Free Trade : A Comparative Advantage

The definition which I can think of is Free trade is international policy where governments doesn’t create any restriction and on goods and other materials to import or export smoothly and no heavy taxes are applied so that both countries can operate smoothly and gain profit.

The question of whether the U.S. should adopt a free international trade policy is a hotly debated one. Currently, the U.S. has a relatively open trade policy and enjoys free trade with twenty countries1 and more are being added to this list through new agreements. But does it benefit from free trade? Evidence, which I will present in this paper, show that the benefits of free trade highly outweigh the little and often misinterpreted disadvantages. In light of this, the U.S. should adopt a free trade policy and look forward to new trade agreements.

Free trade, the ever present driving force behind our national and world economy, is a trade policy embroiled in controversy. It is considered by most economists to be an almost perfect trade policy, barring a few negative effects. Free trade has been shown to increase production, output and income levels in an economy. However, there are many people that view free trade as destroyer of economies and a catalyst of poverty. Critics of free trade have pointed out that in the short-run, free trade causes a loss of jobs which in turn causes a rise in poverty levels. It is interesting to note that the argument for free trade and the argument against free trade are inverses of each other. Proponents of free trade see it as a tool to stimulate an economy while detractors see it as a policy which exacerbates poverty, causes dependency and reduces economic stability.

Since David Smith introduced the theory of the free market force known as the invisible hand in The Wealth of Nations, the argument for free trade was levied against the argument for protectionism. Smith believed that by providing people the freedom to produce and trade as they please, with limited government interference, enlightened self-interest would provide prosperity for all (Smith, 1937.) In Scotland, quality grapes had to be grown in hothouses, while grapes in France did not, which provided France a comparative advantage. Heating Scottish grapes made them more expensive than French grapes. But Scotland did have an abundance of wool which could be traded for grapes. Tariffs on French grapes would cost the Scottish consumer more as well as introduce inefficiency. Countries can enjoy higher levels of consumption if they produce the goods that they are relatively efficient at producing and import to goods that they are relatively inefficient at producing (Inside, 1994.) Specialization in activities that provide a comparative advantage is beneficial when a country produces what it produces best, keeping some for consumption and trading the rest. Even though protectionism advocates believe it is necessary to protect national security, save jobs, and help strategic infant industries, the

In today’s global economy, it makes sense for nations to benefit from producing those goods that they specialize in, and consequently trade amongst each other the excess quantities. As a result, consumers across the globe have access to vast varieties of products produced at the lowest costs. However, when two nations’ efficiencies are equivalent in the same product, one might think that trading products between these nations is futile. Moreover, when one nation is better at producing all items considered for trade, self-sufficiency might seem the obvious choice to the unwitting. Here, we analyze trade between two nations, and reveal that trade benefits indeed exist when exploiting specialization while considering opportunity costs.

The sequence of this paper will be simply organized into the pros then cons of free trade, followed by my regard to its effectiveness in international relations.

The economic benefits of free trade are very apparent in today’s society as globalization seems to be the direction we are heading. In the United States we only have about five percent of the world's population and with free trade we are allowed to freely trade to the other 95 percent of the people in the world. We can sell to anyone who is willing to make a trade agreement with us that is mutually beneficial. The next step to this process is “Once agreements move beyond the regional level, they usually need help. The World Trade Organization steps in at that point It is an international body that helps negotiate global trade agreements”(Balance). This is how making these agreements for free trade will benefit everybody.

Free trade occurs when there are no artificial blockades put in place by governments to restrict the flow of goods and services between trading countries. When trade barriers, such as tariffs and subsidies are put in place, they protect domestic producers from international competition and redirect, rather than create trade flows. This results in less productivity and competition. Free Trade promotes international trade, multilateralism, the development of lesser-developed nations and increases the standard of living.

There are several reasons to why countries may trade. Differences in the technologies used in a country or differences in their ability to manufacture goods is one of the most popular reasons for explaining trade (Krugman, 2011). However, if a country has the better technology to produce all goods than another country, should it then become self-sufficient? It could, yet if it only concentrated on the production of the goods it can produce for the lowest cost and exchange the excess of those goods with the other country for the goods that it produces cheapest, then both can be better off (EconLib, n.d). This example introduces the important economic concept of comparative advantage (CA). A country has a CA in producing a good if it can produce it at a lower opportunity cost (OC), the cost of forgoing the production of another good, than anyone else (Krugman, 2014). This concept was first illustrated by the 19th century economist David Ricardo, who used it to determine the pattern of trade between countries. Ricardo developed a model in which he proved that countries will benefit if they specialize in the production of the goods in which they have a CA and export those goods to other countries in exchange for goods in which they have a CA. As a result of specialization and trade countries will be better off than they would have been in the absence of trade (Krugman, 2011).

Free trade is in a basic sense, trade where there are no restrictions put upon the exports and imports between countries. Although the idea of free trade is complicated and has many facets, there are ways to break it down into something more easily understood. Some countries have free trade with other countries, but others have policies limiting exports and import in order to protect the employment and economy of their country. Other obstacles to free trade can be barriers on export amounts, and import quotas. Trying to understand the complexities of international trade can be difficult, but the book by Pietra Rivoli, The Travels of a T-Shirt in the Global Economy, helps to focus the concepts on a single item, making it easier to

lassical theories of international trade suggest that comparative advantage exist in the factor endowments that a country may be fortunate enough to inherit. Factor endowments include land, natural resources, labor, and the size of the local population.

Free trade is trade between countries that after negotiating between each other eliminates or minimizes the existence of Tariff and Non-Tariff barriers (Helpman, 1993). There has been an increase in free trade agreements from 1 such agreement in 1975 to 216 such agreements in 2009 although 45 agreements have been concluded while the remaining are to be executed and implemented (Bate, 2016). Developing countries rushed to free trade in mid- 1980’s such as Mexico, Philippines, Bangladesh, Ghana, Korea, India and Morocco by removing barriers.

Nowadays, ‘Free trade’ has became one of the most popular words appears in public media. Like what Goldstein and Moss (2011) defined in their book, free trade is the policy that acts on diminishing government intervention on exports or imports business, while those intervention tools could be subsidies, tariffs or quotas. The debates also arisen as there are growing number of mainstream media focusing on the inequality of trade parties in the negotiations, and people want to know ‘who is the biggest winner in free trade’. This article will discuss the benefits of free trade for countries at different stages of their development, and within them.

Free trade has an underlying basis of individual liberty, and implies two symbolic freedoms (Audley, 21). The first being a “cost-less solution to expanding the human scale,” meaning that it is a method to improve the way of human life for the whole world, while costing nothing. This also means that free trade tries to enable many third world countries to become “great” and more advanced, like

Free trade can be defined as a market model in which trade in goods and services between or within countries flow unhindered by government-imposed restrictions such as taxes, duties, tariffs, or subsidies (Kimberly A. 2016). Therefore, free trade reduces or eliminates counterproductive barriers to competition, that limit access and competition on exports and imports between trading partners.