International Trade
scream07
5FREETRADE1.pptx5 FREE TRADE
What is Free Trade?
Free trade is a policy to eliminate discrimination against imports and exports.
Buyers and sellers from different economies may voluntarily trade without a government applying tariffs, quotas, subsidies or prohibitions on goods and services.
Free trade is the opposite of trade protectionism or economic isolationism.
History of Free Trade
The Corn Laws were tariffs and other trade restrictions on imported food and grain ("corn") enforced in Great Britain between 1815 and 1846. ... They were designed to keep grain prices high to favour domestic producers, and represented the British version of mercantilism:
Protect domestic agricultural products producers, even though this meant high prices for consumers, especially low paid urban workers.
The Corn Laws Fight
The Corn Laws, kept prices high. In the process they pushed up the price of bread with devastating consequences for the poor. Hundreds of thousands went hungry. Manchester’s emerging class of merchants and manufacturers — they were known as “the Manchester Men” — were incensed, and not only for humanitarian reasons.
Many of the Manchester Men were self-made and didn’t appreciate the fact that the aristocracy were running the country. People who’d inherited all their land and money.”
The campaign to repeal the laws turned into a totemic struggle with Britain’s ruling class. Factory bosses and their workers, bankers and lawyers, politicians, churchmen and social reformers joined the crusade. But it was not only a battle against what were widely seen as greedy and selfish aristocrats; for the textile tycoons, in particular, it was also a drive toward free trade. They wanted other countries to scrap their tariffs and throw open their markets to British goods.
The case against the Corn Laws proved irresistible. The laws were repealed in 1846. Foreign corn began to pour into Britain. Much of it came eventually from the former colony that supplied the Manchester mills with most of their raw cotton.
America benefited from UK Imports
“America was having a lot of innovations in its farming at the time on the prairies, and what this meant was that for the U.K., huge quantities of grain could be imported relatively inexpensively,”
American grain was significantly cheaper than the stuff that British aristocrat landowners were growing. As they’d feared, the aristocrats’ revenues and power began to shrink, said Will Ashworth, author of a new book about the Industrial Revolution.
“The rapid influx of American prairie grain had a major impact on the social structure of Britain,” he said. “You saw the demise of the landowner and the rise of the British manufacturing class.”
Expansion of Free Trade
The repeal of the Corn Laws did not persuade the rest of the world to immediately follow suit. With the exception of a brief interlude before the outbreak of the Civil War, America, which benefited most from the repeal of the Corn Laws, did not embark on the same program of tariff scrapping.
“We think of America as being the great capitalist power, but in fact America was opposed to free trade right the way through the rest of the 19th century and all the way up to 1945,” said Adrian Wooldridge, political editor of The Economist magazine, which was founded in 1843 as the voice of the anti-Corn Laws crusade.
“Britain was the first country to embrace free trade and to say: The best way to create universal prosperity is to have freedom of commerce and trade. Britain led that in a world where that was disapproved of by practically everyone,” Wooldridge said.
Britain may not have been as high-minded in embracing free trade as it might seem, however. Some historians suggest that the U.K.’s main aim was to exploit its industrial dominance, flood other countries with its manufactured goods, while they focused their energies on agriculture.
How did it work out?
If that was the plan, it has, in the long term, spectacularly backfired:
Britain today has a huge trade deficit
its manufacturing sector is a pale shadow of its former self, and more than half of its food (including grain) comes from abroad.
What Are Free Trade Agreements?
Free trade agreements are treaties that regulate the tariffs, taxes, and duties that countries impose on their imports and exports. The most well-known U.S. regional trade agreement is the North American Free Trade Agreement (NAFTA).
The advantages and disadvantages of free trade agreements affect jobs, business growth, and living standards…
Advantages 1
Six Advantages:
Free trade agreements are designed to increase trade between two countries. Increased international trade has six main advantages:
Increased Economic Growth: The U.S. Trade Representative Office estimates that NAFTA increased U.S. economic growth by 0.5 percent a year.
More Dynamic Business Climate: Often, businesses were protected before the agreement. These local industries risked becoming stagnant and non-competitive on the global market. With the protection removed, they have the motivation to become true global competitors.
Lower Government Spending: Many governments subsidize local industry segments. After the trade agreement removes subsidies, those funds can be put to better use.
Advantages 2
Foreign Direct Investment: Investors will flock to the country. This adds capital to expand local industries and boost domestic businesses. It also brings in U.S. dollars to many formerly isolated countries.
Expertise: Global companies have more expertise than domestic companies to develop local resources. That's especially true in mining, oil drilling, and manufacturing. Free trade agreements allow the global firms access to these business opportunities. When the multinationals partner with local firms to develop the resources, they train them on the best practices. That gives local firms access to these new methods.
Technology Transfer: Local companies also receive access to the latest technologies from their multinational partners. As local economies grow, so do job opportunities. Multi-national companies provide job training to local employees.
Seven Disadvantages
The biggest criticism of free trade agreements is that they are responsible for job outsourcing. There are seven total disadvantages:
Increased Job Outsourcing: Why does that happen? Reducing tariffs on imports allows companies to expand to other countries. Without tariffs, imports from countries with a low cost of living cost less. It makes it difficult for U.S. companies in those same industries to compete, so they may reduce their workforce. Many U.S. manufacturing industries did, in fact, lay off workers as a result of NAFTA. One of the biggest criticisms of NAFTA is that it sent jobs to Mexico.
Disadvantages
Theft of Intellectual Property: Many developing countries don't have laws to protect patents, inventions, and new processes. The laws they do have aren't always strictly enforced. As a result, corporations often have their ideas stolen. They must then compete with lower-priced domestic knock-offs.
Crowd out Domestic Industries: Many emerging markets are traditional economies that rely on farming for most employment. These small family farms can't compete with subsidized agri-businesses in the developed countries. As a result, they lose their farms and must look for work in the cities. This aggravates unemployment, crime, and poverty.
Disadvantages
Poor Working Conditions: Multi-national companies may outsource jobs to emerging market countries without adequate labor protections. As a result, women and children are often subjected to grueling factory jobs in sub-standard conditions.
Degradation of Natural Resources: Emerging market countries often don’t have many environmental protections. Free trade leads to depletion of timber, minerals, and other natural resources. Deforestation and strip-mining reduce their jungles and fields to wastelands.
Destruction of Native Cultures: As development moves into isolated areas, indigenous cultures can be destroyed. Local peoples are uprooted. Many suffer disease and death when their resources are polluted.
Reduced Tax Revenue: Many smaller countries struggle to replace revenue lost from import tariffs and fees.
Conclusion 1
On balance, free trade is better than mercantilism, protectionism or “managed trade” arrangements
However, its benefits are uneven. When markets open up, not everybody wins
Hence the need to “phase in” market liberalization, taking into account specific realities in individual countries, and trying at the same time to calculate how much time certain sectors may need to adjust to the new competition coming from foreign producers who can sell competitive products at lower prices
Conclusion 2
Weak sectors, some of them benefiting from state favors, once exposed to open international competition, may prove to be uncompetitive; that is imports coming into their market without customs duties that increase their prices will wipe them out
In other instances, fragile young sectors may not have the strength to resist massive imports of cheaper goods massively produced in other countries.
Example: Chinese manufactured goods exported into Africa or Latin America simply wiped out domestic producers
