Economic models indicate that free trade leads to greater technology adoption and innovation. According to mainstream economics theory, the selective application of free trade agreements to some countries and tariffs on others can lead to economic inefficiency through the process of trade diversion. It is efficient for a good to be produced by the country which is the lowest cost producer, but this does not always take place if a high cost producer has a free trade agreement while the low cost producer faces a high tariff.
Applying free trade to the high cost producer and not the low cost producer as well can lead to trade diversion and a net economic loss. This reason is why many economists place such high importance on negotiations for global tariff reductions, such as the Doha Round.
The literature analysing the economics of free trade is rich. Economists have done extensive work on the theoretical and empirical effects of free trade. Although it creates winners and losers, the broad consensus among economists is that free trade provides a net gain for society. Quoting Harvard economics professor N. Gregory Mankiw , "[f]ew propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards".
Most economists would agree [ citation needed ] that although increasing returns to scale might mean that a certain industry could settle in a particular geographical area without any strong economic reason derived from comparative advantage , this is not a reason to argue against free trade because the absolute level of output enjoyed by both winner and loser will increase, with the winner gaining more than the loser, but both gaining more than before in an absolute level.
An overwhelming number of people internationally — both in developed and developing countries — support trade with other countries, but are more split when it comes to whether or not they believe trade creates jobs, increases wages, and decreases prices. In emerging economies, 47 percent of people believe trade increases wages, compared to 20 percent who says it lowers wages.
There is a positive relationship of 0. Those with a higher level of education are more likely than those with less education to believe that trade lowers prices. The notion of a free trade system encompassing multiple sovereign states originated in a rudimentary form in 16th century Imperial Spain. Economists who advocated free trade believed trade was the reason why certain civilizations prospered economically. For example, Smith pointed to increased trading as being the reason for the flourishing of not just Mediterranean cultures such as Egypt , Greece and Rome , but also of Bengal East India and China.
Netherlands prospered greatly after throwing off Spanish Imperial rule and pursuing a policy of free trade. Free trade policies have battled with mercantilist , protectionist , isolationist , socialist , populist and other policies over the centuries. Ottoman free trade policies were praised by British economists advocating free trade such as J. McCulloch in his Dictionary of Commerce , but criticized by British politicians opposing free trade such as Prime Minister Benjamin Disraeli , who cited the Ottoman Empire as "an instance of the injury done by unrestrained competition" in the Corn Laws debate, arguing that it destroyed what had been "some of the finest manufactures of the world" in Trade in colonial America was regulated by the British mercantile system through the Acts of Trade and Navigation.
Until the s, few colonists openly advocated for free trade, in part because regulations were not strictly enforced New England was famous for smuggling , but also because colonial merchants did not want to compete with foreign goods and shipping. According to historian Oliver Dickerson, a desire for free trade was not one of the causes of the American Revolution. Free trade came to what would become the United States as a result of the American Revolution. After the British Parliament issued the Prohibitory Act in , blockading colonial ports, the Continental Congress responded by effectively declaring economic independence, opening American ports to foreign trade on 6 April - three months before declaring sovereign independence.
According to historian John W. Tyler, "[f]ree trade had been forced on the Americans, like it or not". Despite this, the export of national corn was forbidden to ensure the food for the Papal States. In Britain, free trade became a central principle practiced by the repeal of the Corn Laws in Large-scale agitation was sponsored by the Anti-Corn Law League. Under the Treaty of Nanking , China opened five treaty ports to world trade in The first free trade agreement, the Cobden-Chevalier Treaty , was put in place in between Britain and France which led to successive agreements between other countries in Europe.
Many classical liberals , especially in 19th and early 20th century Britain e. John Stuart Mill and in the United States for much of the 20th century e. Woodrow Wilson included free-trade rhetoric in his " Fourteen Points " speech of The program of the world's peace, therefore, is our program; and that program, the only possible program, all we see it, is this: [ The removal, so far as possible, of all economic barriers and the establishment of equality of trade conditions among all the nations consenting to the peace and associating themselves for its maintenance.
According to economic historian Douglas Irwin, a common myth about United States trade policy is that low tariffs harmed American manufacturers in the early 19th century and then that high tariffs made the United States into a great industrial power in the late 19th century. Political dynamics would lead people to see a link between tariffs and the economic cycle that was not there.
