Free Trade

This article is about free international trade. For other uses, see Free Zone.

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Imports Exports Tariffs Largest consumer markets Leading trade partners. 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.

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Upper Saddle River, New Jersey Business and economics portal International relations portal. Forms of economic integration. Preferential trading area Free-trade area Economic partnership Passport-free zone Single market. Customs union Monetary union Customs and monetary union Economic and monetary union Complete economic integration. The tariff increases the domestic price to P tariff.

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This has three main effects on societal welfare. Consumers are made worse off because the consumer surplus green region becomes smaller. Producers are better off because the producer surplus yellow region is made larger. The government also has additional tax revenue blue region.

However, the loss to consumers is greater than the gains by producers and the government. The magnitude of this societal loss is shown by the two pink triangles. Removing the tariff and having free trade would be a net gain for society. An almost identical analysis of this tariff from the perspective of a net producing country yields parallel results.

From that country's perspective, the tariff leaves producers worse off and consumers better off, but the net loss to producers is larger than the benefit to consumers there is no tax revenue in this case because the country being analyzed is not collecting the tariff. Under similar analysis, export tariffs, import quotas, and export quotas all yield nearly identical results. Sometimes consumers are better off and producers worse off, and sometimes consumers are worse off and producers are better off, but the imposition of trade restrictions causes a net loss to society because the losses from trade restrictions are larger than the gains from trade restrictions.

Free trade creates winners and losers, but theory and empirical evidence show that the size of the winnings from free trade are larger than the losses. According to mainstream economic 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 economically 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 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 extremely rich with extensive work having been done on the theoretical and empirical effects. Though it creates winners and losers, the broad consensus among economists is that free trade is a large and unambiguous net gain for society.

Quoting Harvard economics professor N. Gregory Mankiw , "Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards.

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Most economists would agree [ citation needed ] that although increasing returns to scale might mean that certain industry could settle in a 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.

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. Adam Smith, for example, 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.

Free trade policies have battled with mercantilist , protectionist , isolationist , communist , 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. After the British Parliament issued the Prohibitory Act , blockading colonial ports, the Continental Congress responded by effectively declaring economic independence, opening American ports to foreign trade on April 6, According to historian John W.

Tyler, "Free trade had been forced on the Americans, like it or not. 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 U. 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.

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.

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Well, they say, 'Buy where you can buy the cheapest'…. Of course, that applies to labor as to everything else.

Free trade

Let me give you a maxim that is a thousand times better than that, and it is the protection maxim: 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. 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. Some degree of protectionism is nevertheless the norm throughout the world. Most developed nations maintain controversial [ citation needed ] agricultural tariffs. 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. 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.

Free-trade area - Wikipedia

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, [42] has concluded free trade agreements with many countries around the world. Most countries in the world are members of the World Trade Organization , [44] which limits in certain ways but does not eliminate tariffs and other trade barriers.

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Free Trade Agreements

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