Pros and Cons of Free Trade
Free Trade – the flow of goods and services across borders that is generally seen as unhindered by government imposed restrictions, which include taxes, quotas, tariffs or any other sort of rule. So goods and services can just flow from one country to the other without any government saying no to that or trying to restrict it in any sort of way.
Competitive Advantage of Nations – basically states that having a cluster of producers in a nation gives that nation special advantage over similar producers in other countries,
Law of Comparative Advantage – basically states that efficiency in general economic welfare are promoted for each country for which it produces goods that it enjoys some sort of cost advantage, so free trade is designed to stimulate competition, further an individual initiative, increase productivity, and improve national wellbeing.
Production possibilities curve or frontier
So, free trade as illustrated is good for everybody. Everybody gets to produce things that they are good at producing, they do not focus on things they are not good at doing, then they can wind up trading the surplus.
Protectionism – The argument against free trade, protectionism is the use of trade barriers to shield domestic industries from foreign competitors, there are reasons to do this,
First – some countries have an unhealthy trade deficit, they import to many goods and they do not export enough, it is similar to over using a credit card, you are spending more money than you actually earn, this is a bad thing, so you may want to use protectionism to reduce the amount of imports you have and promote the exports.
Second – some governments can use industrial policy to promote the growth of technologies, companies, or industry sectors.
Some countries, particularly developing countries may use tariffs as a way to generate revenue. A lot of countries that are developing do not have income and tax infrastructure that are developed like we do in the west, or industrialized world, so the tariffs then become the import source of income,
Most free traders are against protectionist, we talked about the overall benefit argument, and the reduction of defensive barriers are a major source of international trade. Still even in the United States we have some unique examples of protectionism,
Federal Buy America Act – if you are purchasing something through Federal requisitions you are authorized to pay a certain percentage more, to use an American company than to use a foreign company,
Example, working in a special army unit that was utilizing high technology and big screen tv’s, they were everywhere, at that time it was 10%, you could pay 10% more for an American product, this was in Korea, and the unit wanted to buy the Samsung flat panel tv’s, we could have paid 10% more for the American tv’s but the Samsung ones were much cheaper than the American products such that the 10% was irrelevant so we bought the Samsung products,
Merchant Marine Act and the Passenger Vessels Services Act -
Both of these are basically saying combined they give this message of
You cannot have foreign ships sailing in American water ways,
such as a British ship sailing up the Mississippi River, this has historical precedence, imagine like during the War of 1812, if British merchant ships and military vessels were able to sail up the Mississippi and bombard our coasts,
They both also say that if it is an American ship traveling from one American port to another, the vessel must be American flagged, American crewed, and by an American company
So even though tariffs have declined over the years, a lot of other countries have certain kinds of protectionist policies.
Example, China has a lot of barriers on imports like watches, automobiles, steel, textiles, and a lot of food products. This is to protect the infant industries of the country.
Example, Japan, they restrict the importation of most American agricultural products, they always argue that the American products are not as clean as theirs,
Example, the EU, has extensive restrictions on American products because they do not like GMO’s,
Example, Taiwan, has restrictions on the imports of rice, if there were to be a war, Taiwan would have to feed its own people
Example, Korea, has trade restrictions and other sorts of non-tariff barriers on variety of agricultural products
Example, Brazil, has restrictions on technological products to protect those infant industries in their country
Example, Mexico, has a large agricultural sector generally restricts the importation of agriculture products