Free trade

Categories: International trade | Economic ideologies

Free trade is the untaxed flow of goods and services between countries, and is a name given to economic policies and parties supporting increases in such trade.

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.

Contents 1 Wider meaning of "free trade" 1.1 When free-exchange is not free trade 1.2 Totally free trade 2 History of free trade 3 Arguments for free trade 3.1 Economic arguments for free trade 3.1.1 Qualitative Arguments 3.1.2 Production possibilities frontiers and indifference curves 3.1.3 Reciprocal free trade is in exporter's interests 3.2 Moral arguments in favor of free trade 3.2.1 Increased commerce means reduced war 3.2.2 Protectionism sullies the cause of patriotism 3.2.3 Tariffs are internally divisive 3.2.4 Free trade is a right 3.2.5 Free trade reduces poverty 4 Criticisms of free trade 4.1 Economic arguments against free trade 4.1.1 Free trade in raw materials retrogrades development 4.1.2 International trade requires more resources to distribute 4.1.3 Sheltering young industries may pay-off later 4.1.4 Free trade favors developed nations 4.1.5 Pernicious Influence of Foreign Firms 4.1.6 Free trade benefits only the wealthy within countries 4.1.7 Free trade increases offshoring 4.1.8 Capital mobility and comparative advantage 4.2 Sociopolitical arguments against free trade 4.2.1 Free trade undermines cultural diversity 4.2.2 Free trade causes dislocation and pain 4.2.3 Dependency theory 4.2.4 Free trade undermines national security 4.2.5 Free trade undermines border control 4.2.6 Rule of law and regulations 4.2.7 The financial consequences of mobile capital 4.2.8 Stability 5 Alternatives to free trade 5.1 Tobin Tax 5.2 Fair trade 5.3 Balanced Trade 5.4 International barter 5.5 Increase the credit risk to international loans 5.6 International price floors 5.7 Separating world prices from domestic prices 5.8 Regional trading blocks 6 Intellectual property and free trade 7 Additional information 8 Notes 9 External links 9.1 In favor of free trade 9.2 Opposed to free trade 9.3 Articles and papers 10 Footnotes

Wider meaning of "free trade"

Free trade is a concept in economics and government that can refer to:

• international trade of goods without tariffs or other trade barriers
• international trade in services without tariffs or other trade barriers
• the free movement of labor 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.

Depending on the specific context, use of the term free trade can signify one or more of the above conditions. In almost all cases, violations of the free trade conditions are due to government-imposed policies.

The term free trade has become very politically loaded, 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.

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.

When free-exchange is not free trade

The World Trade Organization was created to open up markets, and promote international trade based on the laissez faire 'Free Trade' paradigm. The WTO creates and monitors agreements to reduce trade barriers, and arbitrates in disputes over foreign market access, and violations of these agreements. Its definition of 'Free Trade' is trade On a level playing-field, so that the unlimited exchange of goods between countries is not necessarily 'Free'. If one of the countries producing Aircraft, say, subsidizes corporate R&D or enacts local-procurement regulations the WTO considers this a violation of Free Trade, even when the barriers to trade are not imposed at the national borders in an import-export transaction step (like a Tariff).

Totally free trade

Some economists (especially Libertarians) criticize the WTO’s definition of 'Free Trade' as too narrow. They argue that a foreign Governmental producer-subsidy is another form of 'comparative advantage' and should not be used as a reason to impose domestic barriers on the purchase of overseas goods.

These economists argue that (since the surplus benefit to domestic consumers outweighs the surplus loss of domestic producers) the lower price of foreign subsidized goods is a net positive (as in the standard Ricardian argument) and the source of the 'comparative advantage' is irrelevant. Therefore, any import restriction (even on 'dumped goods') makes the domestic society as a whole worse off than it would be with unlimited imports.

This 'abolitionist' position has had little governmental support in the developed world, due to the following considerations:

• Producer interests (and jobs) are more organized than consumer interests
• The 'artificial' handicap of a foreign subsidy seems much less 'just' to local production than advantages deriving from geography, natural resources, or native skill. Electorates often prefer "fairplay" to Utilitarian considerations.
• Despite accepting that a country would be better off without Tariffs than with them, some Game Theory models suggest a superior strategy to immediately dropping all Tariffs; if progressively dropping barriers bilaterally can be used to open foreign markets to domestic suppliers this is a superior long-term strategy. In this model, Tariffs are a negotiating tool with which to pry open foreign markets for domestic goods, benefiting both domestic consumers and domestic producers. (The justification for tariffs is not important; Tariffs only exist in order to be relinquished.)
• If trade barriers are already low, the threat of a "Trade war" of tit-for-tat tariff increases may reduce the temptation for either partner in bilateral trade to raise import barriers.

