Free Trade Is the Exchange of Goods Essay

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Free Trade

Trade is the exchange of goods or services, and international trade is the same when it crosses international borders. Trade across borders traditionally has been subject to trade barriers such as quotas, taxes, tariffs and duties. Modern trade theory rests on two key platforms. The first is Ricardian trade theory, based on comparative advantage, where both parties in a trading arrangement can enjoy a higher net level of trade if they concentrate on producing that in which they have a comparative advantage and trade freely among themselves. This theory has given rise to modern trade theory, which emphasizes this type of resource allocation in production, twinned with barrier-free trade. In practice, "free" trade seldom exists, but freer trade is pursued actively by most nations, operating with the framework of bi- and multi-lateral trade agreements, including those negotiated under the auspices of the World Trade Organization.

Free trade is closely associated with positive outcomes economically, but also socially as well. The economics are strictly Ricardian -- higher levels of output are beneficial to all parties. The belief that social outcomes are inherently superior is rooted in liberal philosophy, in which increased personal freedoms, including economic ones, are correlated with improvements in standard of living by most measures. While the past couple of centuries have demonstrated that humanity can make rapid improvements in living standards as the result of improvements in the global trading system, the system is far from perfect. Only in recent years has there been significant discussion of the equity of free trade philosophy and of the negative externalities that arise from this dramatic increase in economic activity. This paper will examine the question of whether or not free trade is truly desirable, based on its benefit and its costs. Since free trade is a question that affects most of the world's people, a utilitarian approach will be taken with respect to this analysis.

The Nature of Trade

In general, history has demonstrated that the application of liberal trade theory does improve economic outcomes. Connolly (1998) showed that trade -- in goods at least - results in improved innovation in both nations, and this innovation leads to GDP growth in both nations. This finding illustrates the trade-off that many emerging economies must make when deciding trade policy. Such nations can either focus on trade in goods and services in which they presently have a comparative advantage, or in those in which they may have a future comparative advantage (Redding, 1999). An example of the former would be textiles in Bangladesh today; an example of the latter would be electronics in Japan in the 1960s. Liberal trade theory also remains at the core of our current trade theory. The World Trade Organization and other multinational bodies pursue the reduction of trade barriers on the assumption that doing so will improve economic outcomes. Liberal philosophy holds that there is a correlation between freedoms of all types, including economic freedom.

Yet, there are arguments that the nature of trade is based on comparative advantage or even competitive advantage. These arguments also hold that free trade is not inherently fair trade (Krugman, 1987). There is increasing evidence that could potentially be seen as a contradiction to much of liberal trade theory. China stands as evidence that economic freedom and personal freedom are not necessarily related. Inequality of bargaining power means that even in progressive societies -- the United States being one -- improvements in wealth that come from trade are not share among all the people, even those who contribute to the positive economic outcomes with their labour (Strow & Strow, 2006). Negative externalities have come sharply into focus -- climate change is a major one -- but these issues have largely been discussed away from the tables of free trade as though they are not related. Yet, it is precisely the increase in global economic activity that leads to these externalities. As with wealth, the distribution of these externalities varies depending on bargaining power. Citizens of democratic countries in Europe have more bargaining power with their leaders than do citizens of despotic Third World nations, and therefore receive better protection against negative externalities. But even if trade is imperfect, that does not devalue the gains made by large swathes of human society. Even under the thumb of modern China's dictators, the people of China are better off today than they were fifty years ago during the Great Famine.

Trade Barriers

Trade barriers are viewed in liberal trade theory as sources of economic inefficiency. Some forms of trade barrier expressly limit trade, such as embargoes and quotas, while others such as tariffs, subsidies and many non-tariff barriers increase the cost of trade, making it prohibitive for some. There are two elements to the way that trade barriers decrease economic efficiency. The direct way is by increasing the cost of trade. This money is funneled into the hands of government via tariffs or sometimes third parties. While the money would eventually be spent, contributing to the economy, there is question whether such monies are spent in the most economically efficient manner, given that government activities are often not driven by economic considerations. Trade barriers also encourage domestic production decisions. Without any trade barriers, domestic production would focus on the goods with the highest comparative advantage and thus the greatest economic efficiency. With the trade barriers, domestic production may be focused on goods with a lower degree of comparative advantage, which results in a lower degree of economic efficiency. Indeed, the bulk of the academic literature on the subject concludes that there is a connection between trade liberalization and positive economic outcomes (Winter, 2005).

There is an argument to be made, however, that trade barriers can be used to improve social efficiency. Trade barriers are used by many countries with respect to food production, so that the nation can remain self-sufficient in food staples. While this is not economically efficient, it is politically expedient and it is socially efficient, since being able to feed the population is considered desirable by government and that population alike.

Social Well Being

Kimbrell (1998) argues that externalities created by trade policies can be negative. He uses the case of oil prices, in that oil prices often only reflect the economic cost but not the total social cost of oil. These externalities result in indirect costs and opportunity costs, neither of which is priced into the good. All trade policy -- including the policy of free trade -- encourages specific actions, and these actions lead to specific outcomes. When externalities are ignored -- as typically happens when economic efficiency is pursued -- the true cost of goods including their externalities is ignored. This is where the issue of bargaining power comes into play. While the principles of neoliberal trade policy are universal, the actual shape and form of free trade agreements typically best reflects the interests of those who are negotiating those agreements. The environment is not represented at the talks. Labour often is not represented either -- organized labour participation is 19% in Australia (Pink, 2007), but the worker advocate with the highest degree of bargaining power is not present during trade negotiations to argue in favor of labour's interests.

While the precepts of liberal trade theory hold that free trade is correlated with personal freedom, the current system suffers in that it relies on bargaining power for the distribution of positive outcomes. As little bargaining power as western organized labour has, developing world labour has less. That said, in some nations the people have moved from undeveloped living to fully modern living in the span of a generation or two, largely on the basis of free trade (Japan, Korea and now China being examples). It is not a flaw, necessarily, in the fundamental principles of free trade that causes negative externalities to appear, but it is rather unfairness in the execution of these principles that results in negative outcomes.

Is Free Trade Desirable?

The desirability of free trade, therefore, depends largely on how it is implemented. Absolutely free, unfettered trade is a scenario that in practice will never come to pass. It is a purely philosophical exercise to weigh its merits. Free trade as we currently know it -- freer trade -- is largely desirable, but the degree of its desirability stems largely from the manner in which its terms and conditions are negotiated, and by whom. Broadly speaking, from the utilitarian perspective free trade has improved global economic outcomes. However, it has become apparent that positive economic outcomes are an imperfect proxy for positive social outcomes. There is some degree of correlation, but not as much as the proponents of liberalized trade have historically argued.

Hardin (1988) points out that at some point the optimization of an applied concept is likely not only to need technical perfection but also a shift in morals or values. Free trade as we know it is largely based on a set of assumptions about fundamental human values. These values…[continue]

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"Limiting-Trade:-Economics-Lesson" 

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