This paper examines the definition, history and status of free trade in the world today.
In history a lot of countries acted in accordance with protectionist trade policies which means they had a lot of barriers, tariffs, and limits towards the trade with other countries. The aim was to protect their own economy. However, in today's world there is much more free trade which means "the buying and selling of goods, without limits on the amount of goods that one country can sell to another and without special taxes on the goods bought from a foreign country".
The theory of free trade was first invented in 1776 by Adam Smith. And although it goes back to colonial times, free trade remained a theory for centuries. Ever since Adam Smith's concept of free trade, merchants tried to remove trade barriers between countries again and again. But especially during the industrialization period the countries used trade barriers to boost their economy. As late as after the second world war, the US for example started to lower import tariffs. The idea of lowering tariffs is that more trade takes place, countries can specialize economically in what they do best and afterwards exchange these products for goods that they don't produce most efficiently or that they don't have easily available.
That in turn means the people are freer to choose their position in the economy, the worlds resources are used more efficient and the wealth of nations is growing. In a nutshell it means a country can compete in the global market by specializing to its fundamental economic strengths and by doing this increase economic growth. Some international institutions such as the World Bank, International Monetary Fund, and the World Trade Organization (WTO) were founded to promote free trade in place of protectionism and so helped to build the world how it is today in terms of trading.
1. Definition, history, and status of free trade
In history a lot of countries acted in accordance with protectionist trade policies which means they had a lot of barriers, tariffs, and limits towards the trade with other countries. The aim was to protect their own economy1. However in today's world there is much more free trade which means “the buying and selling of goods, without limits on the amount of goods that one country can sell to another and without special taxes on the goods bought from a foreign country”2.
The theory of free trade was first invented in 1776 by Adam Smith. And although it goes back to colonial times, free trade remained a theory for centuries. Ever since Adam Smith's concept of free trade, merchants tried to remove trade barriers between countries again and again. But especially during the industrialization period the countries used trade barriers to boost their economy. As late as after the second world war, the US for example started to lower import tariffs3. The idea of lowering tariffs is that more trade takes place, countries can specialize economically in what they do best and afterwards exchange these products for goods that they don't produce most efficiently or that they don't have easily available. That in turn means the people are freer to choose their position in the economy, the worlds resources are used more efficient and the wealth of nations is growing. In a nutshell it means a country can compete in the global market by specializing to its fundamental economic strengths and by doing this increase economic growth. Some international institutions such as the World Bank, International Monetary Fund, and the World Trade Organization (WTO) were founded to promote free trade in place of protectionism and so helped to built the world how it is today in terms of trading4.
Today there are countless free trade agreements between countries in the world. A free trade agreement is a contract between two or more countries to reduce barriers to imports and exports among them5. One of the most famous free trade areas is the European Union (EU), where consumers don't have to pay any taxes or duties when buying a product from another country in the EU because of the free movement of goods and services. The EU in turn has 41 trade agreements in place, covering 72 countries6. As the development of free trade goes hand in hand with the constant growth of globalization, new technologies allow better communication and faster shipment with lower costs between countries7. As a result of globalization, the idea behind free trade of specialization and subsequently trading goods can be used even more efficiently. Besides the globalization, there are some more advantages of free trades which lead to more free trade and will be discussed in the next chapter.
2. Advantages of free trade
The most famous advantage is described by the theory of a comparative advantage by David Ricardo which is based on Adam Smith's idea . In 1776 Adam Smith wrote the book “The Wealth of Nations” and explained that free trade was beneficial to trading partners. The idea was that countries enter into a free trade agreement, produce a product, and then provide that product for another country at a cheaper rate than the receiving country could produce it. David Ricardo expanded Smiths idea and argued that countries should do what they do better and cheaper than other countries. In conclusion Ricardo noted that concentrating on core competencies give nations a comparative advantage8. The trade between countries with products every country specializes in opens up markets which leads to an increase in gross domestic product (GDP) and invites new, foreign investments9.
Furthermore, free trade policies also have created a higher level of competition in today's open markets which leads to continual innovations and therefore to better products. Additionally, more competition leads to more goods and services at lower prices and thereby to a substantially increase in standards of living. But free trade not only affects the quality and price of products. Trade also enables access to a greater variety of goods and services10.