A boom would generate enough revenue for tariffs to fall, and when the bust came pressure would build to raise them again. By the time that happened, the economy would be recovering, giving the impression that tariff cuts caused the crash and the reverse generated the recovery. Mr Irwin also methodically debunks the idea that protectionism made America a great industrial power, a notion believed by some to offer lessons for developing countries today.
In some industries, they might have sped up development by a few years. But American growth during its protectionist period was more to do with its abundant resources and openness to people and ideas. According to Paul Bairoch , since the end of the 18th century, the United States has been "the homeland and bastion of modern protectionism".
In fact, the United States never adhered to free trade until For the most part, the Jeffersonians strongly opposed it. The opposition Democratic Party contested several elections throughout the s, s and s in part over the issue of the tariff and protection of industry. Polk , Franklin Pierce and James Buchanan.
Under free trade the trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man. Why, if protection builds up and elevates 63,, [the U. We cannot take a step in the pathway of progress without benefitting mankind everywhere.
Well, they say, 'Buy where you can buy the cheapest'…. Of course, that applies to labor as to everything else. Let me give you a maxim that is a thousand times better than that, and it is the protection maxim: 'Buy where you can pay the easiest. During the interwar period, economic protectionism took hold in the United States, most famously in the form of the Smoot—Hawley Tariff Act which is credited by economists with the prolonging and worldwide propagation of the Great Depression.
Since the end of World War II , in part due to industrial size and the onset of the Cold War , the United States has often been a proponent of reduced tariff-barriers and free trade. Two core objectives of the EEC were the development of a common market, subsequently renamed the single market , and establishing a customs union between its member states. The European Union, now the world's largest single market,  has concluded free trade agreements with many countries around the world.
Most countries in the world are members of the World Trade Organization  which limits in certain ways but does not eliminate tariffs and other trade barriers. Most countries are also members of regional free trade areas that lower trade barriers among participating countries. Free trade may apply to trade in services as well as in goods. Non-economic considerations may inhibit free trade as a country may espouse free trade in principle, but ban certain drugs such as alcohol or certain practices such as prostitution  and limiting international free trade.
Some degree of protectionism is nevertheless the norm throughout the world. Most developed nations maintain controversial [ citation needed ] agricultural tariffs. Fred Bergsten devised the bicycle theory to describe trade policy. According to this model, trade policy is dynamically unstable in that it constantly tends towards either liberalisation or protectionism.
To prevent falling off the bike the disadvantages of protectionism , trade policy and multilateral trade negotiations must constantly pedal towards greater liberalisation. To achieve greater liberalisation, decision makers must appeal to the greater welfare for consumers and the wider national economy over narrower parochial interests. However, Bergsten also posits that it is also necessary to compensate the losers in trade and help them find new work as this will both reduce the backlash against globalisation and the motives for trades unions and politicians to call for protection of trade.
In Kicking Away the Ladder , development economist Ha-Joon Chang reviews the history of free trade policies and economic growth and notes that many of the now-industrialized countries had significant barriers to trade throughout their history. The United States and Britain, sometimes considered the homes of free trade policy, employed protectionism to varying degrees at all times. The Global Enabling Trade Report measures the factors, policies and services that facilitate the trade in goods across borders and to destinations.
The index summarizes four sub-indexes, namely market access; border administration; transport and communications infrastructure; and business environment. As of , the top 30 countries and areas were the following: . Academics, governments and interest groups debate the relative costs , benefits and beneficiaries of free trade. Arguments for protectionism fall into the economic category trade hurts the economy or groups in the economy or into the moral category the effects of trade might help the economy, but have ill effects in other areas.
A general argument against free trade is that it represents colonialism or imperialism in disguise. The moral category is wide, including concerns about:  [ better source needed ]. However, poor countries that have adopted free-trade policies have experienced high economic growth, with China and India as prime examples. Free trade allows companies from rich countries to directly invest in poor countries, sharing their knowledge, providing capital and giving access to markets.
Economic arguments against free trade criticize the assumptions or conclusions of economic theories. Sociopolitical arguments against free trade cite social and political effects that economic arguments do not capture, such as political stability, national security, human rights and environmental protection. Countries that allow low wages have a competitive advantage in attracting industry, which may lead to a general lowering of wages for workers in all countries. Domestic industries often oppose free trade on the grounds that it would lower prices for imported goods would reduce their profits and market share.
