Free Trade

1. Free Trade Ms. Ramos Alta Loma High School

2. 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

3. 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

4. Origins of the Global Economic System

5. Promote free trade btwn nations & lmtd govt in domestic economies • 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

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

7. 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!

8. 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!

9. 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.

10. Misconceptions About Comparative Advantage • 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

11. Misconceptions About Comparative Advantage • 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

12. Misconceptions About Comparative Advantage • 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

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

14. 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)

15. 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)

16. 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

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

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

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

20. 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

21. 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

22. 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

23. PPT Background Pics • WTO http://www.asiantrendsmonitoring.com/tag/wto/ • IMF http://www.alphabetics.info/international/?tag=imf • World Bank http://www.topnews.in/china-get-710-million-dollar-loan-world-bank-quake-recovery-2124805 • Center http://www.freetradezone.com.my/forumdisplay.php?f=52