Besides products, free trade also disseminates democratic values. Companies which engage in international trade have reasons to adapt their contracts and agreements upon international norms and laws. The WTO is the most known organization which asks its members to honor trade agreements and abide decisions of the WTO. Thus, free trade can reduce the opportunities for corruption in countries with an unstable system where contracts are not enforced, or business relationships fail11.
3. Disadvantages of free trade
Although free trade should in theory lead to more innovation and more wealth, there are also some arguments in favor of trade restrictions which in turn are arguments against free trade.
One argument is the increased job outsourcing. As free trade goes hand in hand with globalization and comes with the idea that a country specializes on what it does best, some jobs will be shifted from one country to another. An increased job outsourcing entails two more negative points. One is that an increased job outsourcing could lead to a higher unemployment rate in one country. Another point is that in different countries there are different standards of working conditions12.
Another reason for blocking free trade is the infant industry argument. It says that if a country is relatively new in a specific industry it would struggle against international competition. It therefore should invest in and protect that new industry to diversify their economy and enable the industry to be able to compete in the future. In particular, there is a justification for placing tariffs on industries where a country has a latent comparative advantage that the countries can develop infrastructure and economies of scale in that industry and as a result will have a comparative advantage later13.
Free trade also leads to degradation of natural resources. As developing countries often only have lax environmental protections, free trade could lead to depletion of timber, minerals, or other natural resources14.
4. Conclusion
As there are some points of criticism free trade is not a consistently perfect concept. Nevertheless, the arguments against free trade can be relativized by arguments in favor of free trade. If you take a look at the argument saying that free trade leads to a degradation of natural resources because of lax environmental protections in developing countries you could also argue that through free trade international norms, laws and the democratic value are brought to developing countries. The argument of increased job outsourcing can be rebutted by saying that free trade also leads to more innovation which by implication will lead to more jobs in research and development. One reasonable point is that through the competition arising from free trade it is hard for relatively new industries of a country to successfully remain in international competition. On the other hand, protectionism (opposite of free trade) is rarely the answer and may only be a solution in the short term. In the longterm protectionist trade policies cannot win against the global market.
5. Excursus: trade war USA vs. China
With the American election in 2016 and Trump as the new American president, the world experienced a setback in terms of free trade. After criticizing the trade relationship with many countries (e.g. Mexico or Germany), Trump especially wanted to change the trade relationship with China. In consequence and as an initial step he started to put tariffs on solar panels and washing machines from China in early 2018. These tariffs equal $1.1 billion in imports15. Two months later Trump announced steel and aluminum tariffs on imports from all countries while 3% of the steel used in the US comes from China. In the same month he asked the United States trade representative (USTR) to investigate tariffs on $50-60 billion worth of Chinese goods.
As a reaction China started putting tariffs on 128 US products which reflects 0.3% of the US gross domestic product. Further escalation followed with Trump putting new tariffs on Chinese products and China following doing the same. The most recent development is that in May 2020 the fear of a renewed trade war between the USA and China comes up again. Background is the American idea of putting new tariffs on China “to hold the country accountable for its role as the original epicenter of the new coronavirus outbreak”16. In conclusion the outlined tariffs mean a deterioration of free trade which in return means a weakening of the above-described advantages of free trade.
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1 Mark J. Perry. 2017.
2 Cambridge Dictionary. O.J.
3 Bundeszentrale für politische Bildung. 2016.
4 Tatjana Dzaleva, Spire Lazaroski. O.J.
5 Adam Barone. 2020.
6 The European Commission. 2019.
7 Tatjana Dzaleva, Spire Lazaroski. O.J.
8 Kimberly Winston. O.J.
9 Kimberly Amandeo. 2020.
10 Tatjana Dzaleva, Spire Lazaroski. O.J.
11 Tatjana Dzaleva, Spire Lazaroski. O.J.
12 Kimberly Amandeo. 2020.
13 Tejvan Pettinger. O.J.
14 Kimberly Amandeo. 2020.
15 Thomas Franck. 2018.
16 Keith Johnson. 2020.
- Arbeit zitieren
- Philipp Rothe (Autor:in), 2020, Chances and Risks of Free Trade Policies, München, GRIN Verlag, https://www.grin.com/document/906982
