Free-trade agreements of the United States
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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. Commercial policy is an all encompassing term that is used to cover topics which involve international t ...
that does not restrict imports or exports. It can also be understood as the free market idea applied to international trade. In government, free trade is predominantly advocated by political parties that hold
economically liberal Economic liberalism is a political and economic ideology that supports a market economy based on individualism and private property in the means of production. Adam Smith is considered one of the primary initial writers on economic liberalism, ...
positions, while economic nationalist and left-wing political parties generally support protectionism, the opposite of free trade. Most nations are today members of the World Trade Organization
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 for payment. Bilateral trade agreements often aim to keep trade def ...
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 and the Mercosur open markets, 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 tariffs to imports or 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 barriers, such as regulatory legislation. 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 The 1973 oil crisis or first oil crisis began in October 1973 when the members of the Organization of Arab Petroleum Exporting Countries (OAPEC), led by Saudi Arabia, proclaimed an oil embargo. The embargo was targeted at nations that had supp ...
). 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 barriers 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 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 without taxes (including tariffs) or other trade barriers (e.g. quotas on imports or subsidies for producers). * Trade in services without taxes or other trade barriers. * The absence of "trade-distorting" policies (such as taxes, subsidies, regulations, or laws) that give some firms, households, or factors of production an advantage over others. * Unregulated access to
markets Market is a term used to describe concepts such as: * Market (economics), system in which parties engage in transactions according to supply and demand * Market economy *Marketplace, a physical marketplace or public market Geography *Märket, a ...
. * Unregulated access to market information. * Inability of firms to distort markets through government-imposed monopoly or
oligopoly An oligopoly (from Greek ὀλίγος, ''oligos'' "few" and πωλεῖν, ''polein'' "to sell") is a market structure in which a market or industry is dominated by a small number of large sellers or producers. Oligopolies often result from ...
power. * Trade agreements which encourage free trade.


