traditional Chinese characters () that was incorporated and used si ...
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. The United States and Britain, sometimes considered the homes of free trade policy, employed protectionism to varying degrees at all times. Britain abolished the
Corn Laws The Corn Laws were tariff A tariff is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law, a legal person is any person A person (plural people or per ...
which restricted import of grain in 1846 in response to domestic pressures and reduced protectionism for manufactures only in the mid 19th century when its technological advantage was at its height, 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. The most consistent practitioners of free trade have been Switzerland, the Netherlands and to a lesser degree Belgium. Chang describes the export-oriented industrialization policies of the Four Asian Tigers as "far more sophisticated and fine-tuned than their historical equivalents".


= Free trade in goods

= The Global Enabling Trade Report measures the factors, policies and services that facilitate the trade in goods across borders and to destinations. The index summarizes four sub-indexes, namely market access; border administration; transport and communications infrastructure; and business environment. As of 2016, the top 30 countries and areas were the following:


Politics

Academics, governments and interest groups debate the relative social cost, costs, benefits and beneficiaries of free trade. Arguments for
protectionism Protectionism is the economic policy The economic policy of governments covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, nationalization, national o ...
fall into the economic category (trade hurts the economy or groups in the economy) or into 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 represents colonialism or imperialism in disguise. The moral category is wide, including concerns about: * Infant industry argument, destroying infant industries * undermining long-run economic development * promoting income inequality * tolerating environmental degradation * supporting child labor and sweatshops * race to the bottom * wage slavery * accentuating poverty in poor countries * harming Defense (military), national defense * forcing cultural change However, poor countries that have adopted free-trade policies have experienced high economic growth, with China and India as prime examples. Free trade allows companies from rich countries to directly invest in poor countries, sharing their knowledge, providing capital and giving access to markets. Economic arguments against free trade criticize the assumptions or conclusions of economic theories. Sociopolitical arguments against free trade cite social and political effects that economic arguments do not capture, such as political stability, national security, human rights and environmental protection. Some products are important to national security and governments may deem it dangerous to allow domestic producers of these products to go out of business, especially if otherwise they might come to depend on producers who operate in a country that may one day become an enemy. Countries that allow low wages have a competitive advantage in attracting industry, which may lead to a general lowering of wages for workers in all countries. Some countries may facilitate low-cost production of goods in their countries by allowing pollution of the environment: their pricing ignores environmental full-cost accounting and hidden costs are paid by their local, national and international neighbours. Domestic industries often oppose free trade on the grounds that it would lower prices for imported goods would reduce their profits and market share. For example, if the United States reduced tariffs on imported sugar, sugar producers would receive lower prices and profits, and sugar consumers would spend less for the same amount of sugar because of those same lower prices. The economic theory of
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist, one of the most influential of the classical economists along with Thomas Malthus Thomas Robert Malthus (; 13/14 February 1766 – 23 December 1834) w ...

David Ricardo
holds that consumers would necessarily gain more than producers would lose. Since each of the 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 reduction in 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.

United States real wages vs. trade as a percent of GDP
Socialists frequently oppose free trade on the ground that it allows maximum Exploitation of labour, exploitation of Labor movement, workers by Capital (economics), capital. For example, Karl Marx wrote in ''The Communist Manifesto'' (1848): "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". Marx supported free trade, however, solely because he felt that it would hasten the social revolution. Many anti-globalization groups oppose free trade based on their assertion that free-trade agreements generally do not increase the economic freedom of the poor or of the working class and frequently make them poorer. Some opponents of free trade favor free-trade theory, but oppose free-trade agreements as applied. Some opponents of NAFTA see the agreement as materially harming 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 that it would be wrong to let Agricultural subsidy, subsidized corn from the United States into Mexico freely under NAFTA at prices well below production cost (Dumping (pricing policy), dumping) because of its ruinous effects to Mexican farmers. Indeed, such subsidies violate free-trade theory, so this argument is not actually against the principle of free trade, but rather against its selective implementation. Research shows that support for trade restrictions is highest among respondents with the lowest levels of education. Hainmueller and Hiscox find
"that the impact of education on how voters think about trade and globalization has more to do with exposure to economic ideas and information about the aggregate and varied effects of these economic phenomena, than it does with individual calculations about how trade affects personal income or job security. This is not to say that the latter types of calculations are not important in shaping individuals' views of trade – just that they are not being manifest in the simple association between education and support for trade openness".
A 2017 study found that individuals whose occupations are routine-task-intensive and who do jobs that are offshoring, offshorable are more likely to favor protectionism. Research suggests that attitudes towards free trade do not necessarily reflect individuals' self-interests.


Colonialism

Various proponents of economic nationalism and of the school of mercantilism have long portrayed free trade as a form of colonialism or imperialism. In the 19th century, such groups criticized British calls for free trade as cover for British Empire, notably in the works of American
Henry Clay Henry Clay Sr. (April 12, 1777June 29, 1852) was an American attorney Attorney may refer to: Roles * Attorney at law, an official title of lawyers in some jurisdictions * Attorney general, the principal legal officer of (or advisor to) a gove ...

