Free trade

Free trade is the untaxed flow of goods and services between countries, and is a name given to economic policies and parties supporting increases in such trade.

Criticisms of free trade

See fair trade for an alternative policy. Much of the dispute over free trade is semantic. The official US interpretation of free trade is opposed to the Vietnamese interpretation, but both governments are in favour of free trade.

Related Topics:
Fair trade - Semantic - US - Vietnamese

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Economic arguments against free trade criticize the assumptions or conclusions of economic theories. Sociopolitical arguments against free trade cite social and political effects that economic arguments do not capture, such as political stability, cultural diversity, and national security.

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Economic arguments against free trade

Free trade in raw materials retrogrades development

The argument that a country could get 'locked in' to serving the needs of the world market in raw materials, and therefore not develop industrially was first advanced by Friedrich List in 1841, and received empirical support in the 20th century. It was discovered that African and Arab nations rich in natural resources (e.g. diamonds and oil) developed less rapidly than those nations without such 'bounty'. This is also a sociopolitical argument against free trade, because it is said that:

Related Topics:
Raw materials - Friedrich List - 1841 - African - Arab - Diamond - Oil

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• The regimes exporting such valuable commodities to the west tended to be autocratic, and remain in unpopular power because of the massive payment streams from exports.
• The reason that civil wars and violence are correlated with the discovery of mineral wealth in the developing world is the world market for the commodities. This is one area of free trade which has few supporters, and conflict diamonds cannot be openly imported into any country.

It was also discovered that developed nations uncovering natural resources could suffer as a result of free trade, and for similar reasons. The massive capital influx to the Netherlands after it started exporting oil increased prices in the famous "Dutch disease".

Related Topics:
Developed nation - Netherlands - Dutch disease

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International trade requires more resources to distribute

If food is purchased from the local farm it requires very little energy and possible no fuel to transport to the table. Delivering food produced on the other side of the world to a supermarket has an environmental impact because it requires a heavier use of fossil fuel in delivery from overseas. The organic food movement claims that there are other downsides to the globalization of the food market (for instance, that preserved food has an inferior taste).

Related Topics:
Farm - Supermarket - Environmental - Fossil fuel - Organic food

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Deep Green thinkers say that Free Trade claims to lead to the "full employment of resources", and strongly oppose Free Trade in the hope of discouraging the immediate depletion of the earth?s resources.

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Sheltering young industries may pay-off later

New Trade theorists challenge the assumption of diminishing returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries will then allow those sectors to dominate the world market. Less quantative forms of this "infant industry argument" against totally free trade have been advanced by trade theorists since at least 1848.

Related Topics:
New Trade theorists - Infant industry argument - Since at least 1848

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Free trade favors developed nations

Some argue also that trade barriers such as quotas and agricultural subsidies prevent farmers in developing nations from competing in local and global markets.

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Some services exported by developed nations are intangibles, such as medicinal formulae, trademarks, software, and entertainment. The value of this intellectual property is derived from legal protection against unauthorized reproduction. Some advocates of the poor claim that the reason IP-rights are strongly protected in International trade is the power developed nations have to protect the interests of intellectual property owners during trade negotiations. WTO-signatory nations renounce the right to produce generic copies of life-saving drugs, the only affordable treatment in developing nations.

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Free trade benefits only the wealthy within countries

Some argue the following:

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• The wealthy own more corporate equity, which increases in value as companies are able to produce at the lowest cost in the world.
• As the world's markets merge into a single global market the number of market-leading companies worldwide drops, with international take-overs of local champions by giant corporations. This process concentrates wealth in fewer corporations.
• Free trade replaces low-skilled jobs often done by the poor easier than high-skilled jobs. This implication of the Stolper-Samuelson theorem is challenged on the basis that technology makes offshoring high value-added work feasible and more profitable than moving low-skilled jobs.