History of free trade

Main article: History of free trade

All developed countries have used protectionism until they gained sufficient wealth to guarantee that they would benefit from free trade. As economist Dani Rodrik notes, "the only systematic relationship [between tariffs and economic growth] is that countries dismantle trade restrictions as they get richer."p22 From the 1700s to the mid-1800s, Britain used industrial policies similar to those later used by Japan and South Korea. Once Britain had secured economic leadership, they began to support free trade. Criticising the British position, President Ulysses S. Grant retorted that "within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade".[1]

Arguments for free trade

In the history of free trade, two types of argument have been advanced in favour of allowing purchases from abroad, and "Free trade" in the broader sense. The first set of arguments are essentially economic, that free trade will make society richer (more prosperous in money terms). These are mostly technical arguments from the discipline of economics, starting especially with Smith's "Wealth of Nations", which overthrew the mercantile orthodoxy. The other set of arguments for free trade could be classified as "moral" arguments, which are pitched at a more high-minded level, some of these are listed below.

Economic arguments for free trade

Classical economic analysis indicates that free trade increases the global level of output because free trade permits specialization among countries. Specialization allows nations to devote their scarce resources to the production of the particular goods and services for which that nation has a comparative advantage. The benefits of specialization, coupled with economies of scale, increase the global production possibility frontier. An increase in the global production possibility frontier indicates that the absolute quantity of goods and services produced is highest under free trade. Not only are the absolute quantity of goods and services higher, but the particular combination of goods and services actually produced will yield the highest possible utility to global consumers.

Qualitative Arguments

Free trade policies are often associated with general laissez faire economic policies, which can allow for faster growth. Laissez faire policies—the absence of government intervention in trade, entrepreneurship and investment—is often positively correlated with high per capita income. Economic Freedom and Per Capita Income

Production possibilities frontiers and indifference curves

Here is the production possibilities frontier for a fictional country, Country A. For simplicity, assume that the country produces only two goods, meat and rice. Because the country has limited resources, the production of an additional unit of rice means some resources must be diverted away from the production of meat. The particular rate of trade-off between meat and rice is not important for this analysis, so it can be ignored.

Here is the production possibilities frontier for a second fictional country, Country B. Again; the country can produce only the same two goods, meat and rice. Like before, limited resources mean that the production of an additional unit of rice means some resources must be diverted away from the production of meat. The particular rate of trade-off between meat and rice is not important for this analysis, so it can be ignored. The fact that the two countries have different relative rates of trade-off is important. This difference gives rise to a comparative advantage, a key concept in economics. Even if one country has an absolute advantage in the production of all goods, both nations can benefit from trade due to comparative advantage.

The first two images above assume a state of autarky, which means no trade occurs between the two countries. If free trade is possible, the green line is the production possibilities frontier for the entire world. The world PPF is made up by combining the two countries' PPFs. Linear PPFs will always combine to form a shape with an inflection point, as shown at right.

Compare the world's production possibilities frontier with each individual nation's. Clearly, the world can produce and consume more when free trade is allowed. To arrive at the world's production possibilities frontier, vector addition must be used. Country A and Country B's meat and rice outputs must be added together for each possible production point.

An intuitive way of arriving at the world's production possibilities frontier is to first assume that each country tries to specialize by producing only one product. In the graph at right, the first units of meat are produced only by country B (red). Once country B is using all its resources to produce meat, then country A (blue) begins shifting resources away from the production of rice and into the production of meat. On the other axis, assume that the first units of rice are always produced by country A. Additional units of rice can only be obtained if country B shifts some resources into rice production.

Returning back to country A, here is the same production possibilities graph, now with indifference curves added in. Indifference curves are a measure of preference and utility. Interplay between the country's preferences and production result in the actual combination of goods produced and consumed. Remember, this is the state of Country A under autarky.

Here is the same view of Country B's economy. Again, the actual combination of goods produced and consumed is dependent on the country's productive abilities and its citizens' preferences. Thus, it is not surprising that the combination of goods consumed in Country B differs from that in Country A.

Graphical information of the two countries can be combined in a single graph, as shown here.

When the two countries' autarkic consumptions are added, the total quantity of each good produced/consumed is less than the world's PPF under free trade. This indicates that by trading, the absolute quantity of goods available for consumption is higher than the quantity available under autarky.

Reciprocal free trade is in exporter's interests

An early lobbying effort on behalf of free trade was made by the businessmen of the Anti-Corn Law League. Some of these gentlemen owned textile factories, and believed that repeal of the Corn Law import-ban would allow 1830s Britain to sell cotton clothing to wheat-exporting nations.

Although this argument is rooted in Mercantilism and producer self-interest it amounts to a voice in favour of free trade. See also: Reciprocal Trade Agreements Act.

In 1950 Jacob Viner showed that a trading block mutually lowering tariffs would produce gains not merely on the demand side but also on the supply side. This was called trade creation, the benefits to the supply side as a whole accrue as resources are reallocated towards firms producing at the highest comparative advantage (among the partners) in each country.

