Free Trade is the policy of permitting the people of a country to buy and sell where they please without restrictions. The term is generally used to describe the conditions of trade between countries, but it may also apply to the conditions of trade within a country. A nation that follows the policy of free trade does not prevent its citizens from buying goods produced in other countries or encourage them to buy at home rather than abroad. (The World Book Encyclopedia 1970), In this essay we will discuss reasons for supporting free trade along with those who are opposed to free trade.
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Some of the benefits of free trade is that it improves productive efficiency and increases consumer choice. The economic theory of comparative advantage also provides an indisputable logic behind why two nations that trade are both better off than if they do not trade, however, free trade remains controversial because gains from trade are not evenly distributed within countries. For example, with the outbreak of the coronavirus and China lifting import restrictions on U.S farm goods, this trade will benefit China by removing barriers on these products which would improve and support free trade. Those who favor free trade argue that protection leads to national isolation, national jealousies, and threats of war, which in turn necessitate even greater protection. They believe that free trade leads to understanding and world peace. (World Book Encyclopedia 1970).
Another argument for free trade is that by providing entrepreneurs with an incentive to seek new ways to export or compete with imports, free trade offers more opportunities for learning and innovation than are provided by a system of “managed” trade, where the government largely dictates the pattern of imports and exports. A related form of gains from free trade involves the tendency for more productive firms to engage in exports while less productive firms stay with the domestic market. (Krugman, Obstfeld, Melitz p.238).
According to Wall Street Journal U.S. officials said Chinese leaders have taken the first steps toward implementing the first phase of a trade deal between the world’s two largest economies, an announcement that amid concerns that the coronavirus could delay the pace of China’s promise to purchase more U.S comes. Crops and other goods. Official noted that Chinese leaders have lifted import restrictions on U.S. poultry and poultry products and pet food, along with other actions, since the deal took effect. The deal calls for China to increase its purchases of U.S. agricultural products by $32 billion over a two-year period. (Wall Street Journal Economy Week Ahead). Free trade will be an advantage to China considering the current economic situation with the coronavirus.
Countries possessing an abundance of land relative to labor will tend to specialize in agricultural products, such as the U.S and will export these products for the manufactured goods made by countries having an abundance of labor relative to land. Australia, for example produces wool and mutton because of large land areas and a suitable climate; Canada produces wheat for similar reasons. Countries specialize, therefore in the production of certain goods and exchange a part of their total output for goods made in other countries. International trade is the extension of the principle of the division of work to the international sphere. It is based on international division of labor and specialization.
Another benefit of free trade is that a country can produce some commodities that other countries cannot. In the real world, there are hundreds of nations producing thousands of products, most with different cost structures and at different levels of efficiency. One example as stated in the textbook discusses the Auto PXCT OF 1964 and the North American Free Trade Agreement (NAFTA). An unusually clear-cut example of the role of economies of scale in generating beneficial international trade is provided by the growth in the automotive trade between the United States and Canada during the second half of the 1960’s. Before 1965, tariff protection by Canada and the United States produced a Canadian auto industry that was largely self-sufficient, neither importing nor exporting much. These firms found it cheaper to have largely separate production systems than to pay the tariffs. (Krugman, Obstfeld, Melitz p.180).
The Canadian subsidiaries of U.S. firms found that small scale was a substantial disadvantage. This was partly because Canadian plants had to be smaller than their U.S counterparts. Perhaps more importantly, U.S. plants could often be dedicated that is devoted to producing a single model of component while Canadian plants had to produce several different things requiring the plants to shut down periodically to change over from producing one item to producing another, to hold larger inventories thus had a labor productivity about 30 percent lower than that of the United States. The gains seem to have been substantial. (Krugman, Obstfeld, Melitz p.180).
On the other hand, we have those who are against free trade. Let us look at some of the reasons free trade is opposed. Firstly, free trade may be advantageous to the advance countries but not to the backward economies. Free trade has brought enough misery to the poor, less developed countries. For example, in the Wall Street Journal it states that the largest U.S. gateway for seaborne imports from China is projecting a twenty-five percent drop in container volumes this month as the economic impact of the coronavirus spreads across shipping operations far from the outbreak. Container ship operators have canceled 40 sailings at the Port of Los Angeles, mostly for vessels coming from China. (Wall Street Journal Logistics Report).
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As Chinese business shutdowns extended past the traditional Lunar Year holiday into February, and workers stayed home from factories and ports, it became clear that we were looking at something much bigger than maybe some had thought. Shipping volumes out of China have plunged as the shutdowns in the wake of the outbreak crimp industrial production, with ocean carriers warning that canceled trips will take a toll on earnings. (Wall Street Journal Logistics Report).
Despite superior efficiency under free trade, most countries favor some protection. One reason is the unsettled state of world affairs. Many persons believe that, so long as there is risk of war, a nation should not be too dependent on foreign supplies. Another reason is the protectionist economic policy followed by some other nations. Today, as the United States shifts away from protection, except in agriculture, many of these nations are increasingly emphasizing protection for themselves. These countries are mainly the less-developed nations of the world that seek to protect their “infant” industries, more or less as the United States did in the 1800’s.
Another argument for deviating from free trade comes directly out of cost-benefit analysis: For a large country that is able to affect the prices of foreign exporters, a tariff lowers the price of imports and thus generates a terms of trade benefit. This benefit must be set against the cost of the tariff, which arise because the tariff distorts production and consumption incentives. It is possible, however that in some cases the terms of trade benefits of a tariff outweigh its costs, so there is a terms of trade argument for a tariff. . (Krugman, Obstfeld, Melitz p.242).
However, it is often argued that free trade leading to unrestricted international division of labor would become a nation of sheepherders, another a nation of miners, and another a nation of industrial workers. Such lack of variety in economic opportunities would provide little outlet for the various talents of the people in each nation. In answer to this argument man economist would insist that costs of transport always provide some protection to local industries. For example, costs of transportation make it necessary to have brickmaking, food processing, and textile plants in almost every region of the United States, even though goods may move tariff free from one region to another. This is an issue that must be settled country by country. (World Book Encyclopedia 1970).
REFERENCES
- International economics: theory and policy/Paul R. Krugman, Princeton University, Maurice Obstfeld, University of California, Berkeley, Marc J. Melitz, Harvard University 10th edition.
- University of Virginia Darden School Foundation, Charlottesville, VA Copyright 2018.
- Nixon Ends Convertibility of US Dollars to Gold Federal Reserve History www.federalreservehistory.
- Socius: Sociological Research for a Dynamic World Volume 5: 1-4 American Sociological Association
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