Economics


Economic models

Two simple ways to understand the proposed benefits of free trade are through David Ricardo's theory of 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, ''Unequal Protection'', Second Edition, Chapter 20. p. 255 Most economists would recommend that even developing nations should set their tariff rates quite low, but the economist
Ha-Joon Chang Ha-Joon Chang (; ; born 7 October 1963) is a South Korean institutional economist, specialising in development economics. Chang is the author of several widely discussed policy books, most notably ''Kicking Away the Ladder: Development Strateg ...
, 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, 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 Nicholas Gregory Mankiw (; born February 3, 1958) is an American macroeconomist who is currently the Robert M. Beren Professor of Economics at Harvard University. Mankiw is best known in academia for his work on New Keynesian economics. Mankiw h ...
, ''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 h ...
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. 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 Steven E. Landsburg (born February 24, 1954) is an American professor of economics at the University of Rochester in Rochester, New York. From 1989 to 1995, he taught at Colorado State University. Landsburg is also an outspoken commentator on ...
. ''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 Nicholas Gregory Mankiw (; born February 3, 1958) is an American macroeconomist who is currently the Robert M. Beren Professor of Economics at Harvard University. Mankiw is best known in academia for his work on New Keynesian economics. Mankiw h ...
, " 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, returns to scale describe what happens to long-run returns as the scale of production increases, when all input levels including physical capital usage are variable (able to be set by the firm). The concept of returns to scale arises ...
might mean that a certain industry could settle in a particular geographical area without any strong economic reason derived from 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 The Spanish Empire ( es, link=no, Imperio español), also known as the Hispanic Monarchy ( es, link=no, Monarquía Hispánica) or the Catholic Monarchy ( es, link=no, Monarquía Católica) was a colonial empire governed by Spain and its prede ...
. 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 scholar, mostly (but not always) with a formal qualification in law and often a legal practitioner. In the Uni ...
Arthur Nussbaum Arthur Nussbaum (January 31, 1877 – November 22, 1964) was a German-born American jurist. He studied legal science in Berlin from 1894 till 1897. He taught at Humboldt University of Berlin (1918–1933). In 1934, he moved to the United States ...
noted that Spanish theologian 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 gentium'' or ''jus gentium'' (Latin for "law of nations") is a concept of international law within the ancient Roman legal system and Western law traditions based on or influenced by it. The ''ius gentium'' is not a body of statute law ...
''. However, it was two early British economists
Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
and 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 cultures such as Egypt, Greece and Rome, but also of Bengal ( East India) and
China China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
. Netherlands 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 that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduce a ...
, protectionist, isolationist, socialist, populist and other policies over the centuries. The Ottoman Empire had liberal free trade policies by the 18th century, with origins in capitulations of the Ottoman Empire, dating back to the first commercial treaties signed with France in 1536 and taken further with capitulations in 1673, in 1740 which lowered duties 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 John Ramsay McCulloch (1 March 1789 – 11 November 1864) was a Scottish economist, author and editor, widely regarded as the leader of the Ricardian school of economists after the death of David Ricardo in 1823. He was appointed the first pr ...
in his ''Dictionary of Commerce'' (1834), but criticized by British politicians opposing free trade such as Prime Minister
Benjamin Disraeli Benjamin Disraeli, 1st Earl of Beaconsfield, (21 December 1804 – 19 April 1881) was a British statesman and Conservative politician who twice served as Prime Minister of the United Kingdom. He played a central role in the creation o ...
, who cited the Ottoman Empire as "an instance of the injury done by unrestrained competition" in the 1846 Corn Laws 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 after the Revolutionary War. In the ...
was regulated by the British mercantile system through the
Acts of Trade and Navigation The Navigation Acts, or more broadly the Acts of Trade and Navigation, were a long series of English laws that developed, promoted, and regulated English ships, shipping, trade, and commerce between other countries and with its own colonies. The ...
. Until the 1760s, few colonists openly advocated for free trade, in part because regulations were not strictly enforced (New England was famous for smuggling), but also because colonial merchants did not want to compete with foreign goods and shipping. According to historian Oliver Dickerson, a desire for free trade was not one of the causes of the American Revolution. "The idea that the basic mercantile practices of the eighteenth century were wrong", wrote Dickerson, "was not a part of the thinking of the Revolutionary leaders". Free trade came to what would become the United States as a result of the American Revolution. 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 and England and removed the colonies from the King's protection. In essence, it was a declaration of economic warfare by Britain as puni ...
in 1775, blockading colonial ports, the
Continental Congress The Continental Congress was a series of legislative bodies, with some executive function, for thirteen of Britain's colonies in North America, and the newly declared United States just before, during, and after the American Revolutionary War. ...
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 ordered some liberalization of trade to face the economic crisis in the Papal States with the '' motu proprio'' ''
Le più colte Le più colte (literally, "the most cultured") was an apostolic letter produced by Pope Pius VII in the first year of his pontificate (1801) in the form of a ''motu proprio'', written in Italian, which set out drastic reforms in agricultural poli ...
''. Despite this, the export of national corn was forbidden to ensure the food for the Papal States. 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. Under the Treaty of Nanking, China opened five treaty ports 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, especially in 19th and early 20th century Britain (e.g.
John Stuart Mill John Stuart Mill (20 May 1806 – 7 May 1873) was an English philosopher, political economist, Member of Parliament (MP) and civil servant. One of the most influential thinkers in the history of classical liberalism, he contributed widely to ...
) and in the United States for much of the 20th century (e.g. Henry Ford and Secretary of State
Cordell Hull Cordell Hull (October 2, 1871July 23, 1955) was an American politician from Tennessee and the longest-serving U.S. Secretary of State, holding the position for 11 years (1933–1944) in the administration of President Franklin Delano Roosevelt ...
), believed that free trade promoted peace. Woodrow Wilson included free-trade rhetoric in his " Fourteen Points" 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, since the end of the 18th century, the United States has been "the homeland and bastion of modern protectionism". In fact, the United States never adhered to free trade until 1945. For the most part, the Jeffersonians strongly opposed protectionism. In the 19th century, statesmen such as Senator
Henry Clay Henry Clay Sr. (April 12, 1777June 29, 1852) was an American attorney and statesman who represented Kentucky in both the U.S. Senate and House of Representatives. He was the seventh House speaker as well as the ninth secretary of state, al ...
continued
Alexander Hamilton Alexander Hamilton (January 11, 1755 or 1757July 12, 1804) was an American military officer, statesman, and Founding Father who served as the first United States secretary of the treasury from 1789 to 1795. Born out of wedlock in Charlest ...
's themes within the Whig Party under the name American System. The opposition
Democratic Party Democratic 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 *Demo ...
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 became a leading proponent of the American System of economics. This mercantilist American System was opposed by the Democratic Party of Andrew Jackson, Martin Van Buren, John Tyler, James K. Polk,
Franklin Pierce Franklin Pierce (November 23, 1804October 8, 1869) was the 14th president of the United States, serving from 1853 to 1857. He was a northern Democrat who believed that the abolitionist movement was a fundamental threat to the nation's unity ...
and
James Buchanan James Buchanan Jr. ( ; April 23, 1791June 1, 1868) was an American lawyer, diplomat and politician who served as the 15th president of the United States from 1857 to 1861. He previously served as secretary of state from 1845 to 1849 and repr ...
. The fledgling
Republican Party Republican Party is a name used by many political parties around the world, though the term most commonly refers to the United States' Republican Party. Republican Party may also refer to: Africa *Republican Party (Liberia) * Republican Part ...
led by Abraham Lincoln, who called himself a "Henry Clay tariff Whig", strongly opposed free trade and implemented a 44% tariff during the Civil War, in part to pay for railroad subsidies and for the war effort and in part to protect favored industries. William McKinley (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) 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 The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
. From 1934, trade liberalization began to take place through the
Reciprocal Trade Agreements Act The Reciprocal Tariff Act (enacted June 12, 1934, ch. 474, , ) provided for the negotiation of tariff agreements between the United States and separate nations, particularly Latin American countries. The Act served as an institutional reform inte ...
.


