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Arguments for Free Trade

Guest post by: Arfan Ul Haq

Article Overview: In theory, international trade increases world efficiency by specialization in production and exchange according to comparative advantage, given certain assumptions. In other words, a country that engages in international trade enjoys the benefits in terms of both immediate improvements in standards of living and economic growth.

Arguments for Free Trade

In theory, international trade increases world efficiency by specialization in production and exchange according to comparative advantage, given certain assumptions. In other words, a country that engages in international trade enjoys the benefits in terms of both immediate improvements in standards of living and economic growth. The standard of living that can be obtained exceeds that which would be available to a competitive economy which operates without trade (autarky). In addition, there may he political and economic benefits, in that as countries become more economically independent, they are less likely to undertake hostile actions. Nevertheless, countries still apply a variety of measures aimed at controlling the amount of free trade. Why then do countries ignore the obvious benefits of free trade policies?

In developed industrial economies, arguments for intervention in free trade include the following:

(i) The danger of over-specialization in a narrow range of products that follows from comparative advantage.

(ii) The preservation or encouragement of traditional industries.

(iii) Strategic reasons, e.g. defense.

(iv) The protection of special interest groups such as agricultural sectors.

(v) The protection of an infant industry.

(vi) The improvement of the terms of trade.

(vii) A countermeasure against dumping.

(viii) Revenue reasons.

(ix) Strategic trade policy.

(x) Gaining externalities.

In monetary terms the costs of protection are not always obvious. In the case of argument (ii) above, in the United States for example, the cost of protecting each job in the textile industry has been calculated to be roughly four times the average wage of a textile employee. In the case of argument (v), the automobile industry in Korea., the production of commuter airplanes in Brazil, and the EU's protection of its video and compact disc markets, can be termed as successes in the protection of 'infant industries'. Such successes are rare and failure is all too common. Moreover the "infant industry" argument as a form of protection has a number of problems:

(i) The main beneficiaries of the import-substitution (infant industry) process in developing countries have been foreign firms which were able to locale behind tariff walls.

(ii) Often the process of attracting firms has involved heavy government-subsidized importation of capital goods and intermediate products by foreign and domestic companies. In response to this problem the developed countries, and the KU in particular, have specified local content factors, forcing many foreign firms to use a high proportion of domestic intermediate products in the production of a foreign firm's final product. Without such conditions foreign companies may simply be 'screwdriver operations', importing the majority of their parts from abroad and merely-putting them together in the country.

(iii) Many industries do not grow up and are content to hide behind protective tariffs with governments loathe to reduce tariffs.

Countries therefore face a dichotomy. On the one hand free trade maximizes efficiency, economic welfare, and provides the possibility of economies of scale. Whilst on the other, some level of protection may be 'rational'. Furthermore, that which is economic fact may not be-politically expedient, for example, the impact of the liberalization of trade may not affect all parties equally. Consumers may benefit from a $2 to $3 reduction in prices but this may result in the loss of an entire industry.

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