Moral arguments in favor of free trade

The 18th and 19th century intellectuals who backed free trade rarely did so under the rubric of increasing material wealth. In many cases this was given as the least important reason for free trade. Rather, they argued that international society would be improved by increased commerce. Some of these, and later, sociopolitical arguments are listed here.

Increased commerce means reduced war

The argument for free trade that commonly underlies neoliberal foreign policies can be made from the perspective of national security - it is seen by some policy analysts that countries that trade with each other are less likely to go to war due to the enormous cost of suddenly disrupting their trade abroad, particularly since they would be dependent on the world economy as a result of specialization and comparative advantage.

Qualitative analysis suggests that free trade encourages economic interdependence between countries, reducing the likelihood of war. However, the belief that free trade would reduce war was hypothetical rather than empirical (at least until the 1950s). Twenty-two years after Ricardo advanced his theories of comparative advantage they were used as justification by the British to start the Opium wars. Also, it is hard to know when the occurrence of free trade has prevented the outbreak of war, but easy to know when it hasn't; critics of free trade sometimes cite the First World War as an instance where developed, industrialized countries with reasonably extensive trade links abruptly broke off those trade links and entered into a particularly destructive war. It is an open question whether the First World War, its causes, and the economic environment that preceded it are sufficiently similar to the modern globalized economy to draw parallels between 1914 and 2005.

The fact that some wars have been fought between trading-partners does not disprove the notion that increased trade lowers the willingness to go to war, simply that however much it does so, other considerations sometimes overwhelm the economic. McDonald's is in the vanguard of global free trade, permitted to spread its brand of consumerism by the free trade in capital (its product is mostly sourced locally). Famously, only a single, short, war has been fought between any of the 122 countries having franchises. This fact might not be due to the ties of trade, but could still be attributed to the homogenizing effects of free trade, as identical consumers the world over see less reason to wage war on one another.

The process of free trade, especially in post industrial economies, effectively eliminates the existence of unequal resource distribution. Japan imports much of its food source, and in return exports mainly the produce of its extensive and high-tech workforce. Continuing the example, Japan would not likely be able to sustain the population it does today without one of three possibilities, an unbelievable increase in technology to allow for better use of land resources, international trade, or seizing arable land from another state. Trade also allows for better quality produce and competitiveness between nations, effectively raising the living standards of those nations. It would be illogical to many in such a case to jeopardise those living standards for a war. Finally, increased trade leads to increased bilateral communication between nations and as such, wars not focused on resources or land already cured by trade, including ideological arguments become less evident.

After the second world war many liberals said that the war's ultimate cause had been the restrictive trade practices of Nazi Germany and the British Empire. They thought that free trade would increase the likelihood of a lasting peace. Cordell Hull, the U.S. secretary of state until 1944, believed this, and argued that as trade barriers dovetail with war, so free trade does with peace. The post war consensus expressed at Bretton Woods was that government coordination was necessary to prevent trade wars and competitive devaluations, to ensure free trade and peace.

Protectionism sullies the cause of patriotism

Adam Smith thought that protectionism against free trade was a scam on the public on behalf of producers, carried out for nationalism. Even if overall economic interests had not been harmed by tariffs, he was opposed to them on the grounds that patriotism shouldn't be perverted by scoundrels to enrich themselves.

Tariffs are internally divisive

See Nullification crisis.

Free trade is a right

The libertarian position argues that any trade restraint is immoral a priori, since restricting the rights of sovereign consumers to purchase foreign goods is outside the competence of legitimate government. This is in the tradition of the anti-Corn Law radicals, like Richard Cobden, who concluded their 1838 parliamentary petition with an appeal to "negative liberty":

"Holding one of the principles of eternal justice to be inalienable right of every man freely to exchange the result of his labour for the productions of other people, and maintaining the practice of protecting one part of the community at the expense of all other classes to be unsound and unjustifiable, your petitioners earnestly implore your honourable House to repeal all laws relating to the importation of foreign corn and other foreign articles of subsistence, and to carry out to the fullest extent, both as affects agriculture and manufactures, the true and peaceful principles of Free Trade, by removing all existing obstacles to the unrestricted employment of industry and capital." ^[2]

Free trade reduces poverty

Conflating the "moral" and "economic" arguments are those campaigners who say that increased trade is the best way to relieve extreme poverty throughout the world. Opposing free trade, they argue, is tantamount to supporting economic injustice. (For instance, "The Economist" magazine sometimes runs controversial cover stories making this impassioned argument for free trade.)

The thrust of this point is that economic and moral issues cannot properly be separated, and that any other particular socioeconomic problems can be combated most effectively through rising living standards.

Bjørn Lomborg's Copenhagen Consensus on international development challenges ranked trade liberalization as third on the list of development priorities; the experts judged that modest costs could yield large benefits for developing nations. (They ranked freer trade as a "Very Good" opportunity for fighting misery along with cheap measures against HIV infection, micronutrient distribution, and anti-malarial programs.) The conference was of the opinion that reducing subsidies and tariffs would improve the wellbeing of the global poor being more than any agricultural, political, or environmental program. They considered that the free trade in labour would also be a significant (although less important) move against poverty, especially if skilled worker migration were permitted. The approach and conclusions of the "consensus" have been widely criticized, especially trade liberalization's high ranking.