The economic theory of David Ricardo holds that consumers would necessarily gain more than producers would lose. Socialists frequently oppose free trade on the ground that it allows maximum exploitation of workers by capital. In one word, for exploitation, veiled by religious and political illusions, it has substituted naked, shameless, direct, brutal exploitation". Marx supported free trade, however, solely because he felt that it would hasten the social revolution. Many anti-globalization groups oppose free trade based on their assertion that free-trade agreements generally do not increase the economic freedom of the poor or of the working class and frequently make them poorer.
Some opponents of free trade favor free-trade theory, but oppose free-trade agreements as applied. Some opponents of NAFTA see the agreement as materially harming the common people, but some of the arguments are actually against the particulars of government-managed trade, rather than against free trade per se. For example, it is argued that it would be wrong to let subsidized corn from the United States into Mexico freely under NAFTA at prices well below production cost dumping because of its ruinous effects to Mexican farmers.
Indeed, such subsidies violate free-trade theory, so this argument is not actually against the principle of free trade, but rather against its selective implementation. Research shows that support for trade restrictions is highest among respondents with the lowest levels of education. This is not to say that the latter types of calculations are not important in shaping individuals' views of trade — just that they are not being manifest in the simple association between education and support for trade openness".
A study found that individuals whose occupations are routine-task-intensive and who do jobs that are offshorable are more likely to favor protectionism. Research suggests that attitudes towards free trade do not necessarily reflect individuals' self-interests. Various proponents of economic nationalism and of the school of mercantilism have long portrayed free trade as a form of colonialism or imperialism.
In the 19th century, such groups criticized British calls for free trade as cover for British Empire , notably in the works of American Henry Clay , architect of the American System  and of the German-American economist Friedrich List Free-trade debates and associated matters involving the colonial administration of Ireland  have periodically such as in and caused ructions in the British Conservative Tory Party Corn Law issues in the s to the s, Irish Home Rule issues throughout the 19th and earlyth centuries.
Ecuadorian President Rafael Correa in office from to denounced the "sophistry of free trade" in an introduction he wrote for a book, The Hidden Face of Free Trade Accords ,  which was written in part by Correa's Energy Minister Alberto Acosta.
Citing as his source the book Kicking Away the Ladder written by Ha-Joon Chang ,  Correa identified the difference between an "American system" opposed to a "British System" of free trade. The Americans explicitly viewed the latter, he says, as "part of the British imperialist system". According to Correa, Chang showed that Treasury Secretary Alexander Hamilton in office — , rather than List, first presented a systematic argument defending industrial protectionism.
The following alternatives to free trade have been proposed: protectionism ,  imperialism ,  [ failed verification ] balanced trade , [ citation needed ] fair trade , [ citation needed ] and industrial policy. The value of free trade was first observed and documented in by Adam Smith in The Wealth of Nations , writing: .
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. This statement uses the concept of absolute advantage to present an argument in opposition to mercantilism , the dominant view surrounding trade at the time which held that a country should aim to export more than it imports and thus amass wealth. In this vein, it is not the value of exports relative to that of imports that is important, but the value of the goods produced by a nation.
However, the concept of absolute advantage does not address a situation where a country has no advantage in the production of a particular good or type of good. This theoretical shortcoming was addressed by the theory of comparative advantage. Generally attributed to David Ricardo , who expanded on it in his book On the Principles of Political Economy and Taxation ,  it makes a case for free trade based not on absolute advantage in production of a good, but on the relative opportunity costs of production.
A country should specialize in whatever good it can produce at the lowest cost, trading this good to buy other goods it requires for consumption. This allows for countries to benefit from trade even when they do not have an absolute advantage in any area of production. While their gains from trade might not be equal to those of a country more productive in all goods, they will still be better off economically from trade than they would be under a state of autarky.
Exceptionally, Henry George 's book Protection or Free Trade was read out loud in full into the Congressional Record by five Democratic congressmen. We all hear with interest and pleasure of improvements in transportation by water or land; we are all disposed to regard the opening of canals, the building of railways, the deepening of harbors, the improvement of steamships as beneficial. But if such things are beneficial, how can tariffs be beneficial?
The effect of such things is to lessen the cost of transporting commodities; the effect of tariffs is to increase it. If the protective theory be true, every improvement that cheapens the carriage of goods between country and country is an injury to mankind unless tariffs be commensurately increased.
