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It is thus remarkable (some would even say ironic) that corporations lobbying for expanded intellectual property rights have succeeded in including [[TRIPS]], a very strong [[treaty]] on intellectual property rights, as a membership requirement for the [[World Trade Organization]], the international organization dedicated to furthering the cause of free trade.
It is thus remarkable (some would even say ironic) that corporations lobbying for expanded intellectual property rights have succeeded in including [[TRIPS]], a very strong [[treaty]] on intellectual property rights, as a membership requirement for the [[World Trade Organization]], the international organization dedicated to furthering the cause of free trade.


== Arguments for free trade ==
== Free trade controversy ==
:''Main article: [[Free trade controversy]].

Many arguments are used in favour or to oppose free trade. These arguments can be divided in economic, moral and sociopolitical arguments.
In the [[history of free trade]], two types of argument have been advanced in favour of allowing purchases from abroad, and free trade in the broader sense.
#The first set of arguments are essentially economic, that free trade will make society ''richer'' (more prosperous in [[money]] terms). These are mostly technical arguments from the discipline of [[economics]], starting especially with [[Adam Smith|Smith]]'s ''[[The Wealth of Nations]]'', which overthrew the [[mercantile]] orthodoxy.
#The other set of arguments for free trade could be classified as "[[moral]]" arguments, which are pitched at a more high-minded level, some of these are listed [[Free trade#Moral arguments in favour of free trade|below]].
Sops is the
=== Economic arguments for free trade ===

[[classical economics|Classical economic]] analysis shows that free trade increases the global level of [[production|output]] because free trade permits [[economic specialization|specialization]] among countries. Specialization allows nations to devote their [[scarce]] [[resource (economics)|resources]] to the production of the particular goods and services for which that nation has a [[comparative advantage]]. The benefits of specialization, coupled with [[economies of scale]], increase the global [[production possibility frontier]]. An increase in the global production possibility frontier indicates that the absolute quantity of goods and services produced is highest under free trade. Not only are the absolute quantity of goods and services higher, but the particular combination of goods and services actually produced will yield the highest possible [[utility]] to global consumers.

==== Qualitative arguments ====

Free trade policies are often associated with general ''[[laissez faire|laissez-faire]]'' economic policies, which permit faster growth. Laissez-faire policies—the absence of government intervention in trade, entrepreneurship and investment—is often positively correlated with high [[per capita]] [[income]]. {{ref|PerCapitaIncome}} Voluntary exchange, by virtue of its voluntary nature, is beneficial to the parties involved (why else would they engage in the exchange?). Thus, the restriction of voluntary exchange restricts commerce and ultimately the accumulation of wealth.

==== Production possibilities frontiers and indifference curves ====
[[Image:Free_trade_country_a.gif|right|200px|Country A]]
Here is the production possibilities frontier for a fictional country, Country A. For simplicity, assume that the country produces only two goods, meat and rice. Because the country has limited resources, the production of an additional unit of rice means some resources must be diverted away from the production of meat. The particular rate of trade-off between meat and rice is not important for this analysis, so it can be ignored.
<br style="clear:both;" />
[[Image:Free_trade_country_b.gif|right|200px|Country B]]
Here is the production possibilities frontier for a second fictional country, Country B. Again; the country can produce only the same two goods, meat and rice. Like before, limited resources mean that the production of an additional unit of rice means some resources must be diverted away from the production of meat. The particular rate of trade-off between meat and rice is not important for this analysis, so it can be ignored. The fact that the two countries have different relative rates of trade-off is important. This difference gives rise to a [[comparative advantage]], a key concept in economics. Even if one country has an [[absolute advantage]] in the production of all goods, both nations can benefit from trade due to comparative advantage.
<br style="clear:both;" />
[[Image:Free_trade_world.gif|right|200px|World]]
The first two images above assume a state of [[autarky]], which means no trade occurs between the two countries. If free trade is possible, the green line is the production possibilities frontier for the entire world. The world PPF is made up by combining the two countries' PPFs. [[Linear]] PPFs will always combine to form a shape with an [[inflection point]], as shown at right.

Compare the world's production possibilities frontier with each individual nation's. Clearly, the world can produce and consume more when free trade is allowed. To arrive at the world's production possibilities frontier, [[Vector_addition#Vector_addition_and_subtraction|vector addition]] must be used. Country A and Country B's meat and rice outputs must be added together for each possible production point.
<br style="clear:both;" />
[[Image:Free_trade_world_composition.gif|right|200px|World]]
An intuitive way of arriving at the world's production possibilities frontier is to first assume that each country tries to specialize by producing only one product. In the graph at right, the first units of meat are produced only by country B (red). Once country B is using all its resources to produce meat, then country A (blue) begins shifting resources away from the production of rice and into the production of meat. On the other axis, assume that the first units of rice are always produced by country A. Additional units of rice can only be obtained if country B shifts some resources into rice production.
<br style="clear:both;" />
[[Image:Free_trade_country_a_eqm.gif|right|200px|Country A]]
Returning back to country A, here is the same production possibilities graph, now with [[indifference curve]]s added in. Indifference curves are a measure of [[preference]] and [[utility]]. Interplay between the country's preferences and production result in the actual combination of goods produced and consumed. Remember, this is the state of Country A under autarky.
<br style="clear:both;" />
[[Image:Free_trade_country_b_eqm.gif|right|200px|Country B]]
Here is the same view of Country B's economy. Again, the actual combination of goods produced and consumed is dependent on the country's productive abilities and its citizens' preferences. Thus, it is not surprising that the combination of goods consumed in Country B differs from that in Country A.
<br style="clear:both;" />
[[Image:Free_trade_world_eqm.gif|right|200px|World]]
Graphical information of the two countries can be combined in a single graph, as shown here.
<br style="clear:both;" />
[[Image:Free_trade_world_eqm_comp.gif|right|200px|World]]
When the two countries' autarkic consumptions are added, the total quantity of each good produced/consumed is less than the world's PPF under free trade. This indicates that by trading, the absolute quantity of goods available for consumption is higher than the quantity available under autarky.
<br style="clear:both" />

==== [[Reciprocity (international relations)|Reciprocal]] free trade is in exporters’ interests ====

An early lobbying effort on behalf of free trade was made by the businessmen of the [[Anti-Corn Law League]]. Some of these gentlemen owned [[textile]] [[Factory|factories]], and believed that repeal of the [[Corn Law]] import-ban would allow [[1830s]] [[Britain]] to sell [[cotton]] clothing to wheat-exporting nations.