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 Cold War is a term commonly used to refer to a period of geopolitical tension between the United States and the Soviet Union and their respective allies, the Western Bloc and the Eastern Bloc. The term '' cold war'' is used because the ...
, 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 The General Agreement on Tariffs and Trade (GATT) is a legal agreement between many countries, whose overall purpose was to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas. According to its pre ...
and later the World Trade Organization, 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 The North American Free Trade Agreement (NAFTA ; es, Tratado de Libre Comercio de América del Norte, TLCAN; french: Accord de libre-échange nord-américain, ALÉNA) was an agreement signed by Canada, Mexico, and the United States that crea ...
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, six countries formed the
European Coal and Steel Community The European Coal and Steel Community (ECSC) was a European organization created after World War II to regulate the coal and steel industries. It was formally established in 1951 by the Treaty of Paris, signed by Belgium, France, Italy, Luxembo ...
in 1951 which became the
European Economic Community The European Economic Community (EEC) was a regional organization created by the Treaty of Rome of 1957,Today the largely rewritten treaty continues in force as the ''Treaty on the functioning of the European Union'', as renamed by the Lisb ...
(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 concluded free trade agreements with many countries around the world.


Modern era

Most countries in the world are members of the World Trade Organization 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 Comprehensive may refer to: *Comprehensive layout, the page layout of a proposed design as initially presented by the designer to a client. * Comprehensive school, a state school that does not select its intake on the basis of academic achievement ...
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 Prostitution is the business or practice of engaging in Sex work, sexual activity in exchange for payment. The definition of "sexual activity" varies, and is often defined as an activity requiring physical contact (e.g., sexual intercourse, n ...
, 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. Commercial policy is an all encompassing term that is used to cover topics which involve international t ...
. 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 Chang (; ; born 7 October 1963) is a South Korean institutional economist, specialising in development economics. Chang is the author of several widely discussed policy books, most notably ''Kicking Away the Ladder: Development Strateg ...
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 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 The ''Global Enabling Trade Report'' was first published in 2008 by the World Economic Forum. The 2008 report covers 118 major and emerging economies. At the core of the report is the Enabling Trade Index which ranks the countries using data from ...
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 costs, benefits and beneficiaries of free trade. Arguments for protectionism 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 Imperialism is the state policy, practice, or advocacy of extending power and dominion, especially by direct territorial acquisition or by gaining political and economic control of other areas, often through employing hard power (economic and ...
in disguise. The moral category is wide, including concerns about: * destroying infant industries * undermining long-run economic development * promoting income inequality * tolerating
environmental degradation Environmental degradation is the deterioration of the environment (biophysical), environment through depletion of resources such as quality of air, water and soil; the destruction of ecosystems; habitat destruction; the extinction of wildlife; an ...
* supporting child labor and sweatshops * race to the bottom * wage slavery * accentuating poverty in poor countries * harming national defense * forcing
cultural change Culture change is a term used in public policy making that emphasizes the influence of cultural capital on individual and community behavior. It has been sometimes called repositioning of culture, which means the reconstruction of the cultural conce ...
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 cost In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for example ...
s 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 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. Socialists frequently oppose free trade on the ground that it allows maximum
exploitation Exploitation may refer to: *Exploitation of natural resources *Exploitation of labour **Forced labour *Exploitation colonialism *Slavery **Sexual slavery and other forms *Oppression *Psychological manipulation In arts and entertainment *Exploita ...
of workers by
capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used f ...
. 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 The anti-globalization movement or counter-globalization movement, is a social movement critical of economic globalization. The movement is also commonly referred to as the global justice movement, alter-globalization movement, anti-globalist m ...
groups oppose free trade based on their assertion that free-trade agreements generally do not increase the economic freedom of the
poor Poverty is the state of having few material possessions or little
income< ...
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 The North American Free Trade Agreement (NAFTA ; es, Tratado de Libre Comercio de América del Norte, TLCAN; french: Accord de libre-échange nord-américain, ALÉNA) was an agreement signed by Canada, Mexico, and the United States that crea ...
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 subsidized corn from the United States into Mexico freely under
