For centuries economists have sustained free trade as the best free trade policy. Even so, after a more in depth analysis one can notice certain advantages and disadvantages of free trade. This report explains the concept of free trade, the implications of engaging in free trade and the pro and con opinions along with an explication of certain theories related to the concept.
Table of Contents
2. Free trade definition3
3. Comparative advantage4
5. Free trade organizations6
7. Fair trade vs Free trade10
8. Arguments for free trade11
9. Arguments against free trade…………………………………………………………………………………13 10. Conclusion14
The purpose of this report is to define the arguments for and against free international trade. In order to do this, first a definition of free trade and its implications is required. Further on all arguments for and against are analyzed and a discussion on the topic is organized. The last step is reaching a conclusion based on our findings and on the opinion and research of the discussion participants. The contents of this report are based on class lectures, input from classmates, research done using the Internet and the analysis of the work and conclusions of famous economists such as Adam Smith and David Ricardo. 2. Free trade definition
Free trade is a system in which goods, capital and labor flow freely between member countries of an organization. It is a policy through which governments do not use tariffs, subsidies or quotas to interfere with the flow of goods between countries and therefore cause trade discrimination. Even so, it is not always that way. As we will discuss later on, one of the main issues in the free trade topic is the differential treatment regarding tariffs and subsidies that some countries apply to others, although part of the same free trade organization. Free trade was accelerated during the last 20 years. The free trade we have now was influenced a lot by technology and transport improvements. Nowadays the increasing necessity of system that can help to develop different countries’ economies plays an important role in building free trade relationships. All countries are concerned about how to enlarge the GDP and to benefit from producing some goods at lower cost or being the only supplier of rare resources as an example. That became more available thanks to lowering barriers of export and import. Although it also has disadvantages for some, free trade has been promoted as the best way to trade by economists for centuries. Adam Smith discussed the idea of free trade widely and sustains it as well affirming that free trade leads to specialization, greater efficiency and higher aggregate production. Here are his words:
” It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy.. . . If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” His main idea is that every country will eventually be specialized on certain products and some countries might be able to produce them at lower prices. Therefore the trade of products between countries should be based on the products they are specialized in and the ones they can produce with a price advantage compared to other countries. This will avoid economic downturn, unemployment and protectionism, and it will stabilize wages and prices to be globally uniform. Adam Smith sustains that the division of labor between countries can lead to specialization, greater efficiency and higher aggregate demand. But the advantages of free trade are not globally recognized. Many still believe that...