According to Dr. Ravi Batra's book, The Myth of Free Trade, open trade in the US has resulted in replacement of manufacturing jobs for service jobs, which pay less on average. The product trade deficit results in more investment money flowing into the US as a trade-off. This investment money mostly ends up with wealthy investors and owners; and "trickle down" is not sufficient to compensate for the loss of manufacturing jobs and wagers. After all, if a wealthy person receives money from such investments, they may spend some on foreign cars and foreign trips, which is not going to go back into the US economy. According to Batra's research, even though free trade may increase GNP, the increases do not flow to rank-and-file workers.

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Free trade increases offshoring

Free trade allows companies the possibility of outsourcing the production of goods for domestic sale. Environmental and labor standards imposed upon these companies can be less in foreign production. Labor and environmental advocates argue that free trade thereby creates conditions that allow companies to circumvent domestic regulations, by producing elsewhere. As free trade increases, the balance of power shifts in favour of companies and away from governments. This is considered to pose a threat to democratic self-determination by anti-globalizers and authoritarian control by totalitarian states. Free trade supporters argue that all countries have the right to opt out of the world market through isolationism and that companies are fictional persons who are taxed without representation and that the balance of power should shift away from the governments that exploit them.

Related Topics:
Outsourcing - Democratic - Anti-globalizers - Authoritarian - Totalitarian - Isolationism - Companies

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It has also been argued that free trade hurts developed nations because it causes jobs from those nations to move to other countries, and accelerates the "race to the bottom". As well as reducing rich-country GDP through lost jobs, competitive pressures will undermine democracy by creating pressures to lower wage demands, and protections like environmental and safety standards. The "race to the bottom" is blamed on international competition to attract traded-goods production, which, with Free Trade, can be sited anywhere.

Related Topics:
Race to the bottom - GDP - Democracy - Traded-goods

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See also Lump of work fallacy.

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Capital mobility and comparative advantage

Some descriptions of comparative advantage rest on a necessary condition of capital immobility. If financial or labor resources can move between countries, then comparative advantage erodes, and absolute advantage dominates. For instance, the Heckscher-Ohlin model derives comparative advantage from differing relative abundances of capital and labour between countries. Capital mobility and the competitive drive for the highest return on investment would give all countries identical relative abundances for new investment, eliminating comparative advantage and trade.

Related Topics:
Heckscher-Ohlin model - Labour - Return on investment

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Given the liberalization of capital flows under free trade agreements of the 1990s, the condition of capital immobility no longer holds. David Korten and other economists argue that the theory of comparative advantage "is replaced by that of downward levelling". However, capital immobility is only one route to comparative advantage, useful to basic models, but not essential to it.

Related Topics:
1990s - David Korten

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Basic models assuming capital immobility were convenient and not essential to the principle. Although greater capital mobility is likely to reduce comparative advantage, barriers to capital flows are not the only way to derive it.

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• Early qualitative descriptions of the principle were based on the greater ease of producing different commodities in one country than another, and not on capital mobility. The comparative advantage of France over Iceland in wine production is not based on capital immobility.
• As economist Paul Krugman has noted, 19th century economist David Ricardo who formulated the basic model of comparative advantage lived in a period of high capital mobility. His ideas were based on different production functions in different goods (different technologies) internationally. These do not necessarily require capital immobility.
• Comparative advantage can be derived from more complicated models including capital mobility (i.e. international borrowing, lending, and labor movement) and often posit movement of capital as analogous to the movement of goods.

Sociopolitical arguments against free trade

Free trade undermines cultural diversity

The French argue that allowing Hollywood movies to compete against French films would be culturally destructive. Free trade in culture is limited, otherwise, the French language and the visibility of a French perspective on the world would be threatened. Food imports competing with Gallic farmers are limited on the grounds that high food prices are necessary to sustain rural French culture.

Related Topics:
French - Hollywood

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Throughout the world, forces that many blame on free trade are eroding traditional ways of living and rural cultures. For instance, Sir James Goldsmith attacked free trade for causing the conversion of small-scale agriculture to large-scale agribusiness across the developing world: "The loss of rural employment and migration from the countryside to the cities causes a fundamental and irreversible shift. It has contributed throughout the world to the destabilization of rural society and to the growth of vast urban concentrations. In the urban slums congregate uprooted individuals whose families have been splintered, whose cultural traditions have been extinguished and who have been reduced to dependence on welfare from the state." {{ref|Trap103}}

Related Topics:
James Goldsmith - Agriculture - Developing

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Many Canadian nationalists argue that the North American Free Trade Agreement or an extension could harm Canadian culture, due to foreign corporations (magazines, television, and satellite providers) challenging Canada's cultural content laws. These laws encourage Canadian content in the media, which is harmful to foreign corporations.

