Doubts Over the Effectiveness of Free Trade Economic Theory Essays

In conclusion, the topic of free trade is difficult to debate and often controversial as it has advantages but also disadvantages. Nonetheless, the drawbacks outweigh the benefits as it one, contravenes basic moral ideologies, two, makes the rich, richer, and the poor, poorer, and three, jeopardizes our declining environment. All in all, free trade will neither support nor sustain our country to be ethical, prosperous or

“Free trade is not passé, but is an idea that has irretrievably lost its innocence” (Krugman, 1987, p.132). In his article, Is Free Trade Passé, Paul Krugman writes that the classical trade theory has been replaced with a new trade theory. The classical trade theory is based on constant returns to scale and perfect competition, is driven by comparative advantage, and endorses free trade. This classical theory emphasized the idea that trade was brought about by differences in tastes, technology, or factor endowments between countries (Krugman, 1987). However, the new theory of international trade is driven by increasing returns to scale, also known as economies of scale, and leads to imperfect competition (Carbaugh, 2011).

One of the greatest international economic debates of all time has been the issue of free trade versus protectionism. Proponents of free trade believe in opening the global market, with as few restrictions on trade as possible. Proponents of protectionism believe in concentrating on the welfare of the domestic economy by limiting the open-market policy of the United States. However, what effects does this policy have for the international market and the other respective countries in this market? The question is not as complex as it may seem. Both sides have strong opinions representing their respective viewpoints, and even the population of the United States is divided when it comes to taking a stand in

It is commonly believed that free trade between nations is a mutually beneficial arrangement for all parties involved; indeed, this is held to be an absolute truth. Though free trade is undoubtedly the most effective form of commerce between countries from a purely economic standpoint, increasingly we find that our so-called "free trade agreements" are horribly unbalanced. Indicative of these fiascoes is the North American

Economic analysts say trading among other countries with no stipulations improve global efficiency in resource allocation (Tupy, 2005). Free Trade delivers goods and services to those who value them most and allows partners to gain from specializing in the producing those goods and services they do best; according to Tupy’s findings, Economists call that the law of comparative advantage. Tupy also states when producers create goods they are comparatively skilled at i.e. Germans producing beer and the French producing wine, those goods increase in abundance and quality. Trade allows consumers to benefit from more efficient production methods, for example, without large markets for goods and services, large production runs would not be economical. Large production runs, in turn, are instrumental to reducing product costs while lower production

The country can maximize their wealth by putting the resources in the most competitive industries. Government created comparative advantage rather than free trade because now easier moves the production processes and the machines into countries that can produce more goods (Yeager & Tuereck, 1984). However, many countries now move to new trade theory suggests the ability firms to limit the number of competitors associated with economic scale (reduction of costs with a large scale of output) (Krugman, 1992). The comparative advantage occurs when two-way trade in identical products, it will useful where economic scale is important, but it will create problem with this model. As a result, government must intervene in international trade for protection to domestic firms (Krugman, 1990)

The liberal approach to free trade is heavily associated with the fundamentals of capitalism. Free trade is therefore beneficial to the minority who are capable of manufacturing their goods in societies that have more unskilled labourers and in turn can be compensated less. The labourers in the nations that have the technology to do something better but not necessarily cheaper are at the greatest disadvantage within a liberal free trade political economy.

Free trade has long be seen by economists as being essential in promoting effective use of natural resources, employment, reduction of poverty and diversity of products for consumers. But the concept of free trade has had many barriers to over come. Including government practices by developed countries, under public and corporate pressures, to protect domestic firms from cheap foreign products. But as history has shown us time and time again is that protectionist measures imposed by governments has almost always had negative effects on the local and world economies. These protectionist measures also hurt developing countries trying to inter into the international trade markets.

Adam Smith, author of The Wealth of Nations, shows support for free trade and emphasises it as a trade policy which ought to be adopted. Krugman and Obstfeld back Smith's support by stating that the efficiency of trade is increased by free trade and accumulates the national income of countries. Free trade is a theory which suggests that each nation benefits in specialising in an economic activity from which it gains absolute advantage, enjoying absolute superiority over other nations in a specif economical activity (Peng). With free trade follows opportunity, replacing regulation and growth of economic activity. (Rugmann and Collinson).

”Free trade policies have created a level of competition in today's open market that engenders continual innovation and leads to better products, better-paying jobs, new markets, and increased savings and investment” (Denise Froning). Though Free trade plays a huge role in the economy today because of what and where it is used. Free trade allows for traders to trade across national boundaries and other countries without government interference. Meaning that traders have very few regulations that allow for them to do this without the government intervening. Free trade makes things for traders much easier and also allows for many more jobs in the US, such as exporting jobs, or jobs in the auto industry and plants. Though there are many

One of the founders of modern economics was David Ricardo who developed the concept of the comparative advantage of trade. This concept is a part of the classical theory of trade and was published in 1817 in David Ricardo’s book entitled the Principles of Political Economy and Taxation (Appleyard & Field, 2014, p. 30). This paper will address the effectiveness of this concept as it has been applied to real-world international trade after the General Agreement in Trade and Tariffs (GATT) was signed in 1947. How the level of wages, productivity and exchange rates affect the model of comparative advantage and international trade patterns will also be analyzed in this document.

The new trade theory began to emerge in the 1970s when a number of economists pointed out that the ability of firms to attain economies of scale might have important implications for international trade (Wickramasekera, Cronk & Hill 2013). This theory is based on two major concepts that are economies of scale and first-mover advantage. To elaborate:

Ever since the first involvement of government in international trade, many people have posed their opinion about what the role of government should be in it. Different factors are involved when it comes to deciding what this should be. It impacts a lot of people, so in order to do that, trade policy must be properly defined, identify what the roles of government currently are, and their involvement in it, and then analyse what should be their role. Trade policy is how a country carries out trade with other countries (Commercial Policy, n.d). Even though a lot of people support government intervention in international trade, countries would benefit a lot more if the government removes protectionism and promotes free trade instead.

The international trade of goods across the world accounts for approximately 60% of the world Gross Domestic Product (The World Bank, 2014). A great proportion of goods transactions occur every second. The primary question is whether international trade benefits a country as an entirety, and, if so, why would a country implement protective trade policies to restrict particular exports? To address this question, this essay aims to explore the impact of trade on various economic stakeholders, including consumers, producers, labour and government and, furthermore, will compare models and theories with reality to ascertain the true winner/ loser in the international trade market.

Manufacturing adjusts to meet a constant return on the product (Hunt & Morgan, 1995). Effectively, these theories rely on national monopolistic models to explain comparative advantage (Ossa, n.d.). While the standard of comparative advantage explains why trade can exist between countries, the assumptions do not account for conditions of increasing returns and imperfect competition.