Criticisms of free trade

Much of the dispute over free trade is semantic. The official US interpretation of free trade is opposed to the Vietnamese interpretation, but both governments claim to be in favour of free trade. Similarly, advocates of fair trade criticize free trade as unjust, although their criticisms tend to be directed at neomercantile protectionist policies of the First World rather than the theory of free trade itself.

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, cultural diversity, and national security.

Economic arguments against free trade

Free trade in raw materials retrogrades development

The argument that a country could get 'locked in' to serving the needs of the world market in raw materials, and therefore not develop industrially was first advanced by Friedrich List in 1841, and received empirical support in the 20th century. It was discovered that African and Arab nations rich in natural resources (e.g. diamonds and oil) developed less rapidly than those nations without such 'bounty'. This is also a sociopolitical argument against free trade, because it is said that:

1. The regimes exporting such valuable commodities to the west tended to be autocratic, and remain in unpopular power because of the massive payment streams from exports.
2. The reason that civil wars and violence are correlated with the discovery of mineral wealth in the developing world is the world market for the commodities. This is one area of free trade which has few supporters, and conflict diamonds cannot be openly imported into any country.

It was also discovered that developed nations uncovering natural resources could suffer as a result of free trade, and for similar reasons. The massive capital influx to the Netherlands after it started exporting oil increased prices in the famous "Dutch disease".

International trade requires more resources to distribute

If food is purchased from the local farm it requires very little energy and possible no fuel to transport to the table. Delivering food produced on the other side of the world to a supermarket has an environmental impact because it requires a heavier use of fossil fuel in delivery from overseas. The organic food movement claims that there are other downsides to the globalization of the food market (for instance, that preserved food has an inferior taste).

Deep Green thinkers say that Free Trade claims to lead to the "full employment of resources", and strongly oppose Free Trade in the hope of discouraging the immediate depletion of the earth’s resources.

Sheltering young industries may pay-off later

Main article: Infant industry argument

New Trade theorists challenge the assumption of diminishing returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries will then allow those sectors to dominate the world market. Less quantitative forms of this "infant industry argument" against totally free trade have been advanced by trade theorists since at least 1848.

Free trade favors developed nations

Some argue also that trade barriers such as quotas and agricultural subsidies prevent farmers in developing nations from competing in local and global markets.

Some services exported by developed nations are intangibles, such as medicinal formulae, trademarks, software, and entertainment. The value of this intellectual property is derived from legal protection against unauthorized reproduction. Some advocates of the poor claim that the reason IP-rights are strongly protected in International trade is the power developed nations have to protect the interests of intellectual property owners during trade negotiations. WTO-signatory nations renounce the right to produce generic copies of life-saving drugs, the only affordable treatment in developing nations.

Pernicious Influence of Foreign Firms

Within developing countries, there is often suspicion of foreign firms, especially multinational corporations. Many feel that once allowed free reign they will use their superior resources and experience to sway the political establishment of a country in favor of excessive concessions (tax holidays, underpaying for property, etc.) and try to influence the political system in their interests, which may or may not be shared by the citizenry.

Free trade benefits only the wealthy within countries

Some argue the following:

• The wealthy own more corporate equity, which increases in value as companies are able to produce at the lowest cost in the world.
• As the world's markets merge into a single global market the number of market-leading companies worldwide drops, with international take-overs of local champions by giant corporations. This process concentrates wealth in fewer corporations.
• Free trade replaces low-skilled jobs often done by the poor easier than high-skilled jobs. This implication of the Stolper-Samuelson theorem is challenged on the basis that technology makes offshoring high value-added work feasible and more profitable than moving low-skilled jobs.

According to Dr. Ravi Batra's book, The Myth of Free Trade, open trade in the US has resulted in replacement of manufacturing jobs for service jobs, which pay less on average. The product trade deficit results in more investment money flowing into the US as a trade-off. This investment money mostly ends up with wealthy investors and owners; and "trickle down" is not sufficient to compensate for the loss of manufacturing jobs and wagers. After all, if a wealthy person receives money from such investments, they may spend some on foreign cars and foreign trips, which is not going to go back into the US economy. According to Batra's research, even though free trade may increase GNP, the increases do not flow to rank-and-file workers.