Although this argument is rooted in [[Mercantilism]] and protectionism by domestic producers, it amounts to a voice in favour of free trade. See also: [[Reciprocal Trade Agreements Act]].

In [[1950]] [[Jacob Viner]] showed that a trading bloc mutually lowering tariffs would produce gains not merely on the demand side but also on the [[supply]] side. This was called [[trade creation]], the benefits to the supply side as a whole accrue as resources are reallocated towards firms producing at the highest comparative advantage (among the partners) in each country.

=== Moral arguments in favor of free trade ===

The 18th and 19th century intellectuals who backed free trade rarely did so under the rubric of increasing material wealth. In many cases this was given as the least important reason for free trade. Rather, they argued that international society would be improved by increased commerce. Some of these, and later, sociopolitical arguments are listed here.

==== Free trade is a right ====

The [[libertarian]] position argues that any trade restraint is immoral ''[[a priori]],'' since restricting the rights of [[consumer sovereignty|sovereign consumers]] to purchase foreign goods is outside the competence of legitimate government. This is in the tradition of the anti-Corn Law radicals, like [[Richard Cobden]], who concluded their [[1838]] parliamentary petition with an appeal to "[[negative liberty]]":

<blockquote>
Holding one of the principles of eternal justice to be ''inalienable right of every man freely to exchange the result of his labour for the productions of other people'', and maintaining the practice of protecting one part of the community at the expense of all other classes to be unsound and unjustifiable, your petitioners earnestly implore your honourable House to repeal all laws relating to the importation of foreign corn and other foreign articles of subsistence, and to carry out to the fullest extent, both as affects agriculture and manufactures, the true and peaceful principles of Free Trade, by removing all existing obstacles to the unrestricted employment of industry and capital. {{ref|Cobden1838}}</blockquote>

==== Increased commerce means reduced war ====

The argument for free trade that commonly underlies [[neoliberal]] foreign policies can be made from the perspective of national security - it is seen by some policy analysts that countries that trade with each other are less likely to go to war due to the enormous cost of suddenly disrupting their trade abroad, particularly since they would be dependent on the world economy as a result of specialization and [[comparative advantage]].

Qualitative analysis suggests that free trade encourages economic interdependence between countries, reducing the likelihood of [[war]]. However, the belief that free trade would reduce war was hypothetical rather than empirical (at least until the [[1950s]]). Twenty-two years after [[David Ricardo|Ricardo]] advanced his theories of [[comparative advantage]] they were used as justification by the British to start the [[Opium wars]]. Also, it is hard to know when the occurrence of free trade has prevented the outbreak of war, but easy to know when it hasn't; critics of free trade sometimes cite the [[First World War]] as an instance where developed, industrialized countries with reasonably extensive trade links abruptly broke off those trade links and entered into a particularly destructive war. It is an open question whether the First World War, its causes, and the economic environment that preceded it are sufficiently similar to the modern globalized economy to draw parallels between [[1914]] and [[2005]].

The fact that some wars have been fought between trading-partners does not disprove the notion that increased trade lowers the willingness to go to war, simply that however much it does so, other considerations sometimes overwhelm the economic. [[McDonald's]] is in the vanguard of global free trade, permitted to spread its brand of [[consumerism]] by the free trade in [[capital]] (its product is mostly sourced locally). Famously, only a [[McDonald's#Emblem for globalization|single, short, war]] has been fought between any of the 122 countries having franchises. This fact might not be due to the ties of trade, but could still be attributed to the homogenizing effects of free trade, as identical consumers the world over see less reason to wage war on one another.

The process of free trade, especially in post industrial economies, effectively eliminates the existence of unequal resource distribution. Japan imports much of its food source, and in return exports mainly the produce of its extensive and high-tech workforce. Continuing the example, Japan would not likely be able to sustain the population it does today without one of three possibilities: an unbelievable increase in technology to allow for better use of land resources, international trade, or seizing arable land from another state. Trade also allows for better quality produce and competitiveness between nations, effectively raising the living standards of those nations. It would be illogical to many in such a case to jeopardise those living standards for a war. Finally, increased trade leads to increased bilateral communication between nations and as such, wars not focused on resources or land already cured by trade, including ideological arguments become less evident.

After the [[World War II|Second World War]] many liberals said that the war's ultimate cause had been the restrictive trade practices of [[Nazi Germany]] and the [[British Empire]]. They thought that free trade would increase the likelihood of a lasting peace. [[Cordell Hull]], the U.S. secretary of state until 1944, [[Bretton Woods system#"Economic security"|believed this]], and argued that as [[trade barrier]]s dovetail with war, so free trade does with peace. The post war consensus [[Bretton Woods system#The rise of governmental intervention|expressed at Bretton Woods]] was that government coordination was necessary to prevent trade wars and competitive devaluations, to ensure free trade and peace.

==== Protectionism sullies the cause of patriotism ====

[[Adam Smith]] thought that protectionism against free trade was a scam on the public on behalf of producers, carried out in the name of [[nationalism]]. Even if overall economic interests had not been harmed by tariffs, he was opposed to them on the grounds that [[patriotism]] should not be perverted by scoundrels to enrich themselves.

Tariffs are also internally divisive. ''See also: [[Nullification crisis]].

