Trading freely or controlled

Free trade is a controversial topic which won’t go away.  The Canadian government is currently negotiating with the European Union and the United States is thinking about it.  Some Canadians are still debating the North American Free Trade Agreement.

ShippingFree trade is attractive because the law of comparative advantage tells us that two countries will be better off and have improved production efficiencies if they specialize and trade.  Also we can  observe that countries which have tried free trade have done very well.

The difficulty is that introducing free trade means some people may have to change their occupations or even spend the rest of their lives unemployed.  This wouldn’t be so serious if we would arrange our economy so that life didn’t depend upon having a job.  It would also be nice if the improved efficiencies were to result in more leisure time.

The term “free trade agreement” is something of an oxymoron.  It is really a negotiated, controlled trade agreement.  There is nothing free about it.

If a country really wants to benefit from free trade it should do it unilaterally.  Just remove all restrictions on imports and don’t worry if other countries don’t reciprocate.  If they don’ want the benefits of free trade, that is up to them.

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One Response

  1. Trade theory is a big subject. At my place it is taught in the third year, and then it is full on – Stolper Samuelson etc.

    But as the Trade Theory lecturer says, as in the first year you don’t become an economist until you cross the demand curve with the supply curve, and fully understand the implications. Similarily in the third year you do not become a trade theorists until you understand WHY uniliateral, that is totally one sided, reductions in tariffs benefits the country that does it, even if all the other nations in the world keep their tariffs sky high. In other words, high tariffs ruin the countries that have them. Low tariffs benefit the countries that have them.

    You would think, given this insight, the world would be rife with competitive reductions in tariffs until every country has a zero tariff? But this does not happen. Why not? There are lots of explanations. Economists have problems with the workings of human nature, but they blame ignorance, pressure groups, etc.

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