Free trade increases offshoring

Free trade allows companies the possibility of outsourcing the production of goods for domestic sale. Environmental and labor standards imposed upon these companies can be less in foreign production. Labor and environmental advocates argue that free trade thereby creates conditions that allow companies to circumvent domestic regulations, by producing elsewhere. As free trade increases, the balance of power shifts in favour of companies and away from governments. This is considered to pose a threat to democratic self-determination by anti-globalizers and authoritarian control by totalitarian states. Free trade supporters argue that all countries have the right to opt out of the world market through isolationism and that companies are fictional persons who are taxed without representation and that the balance of power should shift away from the governments that exploit them. It has also been argued that free trade hurts developed nations because it causes jobs from those nations to move to other countries, and accelerates the "race to the bottom". As well as reducing rich-country GDP through lost jobs, competitive pressures will undermine democracy by creating pressures to lower wage demands, and protections like environmental and safety standards. The "race to the bottom" is blamed on international competition to attract traded-goods production, which, with Free Trade, can be sited anywhere.

See also Lump of work fallacy.

Capital mobility and comparative advantage

Some descriptions of comparative advantage rest on a necessary condition of capital immobility. If financial or labor resources can move between countries, then comparative advantage erodes, and absolute advantage dominates. For instance, the Heckscher-Ohlin model derives comparative advantage from differing relative abundances of capital and labour between countries. Capital mobility and the competitive drive for the highest return on investment would give all countries identical relative abundances for new investment, eliminating comparative advantage and trade.

Given the liberalization of capital flows under free trade agreements of the 1990s, the condition of capital immobility no longer holds. David Korten and other economists argue that the theory of comparative advantage "is replaced by that of downward levelling". However, capital immobility is only one route to comparative advantage, useful to basic models, but not essential to it.

Basic models assuming capital immobility were convenient and not essential to the principle. Although greater capital mobility is likely to reduce comparative advantage, barriers to capital flows are not the only way to derive it.

• Early qualitative descriptions of the principle were based on the greater ease of producing different commodities in one country than another, and not on capital mobility. The comparative advantage of France over Iceland in wine production is not based on capital immobility.
• As economist Paul Krugman has noted, 19th century economist David Ricardo who formulated the basic model of comparative advantage lived in a period of high capital mobility. His ideas were based on different production functions in different goods (different technologies) internationally. These do not necessarily require capital immobility.
• Comparative advantage can be derived from more complicated models including capital mobility (i.e. international borrowing, lending, and labor movement) and often posit movement of capital as analogous to the movement of goods.

Sociopolitical arguments against free trade

Free trade undermines cultural diversity

The French argue that allowing Hollywood movies to compete against French films would be culturally destructive. Free trade in culture is limited, otherwise, the French language and the visibility of a French perspective on the world would be threatened. Food imports competing with Gallic farmers are limited on the grounds that high food prices are necessary to sustain rural French culture.

Throughout the world, forces that many blame on free trade are eroding traditional ways of living and rural cultures. For instance, Sir James Goldsmith attacked free trade for causing the conversion of small-scale agriculture to large-scale agribusiness across the developing world: "The loss of rural employment and migration from the countryside to the cities causes a fundamental and irreversible shift. It has contributed throughout the world to the destabilization of rural society and to the growth of vast urban concentrations. In the urban slums congregate uprooted individuals whose families have been splintered, whose cultural traditions have been extinguished and who have been reduced to dependence on welfare from the state." ^[3]

Many Canadian nationalists argue that the North American Free Trade Agreement or an extension could harm Canadian culture, due to foreign corporations (magazines, television, and satellite providers) challenging Canada's cultural content laws. These laws encourage Canadian content in the media, which is not in the best interests of foreign corporations.

Free trade causes dislocation and pain

Free trade may change careers too fast. Once, a farmer could expect to finish her life as a farmer, although her children may have been forced into mining or manufacturing instead. Now, changes happen on a sub-generational level, faster than natural attrition. Coping with these transitions can be difficult, especially for the middle-aged and the elderly due to age itself or age discrimination. Problems associated with economic adaptation are generally not factored into the calculation of free trades' effects. In economist's jargon these issues are externalities.

Welfare economics deals with the issue of the overall benefit to society of changes that harm some and help others. In a utilitarian view, the overall benefit of cheaper goods and services is given equal weight with the concentrated impact of lost jobs. Other economists argue that the harmful effect of free trade on some should be given greater weight than the benefit for all. See Pareto optimality.

Dependency theory

Critics of imperialism sometimes focused on how imperial powers gained influence over weaker countries through specialization. Weaker countries would develop areas, typically in raw materials and agriculture, that would be economically dependent on the mother country. In the post-imperial world, this criticism changed. Imperial powers that controlled capital flows could maintain their economic status vis-a-vis their former colonies by using this dependency to their advantage. Imperial powers would have more choice (more competitive market) in countries from which they could acquire raw materials than those countries would have in buying final goods, particularly as imperial countries had the bulk of the world's financial resources and chose to behave oligopolistically. This pattern of exploitation, which may or may not lead to the benefit of imperial nations, focuses on the importance of political power in the international system and its weight in policy choices. See Dependency theory.