==== Free trade reduces poverty ====

Conflating the "moral" and "economic" arguments are those campaigners who say that increased trade is the best way to relieve extreme poverty throughout the world. Opposing free trade, they argue, is tantamount to supporting economic injustice. (For instance, "[[The Economist]]" magazine sometimes runs controversial cover stories making this impassioned argument for free trade.)

The thrust of this point is that economic and moral issues cannot properly be separated, and that any other particular socioeconomic problems can be combated most effectively through rising living standards.

[[Bjørn Lomborg]]'s [[Copenhagen Consensus]] on [[international development]] challenges ranked [[trade liberalization]] as third on the list of development priorities; the experts judged that modest [[costs]] could yield large benefits for [[developing nation]]s. (They ranked freer trade as a "'''Very Good'''" opportunity for fighting misery along with cheap measures against [[HIV]] infection, [[micronutrient]] distribution, and anti-[[malaria]]l programs.) The conference was of the opinion that reducing [[subsidy|subsidies]] and [[tariff]]s would improve the wellbeing of the global poor being more than any agricultural, political, or [[natural environment|environment]]al program. They considered that the free trade in labour would also be a significant (although less important) move against poverty, especially if [[skilled worker]] migration were permitted. The approach and conclusions of the "consensus" have been [[Copenhagen_Consensus#Criticisms|widely criticized]], especially trade liberalization's high ranking.

===Sociopolitical arguments in favor of free trade===
====Free trade enriches cultures====

The whole concept of "preserving culture" is premised on the notion that it is both valuable and endangered. To the extent that local culture is valued, products and services reflective of that culture are desired and thus available among the many alternatives. According to this argument, all major cultures have evolved through hybridization with external influences throughout history. Attempts to subvert this process by erecting trade and investment barriers deprive cultures of the positive influences that keep it from stagnating. This argument focuses on the fact that every culture evolves and that free trade supports cultural exchange, as cultural products can be traded freely. [http://www.freetrade.org/faqs/faqs.html#six]

====Free trade enhances national security====

Free trade can enhance national security, on the condition that a nation does not trade with its enemies. Free trade increases a nation's relative power vis-à-vis its rivals, because free trade gives optimal economic advantages, which translates into more economic and military power and more technological innovation. A clear example is the US, which enjoys to a certain degree free trade. Without this quite liberal trade the military burden (i.e. its military expenditures of about $500 billion) would weigh heavy on its economy. The closed-economy Soviet Union would have had to spend 15-20% of its GDP if it wanted to equal the US (which now spends almost 4% of its GDP). According to most economists heavy military expenditures slow the economic growth of an economy. The higher the expenditures, the higher the disadvantages. Once the burden becomes too high, an economy recesses, forcing the military expenditures to be decreased. According to many political scientists this was the case in the 1980s in the Soviet Union.

=== When free-exchange is not free trade ===

The [[World Trade Organization]] was created to open up markets and promote international trade based on the [[laissez faire]] 'Free Trade' paradigm. The [[World Trade Organisation|WTO]] creates and monitors agreements to reduce trade barriers, and arbitrates in disputes over foreign market access, and violations of these agreements. Its definition of 'Free Trade' is trade ''on a level playing-field'', so that the unlimited exchange of goods between countries is ''not'' necessarily 'Free'. If a country with [[aircraft]] producers, say, subsidizes corporate research and development (R&D) or enacts regulations requiring the industry to procure its aircraft part suppliers be domestic producers, then the WTO considers this a violation of [[Free Trade]], even when the barriers to trade are not imposed at the national borders in an import-export transaction step (like a [[tariff]]).

=== Totally free trade ===

Some economists (especially [[Libertarian]]s) criticize the [[World Trade Organization|WTO]]’s definition of "free trade" as too narrow. They argue that a foreign governmental producer-[[subsidy]] is another form of "comparative advantage"' and should not be used as a reason to impose domestic barriers on the purchase of overseas goods.

These economists argue that (since the surplus benefit to domestic consumers outweighs the surplus loss of domestic producers) the lower price of foreign subsidized goods is a net positive (as in the standard Ricardian argument) and the source of the "comparative advantage" is irrelevant. Therefore, any [[import]] restriction (even on "[[Dumping|dumped goods]]") makes the domestic society as a whole worse off than it would be with unlimited imports.

This "abolitionist" position has had little governmental support in the developed world, due to the following considerations:
* Producer lobbyists and job-protectionists are more organized than consumer advocates.
* The "artificial" handicap of a foreign subsidy seems much less "just" to local production than advantages deriving from geography, natural resources, or native skill. Electorates often prefer "[[Inequity aversion|fairplay]]" to [[Utilitarian]] considerations.
* Despite accepting that a country would be better off without tariffs than with them, some [[Game Theory]] models assert that a long-term [[strategy]] superior to immediately dropping all tariffs is to negotiate progressively lower barriers bilaterally so as to pry open foreign markets to domestic producers of goods, benefiting both domestic consumers ''and'' domestic producers. (The justification for tariffs is not important; tariffs only exist in order to be relinquished.)
* If trade barriers are already low, the threat of a "[[trade war]]" of tit-for-tat tariff increases may reduce the temptation for either partner in bilateral trade to raise import barriers.
* It would tend to decrease the political power and revenue flowing to government bureaucrats.

== Criticisms of free trade ==

Much of the dispute over free trade is [[semantic]]. The official [[US]] interpretation of free trade is opposed to the [[Vietnam|Vietnamese]] interpretation, but both governments claim to be in favour of free trade. Similarly, advocates of [[fair trade]] criticize free trade as unjust, although their criticisms tend to be directed at [[neomercantilism|neomercantile]] [[protectionism|protectionist]] policies of the First World rather than the theory of free trade itself.

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 [[externality|do not capture]], such as political stability, cultural diversity, and national security.