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Free trade causes dislocation and pain

Free trade may change careers too fast. Once, a farmer could expect to finish her life as a farmer, although her children may have been forced into mining or manufacturing instead. Now, changes happen on a sub-generational level, faster than natural attrition. Coping with these transitions can be difficult, especially for the middle-aged and the elderly due to age itself or age discrimination. Problems associated with economic adaptation are generally not factored into the calculation of free trades' effects. In economist's jargon these issues are externalities.

Related Topics:
Mining - Manufacturing - Middle-age - Elderly - Economist's - Jargon - Externalities

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Welfare economics deals with the issue of the overall benefit to society of changes that harm some and help others. In a utilitarian view, the overall benefit of cheaper goods and services is given equal weight with the concentrated impact of lost jobs. Other economists argue that the harmful effect of free trade on some should be given greater weight than the benefit for all. See Pareto optimality.

Related Topics:
Welfare economics - Utilitarian - Pareto optimality

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Dependency theory

Critics of imperialism sometimes focused on how imperial powers gained influence over weaker countries through specialization. Weaker countries would develop areas, typically in raw materials and agriculture, that would be economically dependent on the mother country. In the post-imperial world, this criticism changed. Imperial powers that controlled capital flows could maintain their economic status vis-a-vis their former colonies by using this dependency to their advantage. Imperial powers would have more choice (more competitive market) in countries from which they could acquire raw materials than those countries would have in buying final goods, particularly as imperial countries had the bulk of the world's financial resources and chose to behave oligopolistically. This pattern of exploitation, which may or may not lead to the benefit of imperial nations, focuses on the importance of political power in the international system and its weight in policy choices. See Dependency theory.

Related Topics:
Imperialism - Oligopolistically - Dependency theory

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Free trade undermines national security

One of the arguments of the Corn Laws repeal was national security. Britain ought not be dependent on grain imports to her country, or else she risked putting her national security in the hands of foreign countries. This argument focused on the ability of free trade to threaten the sovereignty of a nation at war.

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This argument had always been questioned on the grounds that every market in the world would have to stop selling at any price for an importer to find itself imperiled, unless a blockade was used. It was said that any nation (especially England) unable to defeat a blockade couldn't hope to win a 19th century war anyway. Although wars were subsequently fought over access to markets these have always been markets in commodities not domestically available (principally oil; see also ? Raw materials causes of Japanese expansionism.) In the history of the world, no country has ever suffered military defeat, or capitulated to sanctions, due to the inability to produce a domestically producible product.

Related Topics:
England - Oil - Raw materials causes of Japanese expansionism - Sanctions

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In the modern United States and in many developed Western countries, one of the chief arguments in favor of farm subsidies is a national security argument. The threats of bioterrorism and even unintended disease-causing agents has raised the possibility of poorly inspected food entering a country from another, presumably with less stringent food inspections. Like a number arguments against free trade, this argument rests on the inequity of government regulations across countries the world over, although some critics of the US food industry point out that the same argument is used whether or not the standards imposed actually are higher or lower abroad. (See: Fast Food Nation.)

Related Topics:
United States - Farm subsidies - Bioterrorism - Fast Food Nation

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Technological change is another source of anxiety about free trade. Trade in high-tech equipment can facilitate the implementation of advanced military technology in countries that may become strategic opponents later on. This argument is often compelling to policymakers in developed countries, and free trade rarely applies to military technology, and often special restrictions are placed even on advanced technology developed in the nonmilitary sector.