Free trade undermines national security

One of the arguments of the Corn Laws repeal was national security. Britain ought not be dependent on grain imports to her country, or else she risked putting her national security in the hands of foreign countries. This argument focused on the ability of free trade to threaten the sovereignty of a nation at war.

This argument had always been questioned on the grounds that every market in the world would have to stop selling at any price for an importer to find itself imperiled, unless a blockade was used. It was said that any nation (especially England) unable to defeat a blockade couldn't hope to win a 19th century war anyway. Although wars were subsequently fought over access to markets these have always been markets in commodities not domestically available (principally oil; see also – Raw materials causes of Japanese expansionism.) In the history of the world, no country has ever suffered military defeat, or capitulated to sanctions, due to the inability to produce a domestically producible product.

In the modern United States and in many developed Western countries, one of the chief arguments in favor of farm subsidies is a national security argument. The threats of bioterrorism and even unintended disease-causing agents has raised the possibility of poorly inspected food entering a country from another, presumably with less stringent food inspections. Like a number arguments against free trade, this argument rests on the inequity of government regulations across countries the world over, although some critics of the US food industry point out that the same argument is used whether or not the standards imposed actually are higher or lower abroad. (See: Fast Food Nation.)

Technological change is another source of anxiety about free trade. Trade in high-tech equipment can facilitate the implementation of advanced military technology in countries that may become strategic opponents later on. This argument is often compelling to policymakers in developed countries, and free trade rarely applies to military technology, and often special restrictions are placed even on advanced technology developed in the nonmilitary sector.

If free trade encourages the development of a world market that equilibrates wages, industrialization, and productivity per laborer, this can amount to the armament of strategic opponents. This argument is often brought up in the context of United States-China trade relations; if the Chinese economy were to develop the same production per capita as the United States, China would be able to harness economic resources four-fold what the United States economy could, and, in theory, proportional military resources. Although this concern is widespread within the United States, the desire to keep a potential rival weak is not normally advanced within diplomatic circles.

Free trade undermines border control

Another national security argument against free trade — this one often argued in the context of the United States-Mexico border and the trading links between Europe and the Middle East and North Africa — discusses the tendency of free trade to encourage porous borders. The increased volume of trade that passes over a given border can swamp border control. Even with sufficient control, the cost, both to the government and traders having to endure the time and expense of passage, could be prohibitive to trade. See also Immigration.

Rule of law and regulations

Although in David Ricardo's time economists regarded the regulatory powers of the state as being more destructive than beneficial, the economic shocks of the later nineteenth century, the early twentieth century and the Great Depression produced a strain of economists led by John Maynard Keynes who criticized laissez-faire capitalism as itself destructive. After the war these Keynesians assisted the state in the development of regulatory institutions that limited the excesses and mitigated the failures of the free market and which were intended to sustain free trade through regulation. The later twentieth century saw the development of new economic theories that criticized the stress on regulatory institutions, though it is an uncommon opinion even among modern neoclassical economists to wholly regard all such regulatory functions of state as damaging to the economy.

These regulatory institutions, and indeed the rule of law itself, are costs to the development of industries. Although a number of laws - the protection of property rights, for instance - are strongly beneficial to corporations interested in the development of an industry in a foreign country, many other laws, regulatory laws in particular, can produce litigation risks or greatly increase the cost of operating in that country. Environmental regulations, labor laws, minimum wages, safety regulations, and (arguably) basic human rights can effectively increase the cost of operating in a country. As a result, these regulations often lead to a competitive disadvantage in the world economy for countries implementing those laws.

Similar arguments can be made for tax laws; corporations can evade high taxes by moving operations to countries with lax tax structures. In countries where the integrity of the state is weak, there can be an incentive for corporations to subvert governments through corrupt means and further undermine the rule of law in those countries in their favor. Accounting, banking, and investment regulations can take a similar direction; countries very interested in attracting investment may make their financial institutions more lax for short term political benefits. Some economists, such as Frederic Mishkin, point to this as an underlying cause of the Asian financial crisis of 1997-1998.

Many developing countries have not developed the financial institutions that developed countries rely on for the efficient functioning of their economies. The financial institutions that do exist in developing countries are often designed for economies with a strong role built for the state, and often with a great deal of corruption already existing. The influx of large amounts of investment capital from developed countries can put a considerable strain on financial institutions as they cope with enlarging their regulatory role, separating it from old state functions. The capital influx creates lucrative opportunities for corruption, especially within the regulating institutions. The development of these institutions runs a difficult course with investors who are interested both in the rule of law as it improves investment opportunities, and also in limiting their risk as investors. The development of these institutions can be a low priority for a poor county, which must bear the cost of modifying its business code, essentially for the benefit of foreign capitalists.

Free trade, then, creates an economic incentive for a race to the bottom in regulatory institutions; countries with lax, lenient, non-enforced, or selectively enforced regulatory legal structures will have a competitive advantage in attracting investment to their countries, and not merely in wages. From the capitalist's point of view, an ideal legal environment would have these features:

1. Weak or un-enforced labour and environmental protection laws.
2. Low or uncollected taxes.
3. Strong legal protection for property rights.
4. Changes to the legal code should be few and predictable, allowing business planning. The government should not be likely to override the rule of law, or impose exchange controls.