Henry Clay
, architect of the American System and of the German Americans, German-American economist Friedrich List (1789-1846). Free-trade debates and associated matters involving the colonial administration of Ireland have periodically (such as in 1846 and 1906) caused ructions in the Conservative Party (UK), British Conservative (Tories (British political party), Tory) Party (Corn Laws, Corn Law issues in the 1820s to the 1840s, Irish Home Rule movement, Irish Home Rule issues throughout the 19th and early-20th centuries). Ecuadorian President Rafael Correa (in office from 2007 to 2017) denounced the "sophistry of free trade" in an introduction he wrote for a 2006 book,''The Hidden Face of Free Trade Accords'', which was written in part by Correa's Energy Minister Alberto Acosta. Citing as his source the 2002 boo
''Kicking Away the Ladder''
written by
Ha-Joon Chang Ha-joon is a Korean masculine given name. Its meaning depends on the hanja Hanja (, , or Hancha) is the Korean name for a traditional writing system consisting mainly of Traditional Chinese characters () that was incorporated and used si ...
, Correa identified the difference between an "American system" opposed to a "British System" of free trade. The Americans explicitly viewed the latter, he says, as "part of the British imperialist system". According to Correa, Chang showed that Treasury Secretary
Alexander Hamilton Alexander Hamilton (January 11, 1755 or 1757July 12, 1804) was an American statesman, politician, legal scholar, military commander, lawyer, banker, and economist. He was one of the Founding Fathers of the United States The Founding Fa ...

Alexander Hamilton
(in office 1789–1795), rather than List, first presented a systematic argument defending industrial protectionism.


Major free trade areas


Africa


Europe


Americas


Alternatives

The following alternatives to free trade have been proposed:
protectionism Protectionism is the economic policy The economic policy of governments covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, nationalization, national o ...
, imperialism, balanced trade, fair trade, and industrial policy.


In literature

The value of free trade was first observed and documented in 1776 by
Adam Smith Adam Smith ( 1723 – 17 July 1790) was a Scottish economist, philosopher as well as a moral philosopher Ethics or moral philosophy is a branch of philosophy that "involves systematizing, defending, and recommending concepts of right and ...

Adam Smith
in ''The Wealth of Nations'', writing: This statement uses the concept of absolute advantage to present an argument in opposition to mercantilism, the dominant view surrounding trade at the time which held that a country should aim to export more than it imports and thus amass wealth. Instead, Smith argues, countries could gain from each producing exclusively the goods in which they are most suited to, trading between each other as required for the purposes of consumption. In this vein, it is not the value of exports relative to that of imports that is important, but the value of the goods produced by a nation. However, the concept of absolute advantage does not address a situation where a country has no advantage in the production of a particular good or type of good. This theoretical shortcoming was addressed by the theory of comparative advantage. Generally attributed to
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist, one of the most influential of the classical economists along with Thomas Malthus Thomas Robert Malthus (; 13/14 February 1766 – 23 December 1834) w ...

David Ricardo
, who expanded on it in his 1817 book ''On the Principles of Political Economy and Taxation'', it makes a case for free trade based not on absolute advantage in production of a good, but on the relative opportunity costs of production. A country should specialize in whatever good it can produce at the lowest cost, trading this good to buy other goods it requires for consumption. This allows for countries to benefit from trade even when they do not have an absolute advantage in any area of production. While their gains from trade might not be equal to those of a country more productive in all goods, they will still be better off economically from trade than they would be under a state of autarky. Exceptionally, Henry George's 1886 book ''Protection or Free Trade'' was read out loud in full into the Congressional Record by five Democratic Party (United States), Democratic congressmen. American economist Tyler Cowen wrote that ''Protection or Free Trade'' "remains perhaps the best-argued tract on free trade to this day".' Although George is very critical towards protectionism, he discusses the subject in particular with respect to the interests of labor:
We all hear with interest and pleasure of improvements in transportation by water or land; we are all disposed to regard the opening of canals, the building of railways, the deepening of harbors, the improvement of steamships as beneficial. But if such things are beneficial, how can tariffs be beneficial? The effect of such things is to lessen the cost of transporting commodities; the effect of tariffs is to increase it. If the protective theory be true, every improvement that cheapens the carriage of goods between country and country is an injury to mankind unless tariffs be commensurately increased.
George considers the general free trade argument inadequate. He argues that the removal of protective tariffs alone is never sufficient to improve the situation of the working class, unless accompanied by a shift towards land value tax.


See also

; Concepts/topics * * * * * * * * * * * * * * * ; Trade organizations * * *


References


Bibliography

* Bannerman, Gordon
''Free Trade''EGO - European History Online
Mainz
Institute of European History
2015, retrieved: March 8, 2021
pdf
. * Jagdish Bhagwati, Bhagwati, Jagdish. ''Free Trade Today''. Princeton: Princeton University Press (2002). . * * Ha-Joon Chang, Chang, Ha-Joon. ''Kicking Away The Ladder: Development Strategy in Historical Perspective''. London: Anthem Press 2003. . * Oliver Morton Dickerson, Dickerson, Oliver M. ''The Navigation Acts and the American Revolution''. New York : Barnes (1963). . * Thomas Pugel, Pugel, Thomas A. ''International Economics'', 13th edition. New York: McGraw-Hill Irwin (2007). . * David Ricardo, Ricardo, David. ''On the Principles of Political Economy and Taxation'', Library of Economics and Liberty (1999). * Adam Smith, Smith, Adam. ''An Inquiry into the Nature and Causes of the Wealth of Nations'', Digireads Publishing (2009), . * Tyler, John W. ''Smugglers & Patriots: Boston Merchants and the Advent of the American Revolution''. Boston: Northeastern University Press (1986). .


Further reading

*
World Trade Organization. 2018. History of the multilateral trading system
* Galiani, Sebastian, Norman Schofield, and Gustavo Torrens. 2014. "Factor Endowments, Democracy and Trade Policy Divergence". ''Journal of Public Economic Theory''. 16(1): 119–56.


External links


The Online Library of Liberty
*
66 contemporary British illustrations about free trade, 1830s–1910s
{{DEFAULTSORT:Free Trade Free trade, Commercial policy