=== Economic arguments against free trade ===

==== Free trade in raw materials retrogrades development ====

The argument that a country could get 'locked in' to serving the needs of the world market in [[raw materials]], and therefore not develop industrially was first advanced by [[Friedrich List]] in [[1841]], and received empirical support in the 20th century. It was discovered that [[African]] and [[Arab]] nations rich in natural resources (e.g. [[diamond]]s and [[oil]]) developed ''less'' rapidly than those nations without such 'bounty'. This is also a sociopolitical argument against free trade, because it is said that:
# The regimes exporting such valuable commodities to the west tended to be [[autocratic]], and remain in unpopular power because of the massive payment streams from [[export]]s.
# The reason that civil wars and violence are correlated with the discovery of mineral wealth in the developing world is the world market for the commodities. This is one area of free trade which has few supporters, and [[conflict diamond]]s cannot be openly imported into any country.

It was also discovered that [[developed nation]]s uncovering natural resources could suffer as a result of free trade, and for similar reasons. The massive capital influx to the [[Netherlands]] after it started exporting oil increased prices in the famous "[[Dutch disease]]".

==== International trade requires more resources to distribute ====

Delivering food produced on the other side of the world to a [[supermarket]] has an [[natural environment|environmental]] impact because it requires the use of [[fossil fuel]] in delivery from overseas, as compared to local delivery. However, this critique is dependent upon the productivity of local markets relative to that of foreign markets'. A foreign market's greater productivity may offset the fuel expended for delivery. Conversely, local markets may use resources so inefficiently that importing goods constitutes a more energy-efficient per unit alternative. However, the lower prices achieved therein may beget more consumption, a result not necessarily favored by "greens."

[[Greens#Different kinds of Greens|Deep Green]] thinkers say that Free Trade claims to lead to the "full employment of resources", and strongly oppose Free Trade in the hope of discouraging the immediate depletion of the earth’s resources.

==== Sheltering young industries may pay-off later ====
{{main|Infant industry argument}}

[[New Trade Theory|New Trade theorists]] challenge the assumption of diminishing returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries will then allow those sectors to dominate the world market. Less quantitative forms of this "[[infant industry argument]]" against totally free trade have been advanced by trade theorists [[History of free trade|since at least 1848]].

==== Free trade favors developed nations in certain areas ====

Some services exported by developed nations are intangibles, such as medicinal formulae, trademarks, software, and entertainment. The value of this intellectual property is derived from legal protection against unauthorized reproduction. Some advocates of the poor claim that the reason [[Free Trade#Intellectual property and free trade|IP-rights are strongly protected in International trade]] is the power developed nations have to protect the interests of intellectual property owners during trade negotiations. WTO-signatory nations renounce the right to produce generic copies of life-saving drugs, the only affordable treatment in developing nations.

==== Pernicious Influence of Foreign Firms ====

Within developing countries, the local populace often eyes multinational corporations with suspicion. Many feel that once allowed free reign they will use their superior resources and experience to sway the political establishment of a country in favor of excessive concessions (tax holidays, underpaying for property, etc.) and try to influence the political system in their interests, which may or may not be shared by the citizenry.

==== Free trade benefits only the wealthy within countries ====

Some argue the following:

* The wealthy own more corporate equity, which increases in value as companies are able to produce at the lowest cost in the world.
* As the world's markets merge into a single global market the number of market-leading companies worldwide drops, with international take-overs of local champions by giant corporations. This process concentrates wealth in fewer corporations.
* Free trade replaces low-skilled jobs often done by the poor easier than high-skilled jobs. This implication of the [[Stolper-Samuelson theorem]] is challenged on the basis that technology makes [[offshoring]] high value-added work feasible and more profitable than moving low-skilled jobs.
According to [[Ravi Batra]]'s book, ''The Myth of Free Trade'', open trade in the US has resulted in replacement of manufacturing jobs for service jobs, which pay less on average. The product trade deficit results in more investment money flowing into the US as a trade-off. This investment money mostly ends up with wealthy investors and owners; and "trickle down" is not sufficient to compensate for the loss of manufacturing jobs and wagers. After all, if a wealthy person receives money from such investments, they may spend some on foreign cars and foreign trips, which is not going to go back into the US economy. According to Batra's research, even though free trade may increase GNP, the increases do not flow to rank-and-file workers.

==== Free trade increases offshoring ====

Free trade allows companies the possibility of [[outsourcing]] the production of goods for domestic sale. Environmental and labor standards imposed upon these companies can be less in foreign production. Labor and environmental advocates argue that free trade thereby creates conditions that allow companies to circumvent domestic regulations, by producing elsewhere. As free trade increases, the balance of power shifts in favour of companies and away from governments. This is considered to pose a threat to [[democratic]] self-determination by [[anti-globalization|anti-globalizers]] and [[authoritarian]] control by [[totalitarian]] states. Free trade supporters argue that all countries have the right to opt out of the world market through [[isolationism]] and that [[companies]] are fictional persons who are taxed without representation and that the balance of power should shift away from the governments that exploit them.
It has also been argued that free trade hurts developed nations because it causes jobs from those nations to move to other countries, and accelerates the "[[race to the bottom]]". As well as reducing rich-country [[Gross domestic product|GDP]] through lost jobs, competitive pressures will undermine [[democracy]] by creating pressures to lower wage demands, and protections like environmental and safety standards. The "race to the bottom" is blamed on international competition to attract [[traded-goods]] production, which, with Free Trade, can be sited anywhere.

See also [[Lump of work fallacy]].

==== Capital mobility and comparative advantage ====

Some descriptions of comparative advantage rest on a necessary condition of capital immobility. If financial or labor resources can move between countries, then comparative advantage erodes, and absolute advantage dominates. For instance, the [[Heckscher-Ohlin model]] derives comparative advantage from differing relative abundances of capital and [[labour (economics)|labour]] between countries. Capital mobility and the competitive drive for the highest [[return on investment]] would give all countries identical relative abundances for new investment, eliminating comparative advantage and trade.

