International Economy and Finance Term Paper

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powerful arguments in its favor, has free trade not been the norm?

For over two centuries free trade arguably has been promoted as the most favorable economic policy among nations (Blinder, 2008). Yet it has yet to be implemented as a global trade policy. The reasons for this are many. Economists often favor protectionist policies or other face saving policies that tend to "protect" nations from what economists deem "unfair competition" (Binder, 2008). However, according to many, it makes more sense to pay others that specialize in work to do specialized work, because in the long-term this will save money. Cutting our nation off from specialists will only result in a reduced quality and standard of living in the long-term. This applies to the U.S. And to nations as a whole. Adam Smith noted this, by stating the following: "It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy..." (Binder, 2008).

Thus, if foreign countries can supply the U.S. Or other countries with valuable commodities at cheaper prices than what the home country or U.S. can make, it is better to buy it of the foreign country than to make it at home; this provides the U.S. with an advantage (Binder, 2008; Destler, 2005).

Binder presents this case easily by arguing the case of a lawyer that types especially well. The lawyer may type much better than his secretary. Yet, it would not make sense for the lawyer to stop arguing cases to type. Rather, the lawyer should hire a secretary to do this type of work, because the lawyer specializes in law. It would cost far more for the lawyer to attempt to handle his or her case load and type up the cases and other office or administrative work (Binder, 2008). Likewise, there are times when nations need to hire outside specialists to accomplish certain tasks. To do so is far cheaper than to attempt to carry out certain functions in house. In some cases, China may have a cost advantage points out Binder, in the case of say, manufacturing toys; this however is not the case in manufacturing all items, as in the case of manufacturing electronic items like computers (Binder, 2008). The United States then can manufacture higher end items, and engage in free trade with China to help keep the cost of manufacturing low for both countries. This is an example of making free trade work for both countries. There are many economists that don't agree with this argument however. They note that American workers are not paid at the same wage that Chinese workers are paid at. Thus, they say free trade is not justified. However, Binder points out that wage is dependent on the productivity of its workforce and not the trade policy, and "as long as American workers remain more skilled and better educated, work with more capital, and use superior technology, they will continue to earn higher wages" and the wage gap will disappear once these differences disappear" (Binder, 2008). Thus, everything balances out in the long-term. Within each of the states within the United States, free trade is also enjoyed, with each state specializes in different products.

Governments have long been afraid that free trade would cause them to lose a competitive advantage over their international neighbors. But, this is not often the case. For some time many governments have felt it their duty to control trade so they could secure more financial leverage over their competition. Free trade technically allows traders to trade across national boundaries without interference from respective governments. This should allow trading partners to receive mutual gains from the trade of their goods and services. This would suggest that the prices reflect the true supply and demand of these goods and services; however there is much corruption in the industry. Free trade has not been widely adopted because most countries have adopted policies of either protectionism or mercantilism. This often prevents free trade from flourishing in the manner in which it should, unfortunately preventing most countries from enjoying the many benefits of free trade that they should.

Protectionism is a policy adopted largely by the U.S. And other countries which in the past have been afraid of enjoying the benefits free trade has to offer. It was adopted mostly…[continue]

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