George considers the general free trade argument inadequate. He argues that the removal of protective tariffs alone is never sufficient to improve the situation of the working class, unless accompanied by a shift towards land value tax. From Wikipedia, the free encyclopedia. Absence of government restriction on international trade. Not to be confused with Free market or Fair trade.
Economic integration. Preferential trading area Free-trade area Currency union Customs union Single market Economic union Fiscal union Customs and monetary union Economic and monetary union. Imports Exports Tariffs Largest consumer markets Leading trade partners. By country. Comparative advantage Competitive advantage Heckscher—Ohlin model New trade theory Economic geography Intra-industry trade Gravity model of trade Ricardian trade theories Balassa—Samuelson effect Linder hypothesis Leontief paradox Lerner symmetry theorem Terms of trade.
Related topics. Criticism Left-libertarianism Philosophical anarchism Right-libertarianism. Age of Enlightenment List of liberal theorists contributions to liberal theory. Schools of thought. Regional variants. Industrial Revolution Mercantilism Classical liberalism Keynesian economics. Comparative advantage Economic growth Gross domestic product International economics International finance International trade Laffer curve.
Anti-capitalism Anti-copyright Anti-globalization Alter-globalization Authoritarian capitalism Criticism of capitalism Criticism of intellectual property Inverted totalitarianism Market fundamentalism Perspectives on capitalism Protectionism. Further information: Supply and demand. See also: Timeline of international trade.
Further information: Anti-Corn Law League. Main articles: World Trade Organization , List of multilateral free trade agreements , and List of bilateral free trade agreements. Main article: Global Enabling Trade Report. Singapore 6. This section may be in need of reorganization to comply with Wikipedia's layout guidelines. Please help by editing the article to make improvements to the overall structure.
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Trade and Immigration. Policy Briefs. May 23, Share Tweet Print. Senior Fellow, F. Key materials. Download Publication PDF. Sign Up for our Weekly Email. The Truths of Free Trade Free trade increases prosperity for Americans—and the citizens of all participating nations—by allowing consumers to buy more, better-quality products at lower costs. Free trade increases access to higher-quality, lower-priced goods. Cheaper imports, particularly from countries such as China and Mexico, have eased inflationary pressure in the United States.
Prices are held down by more than 2 percent for every 1 percent share in the market by imports from low-income countries like China, which leaves more income for Americans to spend on other products. Free trade means more growth. At least half of US imports are not consumer goods; they are inputs for US-based producers, according to economists from the Bureau of Economic Analysis.
Free trade improves efficiency and innovation. Over time, free trade works with other market processes to shift workers and resources to more productive uses, allowing more efficient industries to thrive. The results are higher wages, investment in such things as infrastructure, and a more dynamic economy that continues to create new jobs and opportunities. Free trade drives competitiveness. Free trade does require American businesses and workers to adapt to the shifting demands of the worldwide marketplace.
But these adjustments are critical to remaining competitive, and competition is what fuels long-term growth. Free trade promotes fairness. When everyone follows the same rules-based system, there is less opportunity for cronyism, or the ability of participating nations to skew trade advantages toward favored parties. In the absence of such a system, bigger and better-connected industries can more easily acquire unfair advantages, such as tax and regulatory loopholes, which shield them from competition.
Myth vs. Reality 1. Myth: More exports mean more wealth. Poorer Americans suffer more from tariffs than higher-income people. Not only do they spend more of their income on consumption goods, many of the goods they consume are subject to higher tariffs than more expensive goods of the same type.
Similarly, plain drinking glasses face a tariff of nearly 30 percent, while expensive crystal glasses are taxed at 3 percent. Myth: Free trade means jobs go overseas. Much of the change in the labor force is not the result of free trade but of innovation. Myth: Restrictions on trade help Americans.
Despite receiving protection from foreign competition for many decades, large firms have steadily left the US steel industry because of high fixed costs and competition from smaller firms. Tariffs on steel increase costs in steel-consuming industries, which employ almost 13 million Americans, compared to the , Americans employed in the steelmaking industry. Other countries often retaliate against US tariffs. Tariffs on Chinese-made solar panels between and resulted in China imposing tariffs on American polysilicon, raising the cost of solar equipment and reducing employment opportunities in both nations.
Myth: US trade deficits are bad for Americans. Reality: US trade deficits generally are good for Americans.