NAFTA The North American Free Trade Agreement (NAFTA ; es, Tratado de Libre Comercio de América del Norte, TLCAN; french: Accord de libre-échange nord-américain, ALÉNA) was an agreement signed by Canada, Mexico, and the United States that crea ...
at prices well below production cost ( 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 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 Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduce a ...
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 and statesman who represented Kentucky in both the U.S. Senate and House of Representatives. He was the seventh House speaker as well as the ninth secretary of state, al ...
, architect of the American System and of the German-American economist Friedrich List (1789–1846):
Had the English left everything to itself – " Laissez faire, laissez aller", as the popular economical school recommends – the
erman Erman Rašiti may refer to: Given name * Erman Bulucu (born 1989), Turkish footballer * Erman Eltemur (born 1993), Turkish karateka * Erman Güraçar (born 1974), Turkish footballer * Erman Kılıç (born 1983), Turkish footballer * Erman Kunter (b ...
merchants of the
Steelyard The Steelyard, from the Middle Low German (sample yard), was the main trading base () of the Hanseatic League in London during the 15th and 16th centuries. Location The Steelyard was located on the north bank of the Thames by the outflow o ...
would be still carrying on their trade in London, the Belgians would be still manufacturing cloth for the English, England would have still continued to be the sheep-farm of the Hansards, just as Portugal became the vineyard of England, and has remained so till our days, owing to the stratagem of a cunning diplomatist.
Free-trade debates and associated matters involving the colonial administration of Ireland have periodically (such as in 1846 and 1906) caused ructions in the
British Conservative The Conservative Party, officially the Conservative and Unionist Party and also known colloquially as the Tories, is one of the two main political parties in the United Kingdom, along with the Labour Party. It is the current governing party, ...
( Tory) Party (
Corn Law The Corn Laws were tariffs and other trade restrictions on imported food and corn enforced in the United Kingdom between 1815 and 1846. The word ''corn'' in British English denotes all cereal grains, including wheat, oats and barley. They were ...
issues in the 1820s to the 1840s,
Irish Home Rule The Irish Home Rule movement was a movement that campaigned for Devolution, self-government (or "home rule") for Ireland within the United Kingdom of Great Britain and Ireland. It was the dominant political movement of Irish nationalism from 1 ...
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 book ''Kicking Away the Ladder'' written by
Ha-Joon Chang Ha-Joon Chang (; ; born 7 October 1963) is a South Korean institutional economist, specialising in development economics. Chang is the author of several widely discussed policy books, most notably ''Kicking Away the Ladder: Development Strateg ...
, 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 military officer, statesman, and Founding Father who served as the first United States secretary of the treasury from 1789 to 1795. Born out of wedlock in Charlest ...
(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,
imperialism Imperialism is the state policy, practice, or advocacy of extending power and dominion, especially by direct territorial acquisition or by gaining political and economic control of other areas, often through employing hard power (economic and ...
,
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 or trade surpluses. The concept of balanced trade ar ...
,
fair trade Fair trade is an arrangement designed to help producers in developing countries achieve sustainable and equitable trade relationships. The fair trade movement combines the payment of higher prices to exporters with improved social and enviro ...
, and
industrial policy An industrial policy (IP) or industrial strategy of a country is its official strategic effort to encourage the development and growth of all or part of the economy, often focused on all or part of the manufacturing sector. The government takes m ...
.


In literature

The value of free trade was first observed and documented in 1776 by
Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
in '' The Wealth of Nations'', writing: This statement uses the concept of
absolute advantage In economics, the principle of absolute advantage is the ability of a party (an individual, or firm, or country) to produce a good or service more efficiently than its competitors. The Scottish economist Adam Smith first described the principle o ...
to present an argument in opposition to
mercantilism Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduce a ...
, 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, 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 cost In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for example ...
s 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 ''Protection or Free Trade'' is a book published in 1886 by the economist and social philosopher, Henry George. Its sub-title is ''An Examination of the Tariff Question with Especial Regard to the Interests of Labor.'' As the title suggests, George ...
'' was read out loud in full into the
Congressional Record The ''Congressional Record'' is the official record of the proceedings and debates of the United States Congress, published by the United States Government Publishing Office and issued when Congress is in session. The Congressional Record Inde ...
by five 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 * * *


Citations


General and cited references

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


Further reading

* Galiani, Sebastian, Norman Schofield, and Gustavo Torrens (2014)
"Factor Endowments, Democracy and Trade Policy Divergence"
''Journal of Public Economic Theory''. 16(1): 119–156. . * * * World Trade Organization (2018)


External links


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