Given the liberalization of capital flows under free trade agreements of the [[1990s]], the condition of capital immobility no longer holds. [[David Korten]] and other economists argue that the theory of comparative advantage "is replaced by that of downward levelling". However, capital immobility is only one route to comparative advantage, useful to basic models, but not essential to it.

Basic models assuming capital immobility were convenient and not essential to the principle. Although greater capital mobility is likely to reduce comparative advantage, barriers to capital flows are not the only way to derive it.
* Early [[qualitative]] descriptions of the principle were based on the greater ease of producing different [[commodity|commodities]] in one country than another, and not on capital mobility. The comparative advantage of [[France]] over [[Iceland]] in [[wine]] production is not based on capital immobility.
* As economist [[Paul Krugman]] has noted, 19th century economist [[David Ricardo]] who formulated the basic model of comparative advantage lived in a period of high capital mobility. His ideas were based on different production functions in different goods (different technologies) internationally. These do not necessarily require capital immobility.
* Comparative advantage can be derived from more complicated models including capital mobility (i.e. international borrowing, lending, and labor movement) and often posit movement of capital as analogous to the movement of goods.

=== Sociopolitical arguments against free trade ===

==== Free trade undermines cultural diversity ====

The [[France|French]] argue that allowing [[Hollywood]] movies to compete against French films would be culturally destructive. Free trade in culture is limited, otherwise, the French language and the visibility of a French perspective on the world would be threatened. Food imports competing with Gallic farmers are limited on the grounds that high food prices are necessary to sustain rural French culture.

Throughout the world, forces that many blame on free trade are eroding traditional ways of living and rural cultures. For instance, Sir [[James Goldsmith]] attacked free trade for causing the conversion of small-scale [[agriculture]] to large-scale agribusiness across the [[developing country|developing]] world: "The loss of rural employment and migration from the countryside to the cities causes a fundamental and irreversible shift. It has contributed throughout the world to the destabilization of rural society and to the growth of vast urban concentrations. In the urban slums congregate uprooted individuals whose families have been splintered, whose cultural traditions have been extinguished and who have been reduced to dependence on welfare from the state." {{ref|Trap103}}

Many Canadian nationalists argue that the [[North American Free Trade Agreement]] or an extension could harm Canadian culture, due to foreign corporations (magazines, television, and satellite providers) challenging Canada's cultural content laws. These laws encourage Canadian content in the media.

==== Free trade causes dislocation and pain ====

Free trade may change careers too fast. Once, a farmer could expect to finish her life as a farmer, although her children may have been forced into [[mining]] or [[manufacturing]] instead. Now, changes happen on a sub-generational level, faster than natural attrition. Coping with these transitions can be difficult, especially for the [[Middle age|middle-age]]d and the [[Old age|elderly]] due to age itself or age discrimination. Problems associated with economic adaptation are generally not factored into the calculation of free trades' effects.

[[Welfare economics]] deals with the issue of the overall benefit to society of changes that harm some and help others. In a [[utilitarian]] view, the overall benefit of cheaper goods and services is given equal weight with the concentrated impact of lost jobs. (With a Kantian application of John Locke's state of nature, however, state-executed welfare violates the natural rights of individuals (see [[Anarchy, State, and Utopia]], Nozick)). Other economists argue that the harmful effect of free trade on some should be given greater weight than the benefit for all. See [[Pareto optimality]].

==== Dependency theory ====
:''Main article: [[Dependency theory]].
Critics of [[imperialism]] sometimes focused on how imperial powers gained influence over weaker countries through specialization. Weaker countries would develop areas, typically in raw materials and agriculture, that would be economically dependent on the mother country. In the post-imperial world, this criticism changed. Imperial powers that controlled capital flows could maintain their economic status vis-a-vis their former colonies by using this dependency to their advantage. Imperial powers would have more choice (more competitive market) in countries from which they could acquire raw materials than those countries would have in buying final goods, particularly as imperial countries had the bulk of the world's financial resources and chose to behave [[oligopoly|oligopolistically]]. This pattern of exploitation, which may or may not lead to the benefit of imperial nations, focuses on the importance of political power in the international system and its weight in policy choices.

The dependency theory is discredited however by modern economists, as this theory lacks empirical validity, as some countries have been able to become economically more developed (often also due to a more liberalised trade).

==== Free trade undermines national security ====

One of the arguments of the [[Corn Laws]] repeal was national security. Britain ought not be dependent on grain imports to her country, or else she risked putting her national security in the hands of foreign countries. This argument focused on the ability of free trade to threaten the sovereignty of a nation at war.

This argument had always been questioned on the grounds that every market in the world would have to stop selling ''at any price'' for an importer to find itself imperiled, unless a blockade was used. It was said that any nation (especially [[England]]) unable to defeat a blockade couldn't hope to win a 19th century war anyway. Although wars were subsequently fought over access to markets these have always been markets in commodities not domestically available (principally [[oil]]; see also – [[Causes_of_World_War_II#Causes_of_World_War_II_in_Asia|Raw materials causes of Japanese expansionism]].) In the history of the world, no country has ever suffered military defeat, or capitulated to [[sanctions]], due to the inability to produce a domestically producible product. However, there is no doubt that Britain would have run out of food in both the First and Second World Wars if it had not been able to import food from abroad, particularly from the USA. Britain also discovered in both wars that she had been vulnerably dependent on Germany for many advanced manufactured goods, which again put her at a major disadvantage.