The difficulty that modern capital finds in meeting all of these conditions is that (1) and (2) are correlated with an immature legal system, but (3) and (4) are correlated with the division of powers, and long-standing legal institutions. As Russian oligarchs and early foreign direct investors in China discovered, the ability of an enterprise to make money is no guarantee that its profits can be retained. Some have argued that firms actually encourage (or at least prefer) the rule of law, judging that, on balance, it is "good for business". If so, the "Race to the bottom" may become a "Race to the middle" in legal enforcement, assisted by mobile capital, in order to create the optimum legal conditions for investment (balancing legal protections for labour and capital).

In theory, globally harmonized regulations regarding wages, the environment, safety, human rights, and other areas of economic control, would also prevent a "race to the bottom." Although globally harmonized regulations appear to be far off, there have been a number of moves toward regional agreements about these sorts of institutions. However, assumed in the "race to the bottom" argument is that greater labor and evironmental regulation yield greater benefits, and are inherently good, contentious points. The stagnation of western European countries, France and Germany particularly, who enforce strong labor and environmental regulations, suggests otherwise.

The financial consequences of mobile capital

The diversity of legal systems the world over and the limited degree to which those bureaucracies coordinate their regulatory and tax-collecting efforts can create loopholes to the benefit of corporations and private individuals, who can seek out havens from regulation and tax collection, even if they obey the letter of the law.

The freedom of capital to move outside the purview of a single authority has other harmful effects, even where it is not invested in the real economy. The following are common abuses of the free trade in capital:

• Tax avoidance (legal)
• Money laundering (illegal)
• Obfuscation of corporate accounts (possibly legal)

One of the chief concerns among modern economists and financiers is to develop methods of harmonizing international regulatory institutions, in particular accounting practices, to improve transparency in world financial markets and reduce the risk experienced by investors.

Stability

Free trade implies specialized industries and economic change. Economic changes can lead to strains and considerable changes to traditional economic and political systems. Social changes that Europe passed through over centuries - urbanization, development of national infrastructure, development of property rights, secular and national government, centralized administration, the development of financial sectors, and regulatory systems - can happen quickly in an economy exposed to free trade and capital flows.

Offshore outsourcing and an increase of temporary visa workers resulted in a drop in the demand for computer programmers in the US.

Free trade and capital flows can conflict with existing systems. Western financial institutions which are based on lending is an affront to some traditionalists. The imposition of property rights , such as in tribal areas where property is held communally or where they existed in a primitive sense, poses considerable difficulties for governments. That question can arouse concerns of justice, equity, class, and ethnic strife between groups that feel victimized by history. Property rights in developing countries and their implications for free trade has been raised by the Peruvian economist Hernando de Soto.

Free trade can be profoundly redistributive, forcing thousands if not millions to change professions as trade competes their former ones out. In the United States and in many developed countries there are systems of trade adjustment assistance that help to smooth the transition for workers and industries from a pre-globalized economy to an economy transformed by free trade. In countries without those resources, a sense of victimization can rise in laborers displaced by trade that can contribute to a loss of confidence in national policy. Even with trade adjustment assistance in the United States, some of the most outspoken resistance to free trade, in particular to the North American Free Trade Agreement, came from labor unions. Even with assistance to smooth a transition between economic structures, there can be resistance to change in the character of an industry for non-economic, social reasons.

Free trade can change relationships between classes, interest groups, and economic interests. Balances between groups in society - a disproportionate share of power for an industry or group - can be undermined by free trade.

Changes to the national economy can undermine developing countries. Critics of free trade sometimes point to the fall of the Suharto government in Indonesia in the wake of the Asian financial crisis on sociopolitical stability.

Traditionally only the total value of goods and services are used to calculate the best economic model. However, opponents of free trade feel that change rates should also be a factor. Thus, instability and displacement risks of a given approach are factored. Here is an example:

              Value of
              Goods and    Disruption
              Services       Pace

 Approach A:     40           25

 Approach B:     30           10

 Approach C:     20            3

Traditional economics would favor approach A because it produces the most total goods and services. However, skeptics of full free trade would point out that approach A has a large disruption pace associated with it, and so approach B and perhaps C should be considered because of the stability they provide. Generally there will be some tradeoff between total wealth (goods and services) and stability such that both cannot be maximized at the same time.

Alternatives to free trade

Tobin Tax

Fair trade

Balanced Trade

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 capitalists¹. 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 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. If the world commodity price floor is set high enough to sustain first-world melon farming it will be high enough to stimulate over-production in developing nations.

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^[4].

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).

Regional trading blocks

James Goldsmith advocated free trade within regional trading blocs, but not between blocs (such as EC 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.

