The benefits and challenges of free trade

Economists are generally in favor of free trade because most of them know the law of comparative advantage but I bet they would quickly change their minds if a “free trade agreement” were to specify that all economic teaching and advice were to be provided by the partner country.

It’s easy to see the benefits of trade but the obstacles can be overwhelming.

The law of comparative advantage tells us that two countries will produce more if they specialize in what they are most efficient and trade even if one of the countries is less efficient than the other in all areas of production.

The first thing to say is that free trade agreements are not what I learned was free trade.  To me free trade should be trade without any restrictions. There should be no tariffs, no quotas and no subsidies.  A country that wants free trade could and should do it unilaterally.  A free trade agreement should be called managed or negotiated trade as negotiations tend to focus on tradeoffs between commodities.  It is my understanding that countries which have conducted unilateral free trade have done very well.

The problem with free trade is that even though the countries as a whole will be better off some people fear they will lose. It becomes an emotional issue because some people are likely to lose their occupations and their income.

The challenge then is to make a win-lose proposition into a win-win so that everyone can share the benefits.  One way to do this would be with a universal income scheme.  The benefits could be in the form of increased income or increased free time for other activities.

Another aspect of trade is that it is a social activity whether we trade with a neighbor or somebody on the other side of the planet.  It is a bit of a stretch to think we have relationships with the Asian people who make our shirts but when some of them died in a workplace fire quite a few of us felt some pain –  for a short time. For relationships to be satisfactory there needs to be a more or less equal exchange.  If we want other countries to buy from us then we need to buy from them.

With the world economy in trouble everyone sees the answer to their problems is  to export more because domestic markets are slowing.  I think there is something wrong in that.  At the same time those who feel threatened by the free trade agreements now in the works will be strongly opposed.  The best bet would be to cooperate and look for win-win trade.

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One Response

  1. I agree with most of your post. Perhaps you would be interested in reading my dissertation about free trade. It contains some of the proposals you are referring here.

    https://www.academia.edu/1948315/Classical_Free_Trade_A_Policy_Towards_Economic_Growth_and_Development

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