In the modern [[United States]] and in many developed Western countries, one of the chief arguments in favor of [[farm subsidies]] is a national security argument. The threats of [[bioterrorism]] and even unintended disease-causing agents has raised the possibility of poorly inspected food entering a country from another, presumably with less stringent food inspections. Like a number arguments against free trade, this argument rests on the inequity of government regulations across countries the world over, although some critics of the US food industry point out that the same argument is used whether or not the standards imposed actually are higher or lower abroad. (See: [[Fast Food Nation]].)
Technological change is another source of anxiety about free trade. Trade in high-tech equipment can facilitate the implementation of advanced military technology in countries that may become strategic opponents later on. This argument is often compelling to policymakers in developed countries, and free trade rarely applies to military technology, and often special restrictions are placed even on advanced technology developed in the nonmilitary sector.

If free trade encourages the development of a world market that equilibrates wages, industrialization, and productivity per laborer, this can amount to the armament of strategic opponents. This argument is often brought up in the context of United States-[[China]] trade relations; if the Chinese economy were to develop the same production per capita as the United States, China would be able to harness economic resources four-fold what the United States economy could, and, in theory, proportional military resources. Although this concern is widespread within the [[United States]], the desire to keep a potential rival weak is not normally advanced within [[diplomatic]] circles.

==== Free trade undermines border control ====

Another national security argument against free trade &mdash; this one often argued in the context of the [[United States-Mexico border]] and the trading links between Europe and the [[Middle East]] and [[North Africa]] &mdash; discusses the tendency of free trade to encourage porous borders. The increased volume of trade that passes over a given border can swamp border control. Even with sufficient control, the cost, both to the government and traders having to endure the time and expense of passage, could be prohibitive to trade. See also [[Immigration]].

==== Rule of law and regulations ====

Although in [[David Ricardo]]'s time economists regarded the regulatory powers of the state as being more destructive than beneficial, the economic shocks of the later nineteenth century, the early twentieth century and the [[Great Depression]] produced a strain of economists led by [[John Maynard Keynes]] who criticized [[laissez-faire]] capitalism as itself destructive. After the [[second world war|war]] these [[Keynesian]]s assisted the state in the development of regulatory institutions that limited the excesses and mitigated the failures of the free market and which were intended to sustain free trade through regulation. The later twentieth century saw the development of [[Neoclassical economics|new economic theories]] that criticized the stress on regulatory institutions, though it is an uncommon opinion even among modern neoclassical economists to wholly regard all such regulatory functions of state as damaging to the economy.

These regulatory institutions, and indeed the rule of law itself, are costs to the development of industries. Although a number of laws - the protection of [[property rights]], for instance - are strongly beneficial to corporations interested in the development of an industry in a foreign country, many other laws, regulatory laws in particular, can produce [[litigation]] risks or greatly increase the cost of operating in that country. Environmental regulations, labor laws, minimum wages, safety regulations, and (arguably) basic human rights can effectively increase the cost of operating in a country. As a result, these regulations often lead to a competitive disadvantage in the world economy for countries implementing those laws.

Similar arguments can be made for tax laws; corporations can evade high taxes by moving operations to countries with lax tax structures. In countries where the integrity of the state is weak, there can be an incentive for corporations to subvert governments through corrupt means and further undermine the rule of law in those countries in their favor. Accounting, banking, and investment regulations can take a similar direction; countries very interested in attracting investment may make their financial institutions more lax for short term political benefits. Some economists, such as [[Frederic Mishkin]], point to this as an underlying cause of the [[Asian financial crisis]] of [[1997]]-[[1998]].

Many developing countries have not developed the financial institutions that developed countries rely on for the efficient functioning of their economies. The financial institutions that do exist in developing countries are often designed for economies with a strong role built for the state, and often with a great deal of corruption already existing. The influx of large amounts of investment capital from developed countries can put a considerable strain on financial institutions as they cope with enlarging their regulatory role, separating it from old state functions. The capital influx creates lucrative opportunities for corruption, especially within the regulating institutions. The development of these institutions runs a difficult course with investors who are interested both in the rule of law as it improves investment opportunities, and also in limiting their risk as investors. The development of these institutions can be a low priority for a poor county, which must bear the cost of modifying its business code, essentially for the benefit of foreign [[capitalists]].

Free trade, then, creates an economic incentive for a [[race to the bottom]] in regulatory institutions; countries with lax, lenient, non-enforced, or selectively enforced ''regulatory'' legal structures will have a competitive advantage in attracting investment to their countries, and not merely in wages. From the [[capitalist]]'s point of view, an ideal legal environment would have these features:
# Weak or un-enforced labour and environmental protection laws.
# Low or uncollected taxes.
# Strong legal protection for property rights.
# Changes to the legal code should be few and predictable, allowing business planning. The government should not be likely to override the rule of law, or impose [[exchange control]]s.
The difficulty that modern capital finds in meeting all of these conditions is that (1) and (2) are correlated with an immature legal system, but (3) and (4) are correlated with the division of powers, and long-standing legal institutions. As Russian [[oligarchs]] and early foreign direct investors in [[China]] discovered, the ability of an enterprise to make money is no guarantee that its profits can be retained. Some have argued that firms actually encourage (or at least prefer) the [[rule of law]], judging that, on balance, it is "good for business". If so, the "Race to the bottom" may become a "Race to the middle" in legal enforcement, assisted by mobile capital, in order to create the optimum legal conditions for investment (balancing legal protections for labour and capital).

In theory, globally harmonized regulations regarding wages, the environment, safety, human rights, and other areas of economic control, would also prevent a "race to the bottom." Although globally harmonized regulations appear to be far off, there have been a number of moves toward regional agreements about these sorts of institutions. However, assumed in the "race to the bottom" argument is that greater labor and evironmental regulation yield greater benefits, and are inherently good, contentious points. The stagnation of western European countries, France and Germany particularly, who enforce strong labor and environmental regulations, suggests otherwise.

==== The financial consequences of mobile capital ====
The diversity of legal systems the world over and the limited degree to which those bureaucracies coordinate their regulatory and tax-collecting efforts can create loopholes to the benefit of corporations and private individuals, who can seek out havens from regulation and tax collection, even if they obey the letter of the law.