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If free trade encourages the development of a world market that equilibrates wages, industrialization, and productivity per laborer, this can amount to the armament of strategic opponents. This argument is often brought up in the context of United States-China trade relations; if the Chinese economy were to develop the same production per capita as the United States, China would be able to harness economic resources four-fold what the United States economy could, and, in theory, proportional military resources. Although this concern is widespread within the United States, the desire to keep a potential rival weak is not normally advanced within diplomatic circles.

Related Topics:
China - United States - Diplomatic

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Free trade undermines border control

Another national security argument against free trade - this one often argued in the context of the United States-Mexico border and the trading links between Europe and the Middle East and North Africa - discusses the tendency of free trade to encourage porous borders. The increased volume of trade that passes over a given border can swamp border control. Even with sufficient control, the cost, both to the government and traders having to endure the time and expense of passage, could be prohibitive to trade. See also Immigration.

Related Topics:
Mexico - Middle East - North Africa - Immigration

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Rule of law and regulations

Although in David Ricardo's time economists regarded the regulatory powers of the state as being more destructive than beneficial, the economic shocks of the later nineteenth century, the early twentieth century and the Great Depression produced a strain of economists led by John Maynard Keynes who criticized laissez-faire capitalism as itself destructive. After the war these Keynesians assisted the state in the development of regulatory institutions that limited the excesses and mitigated the failures of the free market and which were intended to sustain free trade through regulation. The later twentieth century saw the development of new economic theories that criticized the stress on regulatory institutions, though it is an uncommon opinion even among modern neoclassical economists to wholly regard all such regulatory functions of state as damaging to the economy.

Related Topics:
David Ricardo - Great Depression - John Maynard Keynes - Laissez-faire - War - Keynesian - New economic theories

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These regulatory institutions, and indeed the rule of law itself, are costs to the development of industries. Although a number of laws - the protection of property rights, for instance - are strongly beneficial to corporations interested in the development of an industry in a foreign country, many other laws, regulatory laws in particular, can produce litigation risks or greatly increase the cost of operating in that country. Environmental regulations, labor laws, minimum wages, safety regulations, and (arguably) basic human rights can effectively increase the cost of operating in a country. As a result, these regulations often lead to a competitive disadvantage in the world economy for countries implementing those laws.

Related Topics:
Property rights - Litigation

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Similar arguments can be made for tax laws; corporations can evade high taxes by moving operations to countries with lax tax structures. In countries where the integrity of the state is weak, there can be an incentive for corporations to subvert governments through corrupt means and further undermine the rule of law in those countries in their favor. Accounting, banking, and investment regulations can take a similar direction; countries very interested in attracting investment may laxen their financial institutions for short term political benefits. Some economists, such as Frederic Mishkin, point to this as an underlying cause of the Asian economic crisis of 1997-1998.

Related Topics:
Frederic Mishkin - Asian economic crisis - 1997 - 1998

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Many developing countries have not developed the financial institutions that developed countries rely on for the efficient functioning of their economies. The financial institutions that do exist in developing countries are often designed for economies with a strong role built for the state, and often with a great deal of corruption already existing. The influx of large amounts of investment capital from developed countries can put a considerable strain on financial institutions as they cope with enlarging their regulatory role, separating it from old state functions. The capital influx creates lucrative opportunities for corruption, especially within the regulating institutions. The development of these institutions runs a difficult course with investors who are interested both in the rule of law as it improves investment opportunities, and also in limiting their risk as investors. The development of these institutions can be a low priority for a poor county, which must bear the cost of modifying its business code, essentially for the benefit of foreign capitalists.

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Free trade, then, creates an economic incentive for a race to the bottom in regulatory institutions; countries with lax, lenient, non-enforced, or selectively enforced regulatory legal structures will have a competitive advantage in attracting investment to their countries, and not merely in wages. From the capitalist's point of view, an ideal legal environment would have these features:

Related Topics:
Race to the bottom - Capitalist

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• Weak or un-enforced labour and environmental protection laws.
• Low or uncollected taxes.
• Strong legal protection for property rights.
• Changes to the legal code should be few and predictable, allowing business planning. The government should not be likely to override the rule of law, or impose exchange controls.

