Free trade

In international trade, free trade is an idealised market model, often stated as a political objective, wherin trade of goods and services between countries flows unhindered by government-imposed artificial costs. Intellectually, this arrangement is supported by followers of the neoclassical and microeconomic schools of thought.

The term is given to economic policies, as well as political parties that support increases in such trade.

Free trade is a concept in economics and government, encompassing:

International trade of goods without tariffs (taxes on imports) or other trade barriers (e.g., quotas on imports)
International trade in services without tariffs or other trade barriers
The free movement of labour between countries
The free movement of capital between countries
The absence of trade-distorting policies (such as taxes, subsidies, regulations or laws) that give domestic firms, households or factors of production an advantage over foreign ones
Enforcement of property rights to ensure the above conditions

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The relative costs, benefits and beneficiaries of free trade are debated by academics, economists, governments and interest groups. Aspects of the ongoing debate are addressed below.

Wider meaning of free trade

Depending on the specific context, use of the term free trade can signify one or more of the above conditions. However, it is fundamental that only governments can restrict trade: they have the legal monopoly over the use of physical force in a geographical area.

The term free trade has become very politically based, and it is not uncommon for so-called "free trade agreements" to impose additional trade restrictions. Such restrictions on trade are often due to domestic political pressure by powerful corporate, environmental or labor interest groups seeking special protections of their perceived interests.

Free trade agreements are a key element of customs unions and free trade areas. The details and differences of these agreements are covered in their respective articles.

History of free trade

The history of free trade is a history of international trade focusing on the developments of open markets.

It is known that various prosperous world cultures throughout history have engaged in trade. Based on this, theoretical rationalizations as to why a policy of free trade would be beneficial to nations developed over time. These theories were developed in its academic modern sense from the commercial culture of England, and more broadly Europe, in the past five centuries. In opposition to free trade, a policy of mercantilism was developed in Europe in the 1500s and persists in various forms to this day. Early free trade theorists who were opposed to mercantilism were David Ricardo and Adam Smith. Free trade theorists offered trade as the reason why certain cultures prospered economically. Adam Smith, for example, pointed to increased trading as being the reason for the flourishing of not just Mediterranean cultures such as Egypt, Greece, and Rome, but also of Bengal (East Indies) and China.

Free trade policies have battled with mercantilist, protectionist, isolationist, communist, and other policies over the centuries. Wars, such as the Opium Wars, have been fought primarily over trade.

All developed countries have used protectionism, but usually reduced it as they gained more wealth. Some critics say that having more wealth guarantees that the country would benefit from free trade, although the majority of scientists think that also poor countries would benefit from free trade.

Intellectual property and free trade

Historically, the free trade movement was skeptical and even hostile to the notion of intellectual property, regarding it as monopolistic and harmful to a free, competitive economy. Indeed, during the late 19th century, free trade advocates succeeded in reducing the length of the patents available in many European countries. The Netherlands, remarked for its laissez-faire policies in the 19th century, even abolished its patent system (mostly used by foreign companies) in 1867. Under the stipulations of the Convention of Paris however did the Netherlands have to re-introduce the patent system (made law in 1910), and was the last European country to do so (after Switzerland).

The 19th century anti-patent cause failed largely because the recession of 1874 weakened the free trade movement of the time Fritz Machlup & Edith Penrose, "The Patent Controversy in the 19th Century", Journal of Economic History, 10 (1) pp. 1-29, 1950]]. (and also because patent advocates used a public relations campaign which was remarkably sophisticated for its time).

It is thus remarkable (maybe even ironic) that corporations lobbying for expanded intellectual property rights have succeeded in including Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), a very strong treaty on intellectual property rights, as a membership requirement for the World Trade Organization, the international organization dedicated to furthering the cause of free trade.

Criticism of Free trade

''Main article: Free trade debate.

Free trade is one of the most debated topics of the 20th and 21th century. Different arguments are used by those who favour and by those who oppose free trade, or feel that more constraints are needed. These arguments can be divided in economic, moral and sociopolitical arguments.

Alternatives to free trade

Tobin Tax

''Main article: Tobin Tax.

A Tobin tax is the suggested tax on all trade of currency across borders. This is supposed to put a penalty on short-term speculation in currencies.

Fair trade

''Main article: Fair trade.

The fair trade movement, also known as the trade justice movement, promotes international labor, environment and social standards for the production of traded goods and services. The movement focuses in particular on exports from the Third and Second Worlds to the First World.

Balanced trade

''Main article: Balanced Trade.

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

International barter

Some nations have prohibited trade under monetary terms of trade. For example, Hjalmar Schacht arranged barter for Nazi Germany to bypass the free market which he thought was rigged by Anglo-American capitalists. Officially, the 1933 bilateral-barter policy was designed to ensure that foreign countries bought as much from industrial Germany as she bought from them. However, Milton Friedman has argued (^*) that Hjalmar Schacht's exchange controls were primarily designed to restrict capital flight. The former Soviet Union occasionally arranged bilateral barter within its sphere of influence. See Comprehensive Program for Socialist Economic Integration or Comecon. Arab League nations have also occasionally replaced monetary trade with barter.

Increase the credit risk to international loans

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

International price floors

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

Separating world prices from domestic prices

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

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

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

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

Regional trading blocs

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

Footnotes

See “Economic Freedom and Per Capita Income.”

External links

Economic ideologies | International trade

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