The freedom of capital to move outside the purview of a single authority has other harmful effects, even where it is not invested in the real economy. The following are common [[abuse]]s of the free trade in capital:
* [[Tax avoidance]] (legal)
* [[Money laundering]] (illegal)
* Obfuscation of [[corporation|corporate]] [[accounts]] (possibly legal)

One of the chief concerns among modern economists and financiers is to develop methods of harmonizing international regulatory institutions, in particular accounting practices, to improve transparency in world financial markets and reduce the risk experienced by investors.

A purported, salient benefit of increasingly mobile capital, however, is the competition on tax rates, where countries compete to house companies. Lower tax rates offer a competitive advantage to businesses. This has resulted in calls from some countries, particularly France and Germany, to "harmonize" tax rates, to maintain their high tax system, so that competition therein is impossible.

==== Stability ====

Free trade implies specialized industries and economic change. Economic changes can lead to strains and considerable changes to traditional economic and political systems. Social changes that Europe passed through over centuries - urbanization, development of national infrastructure, development of property rights, secular and national government, centralized administration, the development of financial sectors, and regulatory systems - can happen quickly in an economy exposed to free trade and capital flows.

[[Offshore outsourcing]] and an increase of temporary visa workers resulted in a drop in the demand for computer programmers in the US.

Free trade and capital flows can conflict with existing systems. Western financial institutions which are based on lending is an affront to some traditionalists. The imposition of property rights , such as in tribal areas where property is held communally or where they existed in a primitive sense, poses considerable difficulties for governments. That question can arouse concerns of justice, equity, class, and ethnic strife between groups that feel victimized by history. Property rights in developing countries and their implications for free trade has been raised by the Peruvian economist [[Hernando de Soto (economist)|Hernando de Soto]].

Free trade can be profoundly redistributive, forcing thousands if not millions to change professions as trade competes their former ones out. In the United States and in many developed countries there are systems of [[trade adjustment assistance]] that help to smooth the transition for workers and industries from a pre-globalized economy to an economy transformed by free trade. In countries without those resources, a sense of victimization can rise in laborers displaced by trade that can contribute to a loss of confidence in national policy. Even with trade adjustment assistance in the United States, some of the most outspoken resistance to free trade, in particular to the [[North American Free Trade Agreement]], came from labor unions. Even with assistance to smooth a transition between economic structures, there can be resistance to change in the character of an industry for economic and social reasons.

Free trade can change relationships between classes, interest groups, and economic interests. Balances between groups in society - a disproportionate share of power for an industry or group - can be undermined by free trade.

Changes to the national economy can undermine developing countries. Critics of free trade sometimes point to the fall of the Suharto government in Indonesia in the wake of the Asian financial crisis on sociopolitical stability.

Traditionally only the total value of goods and services are used to calculate the best economic model. However, opponents of free trade feel that change rates should also be a factor. Thus, instability and displacement risks of a given approach are factored. Here is an example:

Value of
Goods and Disruption
Services Pace

Approach A: 40 25

Approach B: 30 10

Approach C: 20 3

Traditional economics would favor approach A because it produces the most total goods and services. However, skeptics of full free trade would point out that approach A has a large disruption pace associated with it, and so approach B and perhaps C should be considered because of the stability they provide. Generally there will be some tradeoff between total wealth (goods and services) and stability such that both cannot be maximized at the same time.


== Alternatives to free trade ==
== Alternatives to free trade ==

Revision as of 20:19, 16 December 2005

Free trade is the untaxed flow of goods and services between countries, and is a name given to economic policies and parties supporting increases in such trade.

Free trade is a concept in economics and government that refers to:

The relative costs, benefits and beneficiaries of free trade are debated by academics, economists, governments and interest groups. Aspects of the ongoing debate are addressed below.

Wider meaning of “free trade”

Depending on the specific context, use of the term free trade can signify one or more of the above conditions. However, it is fundamentally only governments that can restrict trade: They have the legal monopoly over the use of physical force in a geographical area.

The term free trade has become very politically based, and it is not uncommon for so-called "free trade agreements" to impose additional trade restrictions. Such restrictions on trade are often due to domestic political pressure by powerful corporate, environmental or labor interest groups seeking special protections of their perceived interests.

Free trade agreements are a key element of customs unions and free trade areas. The details and differences of these agreements are covered in their respective articles.

History of free trade

Main article: History of free trade

All developed countries have used protectionism until they gained sufficient wealth to guarantee that they would benefit from free trade. As economist Dani Rodrik notes, "the only systematic relationship [between tariffs and economic growth] is that countries dismantle trade restrictions as they get richer." [1] From the 1700s to the mid-1800s, Britain used industrial policies similar to those later used by Japan and South Korea. Once Britain had secured economic leadership, they began to support free trade. Criticising the British position, President Ulysses S. Grant retorted that "within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade". [2]

Intellectual property and free trade

Historically, the free trade movement was skeptical and even hostile to the notion of intellectual property, regarded it as monopolistic and harmful to a free, competitive economy. Indeed, during the late 19th century, free trade advocates succeeded in reducing the length of the patents available in many European countries. The Netherlands even abolished its patent system (temporarily, as it turned out).

The 19th century anti-patent cause failed largely because the recession of 1874 weakened the free trade movement of the time [3] (and also because patent advocates used a public relations campaign which was remarkably sophisticated for its time).

It is thus remarkable (some would even say ironic) that corporations lobbying for expanded intellectual property rights have succeeded in including TRIPS, a very strong treaty on intellectual property rights, as a membership requirement for the World Trade Organization, the international organization dedicated to furthering the cause of free trade.

Free trade controversy

Main article: Free trade controversy.

Many arguments are used in favour or to oppose free trade. These arguments can be divided in economic, moral and sociopolitical arguments.

Alternatives to free trade

Tobin Tax

Main article: Tobin Tax.