Intellectual property and free trade

Historically, the free trade movement was skeptical and even hostile to the notion of intellectual property, regarded 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 even abolished its patent system (temporarily, as it turned out).

The 19th century anti-patent cause failed largely because the recession of 1874 weakened the free trade movement of the time ^[5] (and also because patent advocates used a public relations campaign which was remarkably sophisticated for its time).

It is thus remarkable (some would even say ironic) that corporations lobbying for expanded intellectual property privileges have succeeded in including 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.

Additional information

• free trade zone
• international trade
• trade barrier
• trade war
• trade war over genetically modified food
• offshore outsourcing
• offshoring
• list of international trade topics
• Balanced trade
• NAFTA
• GATT

Notes

1. ^  In “Free Trade Under Attack: What America Can Do” Professor Murray Weidenbaum argued that “Tight-knit special interests are manipulating the political system for greater protectionism, while the more diffused citizen interest suffers.” This article (from 1984) echoes the claim of earlier trade theorists (back to Adam Smith) that protectionism is largely a result of a political failure, but comes from a former Chairman of the Council of Economic Advisers to president Reagan, who witnessed the process in 1980s government, and wrote: “[P]leas for protectionism reflect the ability of relatively small but influential groups to convince legislatures to adopt policies that benefit them, albeit at the expense of citizens at large. The balance of power is extremely uneven, given the limited knowledge that consumers currently have about these matters.” This call for free trade argues that the consumer interest is divided, but assumes that the public would be homogeneously in favour of free trade if better educated; this is controversial and not all consumers currently support Free Trade.
2. ^  Emphasis added to Cobden's quotation of the petition, in a Free Trade speech delivered in 1846, the full text of which is available from cooperativeindividualism.org)
3. ^  Quotation from page 103 of James Goldsmith's THE TRAP, 1994, Macmillan ISBN 0333642244 (summarized in Art Hilgart' review). Goldsmith had a background in corporate takeovers, but breaking up conglomerates within nations would still be permissible in his model, so long as no part of the conglomerate exported outside its area of production. His concern for the harm done to rural societies by the effects of free trade is summarized on page 103 with the sentence: "The cost of such social breakdown can never be measured. The damage is too fundamental."
4. ^  See The Economist's review of fuel subsidy's effects The Economist online.
5. ^  Fritz Machlup & Edith Penrose, "The Patent Controversy in the 19th Century", Journal of Economic History, 10 (1) pp 1-29, 1950.

External links

In favor of free trade

• Global Growth Org (London)
• Globalisation Institute
• Arguments for Free Trade from the Mises Institute
• Lewrockwell.com
• The Cato Institute's Free Trade website
• Techcentralstation.com
• The Heritage Foundation
• The Future of Freedom Foundation
• The Heartland Institute
• The Foundation for Economic Education
• The American Enterprise Institute
• The Timbro Institute (Sweden)
• Border Trade Alliance
• Free Trade Area of the Americas
• European Free Trade Association
• NAFTA Website
• Australia-USA Free Trade Agreement
• Central European Free Trade Agreement
• Free Trade Party

Opposed to free trade

• Reclaim Democracy - Global Corporatization
• David Orchard Campaign for Canada
• Friends of the Earth International - Trade Environment & Sustainability Campaign
• The Third World Network
• Institute for Agriculture and Trade Policy
• The Council of Canadians
• Our World is Not For Sale Network
• New Democratic Party of Canada
• International Institute for Sustainable Development
• Public Citizen - Global Trade Watch (USA)
• World Development Movement (UK)
• Trade Justice Movement (UK)
• International Society for Ecology and Culture (UK)
• Canadian Centre for Policy Alternatives - Trade Project
• Oxfam - Free trade
• FoodFirst.org 12 myths about hunger - Myth 8: Free trade is the answer
• United States Reform Party
• Ross Perot
• Pat Buchanan
• AFL-CIO (USA)
• Ralph Nader
• US Green Party
• Gone With The World - Arguments against excess free-trade
• David Korten's "When Corporations Rule the World".

Articles and papers

• In Defence of Globalization, Free Trade and Free Market
• Stop Calling It “Free Trade!”
• BBC News - The argument for free trade
• Guardian Unlimited - Food & Trade - Hunger in a world of plenty

Footnotes

¹ 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 ([6]) that Hjalmar Schacht's exchange controls were primarily designed to restrict capital flight.

³ Only in rare cases are transfer payments to the producer actually contemplated. When they have been used, transfer payments have taken the form of short-term government aid. The World Trade Organisation allows some temporary relief measures, but permanent payments to relatively high-cost producers in order to make tariff-repeal Pareto optimal are not politically attractive. The result of ruling out "compensating" payments is that the economic interests of producers and consumers are opposed "within" a country considering her trade policy.de:Freihandel es:Libre comercio fr:Libre échange id:Perdagangan bebas it:Liberismo mk:Слободна трговија sv:Frihandel th:การค้าเสรี