Free Trade Ms. Ramos Alta Loma High School

Mercantilism replaced by free trade Mercantilism: trade to increase wealth & pwr of a nation –Corn Laws: England mid 1800s England monopoly on wheat, corn, grain- price high Hurt more (consumers), than benefit (grower) Richard Cobden push to repeal law

Liberal Intl Economic Order Post-WWII Purpose: free & open trade for efficiency and prosperity Study of GD found protection of domestic industries undermined trade & led to global collapse Also, ** self-interest of US: post- WWII, only standing economy

Liberal International Economic Order LIEO World Bank International Monetary Fund GATT- World Trade Organization Origins of the Global Economic System

World Bank: purpose is global lending. Est to reconstruct Europe post-WWII. Today, helps developing nations. IMF: short term aid to nations with balance of payment difficulties GATT/WTO: reduce international tariffs Promote free trade btwn nations & lmtd govt in domestic economies

Proponents of Free Trade Adam Smith David Ricardo Remove barriers on imports- it reduces economic competition & promote inefficiency—Result: pay more

Division of Labor: specialize in production of what good at Comparative Advantage: Nations benefit when produce most efficiently & trade for rest- more, better, cheaper Autarky: self-sufficiency- NOT REALISTIC!

Principles of Political Economy and Taxation- Ricardo Portugal makes good cheap wine –England does not England makes good cheap cloth –Portugal does not Focus on what do well, trade, allows both to enjoy!

Breakfast as an example Vermont & Florida like maple syrup & orange juice. VT syrup cheap, oj would be costly to grow in greenhouses –VT could make oj, but it would be costly –Same thing the other way around Protectionism would be needed to produce both- would raise price of goods. This would hurt consumers- inefficient and cost $ that could be spent on other goods.

Misconceptions About Comparative Advantage 1.Free trade is beneficial only if a country is more productive than foreign countries. –But even an unproductive country benefits from free trade by avoiding the high costs for goods that it would otherwise have to produce domestically. –High costs derive from inefficient use of resources. –The benefits of free trade do not depend on absolute advantage, rather they depend on comparative advantage: specializing in industries that use resources most efficiently. Source: Li Gan Texas A&M University

Misconceptions About Comparative Advantage 2.Free trade with countries that pay low wages hurts high wage countries. –While trade may reduce wages for some workers, thereby affecting the distribution of income within a country, trade benefits consumers and other workers. –Consumers benefit because they can purchase goods more cheaply. –Producers/workers benefit by earning a higher income in the industries that use resources more efficiently, allowing them to earn higher prices and wages. Source: Li Gan Texas A&M University

Misconceptions About Comparative Advantage 3.Free trade exploits less productive countries. –While labor standards in some countries are less than exemplary compared to Western standards, they are so with or without trade. –Are high wages and safe labor practices alternatives to trade? Deeper poverty and exploitation (ex., involuntary prostitution) may result without export production. –Consumers benefit from free trade by having access to cheaply (efficiently) produced goods. –Producers/workers benefit from having higher profits/wages — higher compared to the alternative. Source: Li Gan Texas A&M University

Yeah!!! Free trade Key people: Smith & Ricardo

Major Arguments For Free Trade Free trade w/in nations –states do not charge import tax CA does not charge tax on TX goods Primacy of consumer –Ppl better off if buy lowest price, $ to buy other goods –Intl trade not zero sum (one’s benefit is another’s loss) but positive sum (all benefit)

Challenges to free trade Nontariff barriers: policies designed to inhibit trade –Safety reg, food inspection, environ reg Dumping: sell on world market for less than cost (often w/subsidies)

Short term negative consequences Company out of business & job loss –Political prob for govt –Pressure re: intl trade –Temptation of free rider: let others practice free trade while you do not, therefore you benefit EX: claims by US of Western Europe & Japan

Boooo! What’s wrong with free trade you ask? Key person: List

Friedrich List German economist Popular in Europe & Asia Most of the time free trade good idea, BUT times want protectionism if in national interest

Major criticisms of free trade Efficiency Difference btwn national & intl trade Strategic trade policy

Efficiency- so what? Society does things all the time inconsistent w/ efficiency –Healthcare spend most $ on ppl at end of life when not economically productive –Japan produces rice US rice cheaper. Japan grows- part of culture & history –France & cheese –Germany & beer –US & automobiles

Difference btwn national & intl trade Trade w/in a country rarely used as leverage –FL does not need to worry VT won’t sell syrup unless vote for x in presidential election –Anti Prop 19 does not need to worry grocery store won’t sell if vote no on 19

Strategic trade policy STP: trade policy to benefit self and leverage over others Need to protect infant industries Predatory pricing: set price to drive others out of business, even if sell less than cost

PPT Background Pics WTO IMF World Bank quake-recovery Center