A Tobin tax is the suggested tax on all trade of currency across borders. This is supposed to put a penalty on short-term speculation in currencies

Fair trade

Main article: Fair trade.

The fair trade movement, also known as the trade justice movement, promotes international labour, environment and social standards for the production of traded goods and services. The movement focuses in particular on exports from the Third and Second Worlds to the First World.

Balanced trade

See also: Balanced Trade.

Balanced trade is an alternative economic model to free trade. Under balanced trade nations are required to provide a fairly even reciprocal trade pattern; they cannot run large trade deficits. If deficits appear, the surplus nation must find a way to balance out trade or risk sanctions, fees, or quotas.

International barter

Some nations have prohibited trade under monetary terms of trade. For example, Hjalmar Schacht arranged barter for Nazi Germany to bypass the free market which he thought was rigged by Anglo-American capitalists. [4] The former Soviet Union occasionally arranged bilateral barter within its sphere of influence. See Comprehensive Program for Socialist Economic Integration or Comecon. Arab League nations have also occasionally replaced monetary trade with barter.

Increase the credit risk to international loans

George Soros and others argue that some of the most destructive free trade, such as developing world agricultural monoculture, is driven by export-oriented production targets set by the IMF and the governments it supports. He suggests that the volume of this trade would be lower if the lending banks were liable for credit default instead of receiving IMF bail-outs. If banks were responsible for default, the levels of lending would be lower and lead to more sustainable export programs due to the discipline of the free market, he believes.

International price floors

Some argue that free trade is responsible for the decline in international commodity prices. One reason for these low prices is the over-production of subsidized commodities in the developed world. Rather than removing the production subsidy for farmers in the rich world some suggest extending them to farmers in the developing world. For instance, producers in Poland lobbied to be included in the Common Agriculture Policy. The reason that rich-country farmers need subsidies to thrive is the comparative advantage of cheap land and labour enjoyed by their poor-country competitors. If the world commodity price floor is set high enough to sustain first-world melon farming it will be high enough to stimulate over-production in developing nations. test

Separating world prices from domestic prices

Foreign trade of Communist Czechoslovakia was conducted at "free trade" import prices, with the Ministry of Foreign Trade selling the goods on, into the internal market, at pre-determined prices for each good. In this way, Czechoslovakian consumers were insulated from shifts in world prices whilst having some access to foreign products.

It is difficult for governments to sustain different internal prices over the long term. If the internal price is set below world prices, smugglers try to profit from the differential by illegally exporting the product to nations where they can sell it at a higher price. To the extent smugglers succeed, the domestic government is indirectly subsidizing foreign consumers. This problem has been vividly illustrated in nations where fuel prices are subsidized below world prices; domestic shortages frequently occur as a significant portion of the good is illegally smuggled out of the country. Rationing and black markets are stimulated by artificially low prices; in Iraq the famously long petrol pump queues for petrol at 50 dinars/litre can be bypassed by buying on the black market at 250 dinars/litre. Unofficial markets are a common problem wherever the "official" price is below (or above) the free trade price. [5]

Despite the difficulties of maintaining fixed commodity prices many Governments that attempt it claim that doing so "immunizes" their economies against destabilizing price shocks. It is sometimes argued that the social and economic benefits alone, outweigh the disadvantages (of import-price stability).

Regional trading blocs

James Goldsmith advocated free trade within regional trading blocs, but not between blocs (such as EC countries). If countries within the "customs union" had similar living standards and norms of social and environmental policy they would not race to the bottom. He also proposed protectionism in the goods market, whilst allowing free trade in technology and capital.

See also

Footnotes

  1. ^ See page 22 of “The Global Governance of Trade As If Development Really Mattered.”
  2. ^ See “Globalization and the Myth of Free Trade.”
  3. ^ Fritz Machlup & Edith Penrose, "The Patent Controversy in the 19th Century", Journal of Economic History, 10 (1) pp. 1-29, 1950.
  4. ^ Emphasis added to Cobden's quotation of the petition, in a free-trade speech delivered in 1846, the full text of which is available at “Free Trade With All Nations.”
  5. See “Economic Freedom and Per Capita Income.”
  6. ^ Quotation from page 103 of James Goldsmith's The Trap, 1994, Macmillan ISBN 0333642244 (summarized in Art Hilgart' review). Goldsmith had a background in corporate takeovers, but breaking up conglomerates within nations would still be permissible in his model, so long as no part of the conglomerate exported outside its area of production. His concern for the harm done to rural societies by the effects of free trade is summarized on page 103 with the sentence: "The cost of such social breakdown can never be measured. The damage is too fundamental."
  7. ^ Officially, the 1933 bilateral-barter policy was designed to ensure that foreign countries bought as much from industrial Germany as she bought from them. However, Milton Friedman has argued ([6]) that Hjalmar Schacht's exchange controls were primarily designed to restrict capital flight.
  8. ^ See The Economist’s review of fuel subsidy's effects The Economist online.
  9. ^ In “Free Trade Under Attack: What America Can Do,” Professor Murray Weidenbaum argued that “Tight-knit special interests are manipulating the political system for greater protectionism, while the more diffused citizen interest suffers.” This article (from 1984) echoes the claim of earlier trade theorists (back to Adam Smith) that protectionism is largely a result of a political failure, but comes from a former Chairman of the Council of Economic Advisers to U.S. President Ronald Reagan, who witnessed the process in 1980s government, and wrote: “[P]leas for protectionism reflect the ability of relatively small but influential groups to convince legislatures to adopt policies that benefit them, albeit at the expense of citizens at large. The balance of power is extremely uneven, given the limited knowledge that consumers currently have about these matters.” This call for free trade argues that the consumer interest is divided, but assumes that the public would be homogeneously in favour of free trade if better educated; this is controversial and not all consumers currently support free trade.

In favor of free trade

Opposed to free trade

Articles and papers

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