The difficulty that modern capital finds in meeting all of these conditions is that (1) and (2) are correlated with an immature legal system, but (3) and (4) are correlated with the division of powers, and long-standing legal institutions. As Russian oligarchs and early foreign direct investors in China discovered, the ability of an enterprise to make money is no guarantee that its profits can be retained. Some have argued that firms actually encourage (or at least prefer) the rule of law, judging that, on balance, it is "good for business". If so, the "Race to the bottom" may become a "Race to the middle" in legal enforcement, assisted by mobile capital, in order to create the optimum legal conditions for investment (balancing legal protections for labour and capital).

Related Topics:
Oligarchs - China - Rule of law

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In theory, globally harmonized regulations regarding wages, the environment, safety, human rights, and other areas of economic control, would also prevent a "race to the bottom." Although globally harmonized regulations appear to be far off, there have been a number of moves toward regional agreements about these sorts of institutions.

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The financial consequences of mobile capital

The diversity of legal systems the world over and the limited degree to which those bureaucracies coordinate their regulatory and tax-collecting efforts can create loopholes to the benefit of corporations and private individuals, who can seek out havens from regulation and tax collection, even if they obey the letter of the law.

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The freedom of capital to move outside the purview of a single authority has other harmful effects, even where it is not invested in the real economy. The following are common abuses of the free trade in capital:

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• Tax avoidance (legal)
• Money laundering (illegal)
• Obfuscation of corporate accounts (possibly legal)

One of the chief concerns among modern economists and financiers is to develop methods of harmonizing international regulatory institutions, in particular accounting practices, to improve transparency in world financial markets and reduce the risk experienced by investors.

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Stability

Free trade implies specialized industries and economic change. Economic changes can lead to strains and considerable changes to traditional economic and political systems. Social changes that Europe passed through over centuries - urbanization, development of national infrastructure, development of property rights, secular and national government, centralized administration, the development of financial sectors, and regulatory systems - can happen quickly in an economy exposed to free trade and capital flows.

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Offshore outsourcing and an increase of temporary visa workers resulted in a drop in the demand for computer programmers in the US.

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Free trade and capital flows can conflict with existing systems. Western financial institutions which are based on lending is an affront to some traditionalists. The imposition of property rights , such as in tribal areas where property is held communally or where they existed in a primitive sense, poses considerable difficulties for governments. That question can arouse concerns of justice, equity, class, and ethnic strife between groups that feel victimized by history. Property rights in developing countries and their implications for free trade has been raised by the Peruvian economist Hernando de Soto.

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Free trade can be profoundly redistributive, forcing thousands if not millions to change professions as trade competes their former ones out. In the United States and in many developed countries there are systems of trade adjustment assistance that help to smooth the transition for workers and industries from a pre-globalized economy to an economy transformed by free trade. In countries without those resources, a sense of victimization can rise in laborers displaced by trade that can contribute to a loss of confidence in national policy. Even with trade adjustment assistance in the United States, some of the most outspoken resistance to free trade, in particular to the North American Free Trade Agreement, came from labor unions. Even with assistance to smooth a transition between economic structures, there can be resistance to change in the character of an industry for non-economic, social reasons.

Related Topics:
Trade adjustment assistance - North American Free Trade Agreement

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Free trade can change relationships between classes, interest groups, and economic interests. Balances between groups in society - a disproportionate share of power for an industry or group - can be undermined by free trade.

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Changes to the national economy can undermine developing countries. Critics of free trade sometimes point to the fall of the Suharto government in Indonesia in the wake of the Asian economic crisis on sociopolitical stability.

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Traditionally only the total value of goods and services are used to calculate the best economic model. However, opponents of free trade feel that change rates should also be a factor. Thus, instability and displacement risks of a given approach are factored. Here is an example:

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Value of

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Goods and Disruption

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Services Pace

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Approach A: 40 25

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Approach B: 30 10

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Approach C: 20 3

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Traditional economics would favor approach A because it produces the most total goods and services. However, skeptics of full free trade would point out that appoach A has a large disruption pace associated with it, and so approach B and perhaps C should be considered because of the stability they provide. Generally there will be some tradeoff between total wealth (goods and services) and stability such that both cannot be maximized at the same time.

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