Free Trade Essay, Research Paper

The principle of free trade is non-interference, This was written by the English classical economist, Nassau Senior in 1828. It is to suffer every man to employ his industry in the manner which he thinks most advantageous, without a pretence on the part of the legislator to control or direct his operations.

This report aims to explain the meaning of free trade and why such a system is beneficiary to countries that adopt such a policy. In the later part of the report, focus will be given post World War time and the development of free trade policies in Europe and to some extent the United States. In my own opinion, the benefits derived from free trade policies override the drawbacks and this is why concentration will be given to the positive aspects. However, some of the negative points will also be mentioned but will in no way be stressed. My aim is to show that countries that adopt policies of free trade benefit from this, not only in an economical way, but also in terms of keeping peace with other nations.

I have chosen a different approach to the subject in order to show more than just the fundamental facts of the area.

The questions to answer leads as follows, and will constitute the first part of this report.

Why do most economists argue that free trade between two countries benefits both of them? Are there circumstances where this might not be true?

The second part will deal with historical facts that have lead to the implementation of free trade policies in the European countries and the United States.

Introduction

Since the end of the Second World War, we have witnessed a long and remarkably stable peace between the major industrial democratic powers. Even the possibility of armed conflict between the U.S., Britain, France, Germany, and Japan seems so remote as to be not worthy of consideration.

An explanation for the long post-World War Two peace is free trade. Countries/governments tend to adopt policies of militarism or peace depending on which policy option promises to bring the most material benefit. A system of free trade among states maximises possibilities of voluntary exchange and overall wealth creation, creating powerful inducements to peace. The creation of barriers to trade, on the other hand, contributes greatly to inter-country animosity, militarism, and in some cases, war.

Today, many free trade areas exist in the world, and subsequently peace has more or less prevailed in these areas.

Reasons for which economists argue that free trade is beneficiary

Most reputed economists agree on the fact that free trade is beneficiary to all parties involved. There are several reasons for this, of which can be mentioned the following:

+ Free trade promotes peace in the way that it eliminates reasons for military (costly) conquest in order to strengthen domestic economy.

+ By implementing free trade, redundant workforce can be eliminated, thus saving money for firms as well as governments. This, since salaries no longer have to paid to these workers.

+ Free trade allows people and goods to move freely across borders. This enhances both cultural and economic understanding between nations.

+ Free trade means that goods can be produced and distributed in the right place. This meaning that a good that can be produced relatively cheaply in place only needs to be produced there whilst other places/nations can focus on their respective goods. This produces a situation where each country specialises in what it can produce relatively cheaper than others, also called the law of comparative advantage. There is also a law of absolute advantage, meaning that the absolute cost of, say labour, in one country, is cheaper than another in pure monetary terms.

The concept of free trade has existed for a long time, as has the concept of so called restricted or regulated trade. Many ways exist in which to regulate trade and there may be several reasons to do this.

Sometimes a country may introduce heavy duties on imported goods so as to protect their own internal markets. This is referred to as protectionism. Protectionism was very apparent in the years of the industrialisation period in the western world. For example the British Empire forced heavy taxes on their colonies for goods produced and sold in these. However, raw materials were taken from the colonies, then refined into ready products and sold again in the colonies where these goods were taxed. Of course these taxes were collected by the crown and most of them used to enhance industry and infrastructure in the UK, not in the colonial areas.

Today, one can still see protectionism. Many times it takes the form of anti-dumping policies and duties. Anti-dumping policies are often used to prevent near-free goods exported from developing nations to reach the west. Normally, there are heavy duties and taxes on such goods in order to prevent the domestic market and production to survive. If these good would be allowed in without penalty, many people in the country would suddenly find themselves unemployed since the cost of producing the same things is likely to be much higher at home.

Consumers in the west will very often prefer to buy goods produced in their own country if the price difference between domestic and imported products is not too high.

Anti-dumping policies however, are very likely to get exhausting since the country or countries affected by the same will be likely to retaliate with similar measures. Obviously, quarrels of this type between nations will make trade difficult and complex. The likelyhood of trade wars become apparent.

In order to prevent such disputes, many nations, or groups of nations have implemented free trade policies between themselves.

In these free trade zones, goods are allowed to imported/exported without penalty from duties and taxes or other restrictions. Sometimes this concerns all goods, but very often policies regulate the trade of certain goods. Trade in this way, is made easy and often both countries enjoy many benefits from such policies.

Circumstances where free trade might not be beneficiary

There are some drawbacks with free trade. Many of them, however, are argued to be short term negative effects that even out with time. A few are presented below:

+ Sometimes free trade does not promote peace but the opposite. Internal disputes might break out since some domestic industries are forced to shut down because of free trade making these industries redundant.

+ Workforce that has become redundant in their respective industry now has to find new jobs, training etc. Some might not have any required skills for the new economy in the country and therefor fall into long-term unemployment.

+ Due to the increased unemployment, social problems arise and governments have to spend more money on improving the situation for their citizens.

+ Control over goods travelling across borders becomes very hard. Illicit drugs and other substances might gain easier access to markets that were previously closed.

+ Quality control is more difficult since it is easier for products of low quality to enter the country.

As one can see, some negative effects are quite severe, but, as argued earlier, most of these effects will be temporary.

An example might be quality control. It does become harder for authorities to control quality, but, on the other hand, consumers will by themselves chose those products that they find satisfactory. The bad products therefor will automatically disappear from the market.

Unemployment is another example. Workers in one industry might be become redundant. However, in the industry that benefits from the free trade, growth very possibly takes place, creating new job opportunities. The redundant workforce have ample opportunities to find new jobs in the positively affected industries, possibly after receiving some training.

One negative aspect though, the one where illicit drugs easier move and gain foot hold, might not be so easy to tackle. Of course, a country can have checks within its borders, but this would be very frustrating for people and somehow defeats the whole idea of free movement of goods and people.

Development of free trade policies a historical perspective

For centuries, military conquest was perceived to important and desirable as means of acquiring material goods. War chiefs could build mighty empires by plundering other civilisations, enslaving peoples, and acquiring new lands. Even democratic and semi-democratic republics, such as Athens and Rome, would go to war against fellow republics in the hope of acquiring new slaves. Throughout ancient and medieval times, the economic benefits of conquest remained unquestioned. This, however changed in modern times.

Adam Smith, writing in 1776, argued that optimal wealth creation rested not on the conquest and rule of empires but rather on expansion of the international division of labour and the freest possible trade between peoples. Smith argued that human productive capabilities were maximised, when each nation specialised in what it did best and exchanged its products with the rest of the world.

David Hume, arguing against mercantilist conceptions that the pursuit of wealth was a zero-sum game, wrote that it would benefit Britain greatly if the other states of Europe also flourished economically, that there was more to be gained by trading with other wealthy states than with impoverished states. At the time, this was considered a radical doctrine.

The logical implications of these findings were clear: if countries could best fulfil their material needs by peaceful production and trade with other countries, then it was economically bad to hinder or destroy the prosperity of other states by means of militarist policies. As long as the possibility of voluntary exchange existed, conquest was unnecessary, even pointless. Moreover, restrictions on trade hindered productive advances, encouraging old ways of militarism.

It took some time for countries to make the transition from policies of military expansion to trade. European powers continued to pursue imperial adventures in Asia, Africa, and the Middle East in the eighteenth, nineteenth and early twentieth centuries. However, it is important to note that even these imperial policies were directed primarily at areas of the world which were underdeveloped. The empire-building which took place in the underdeveloped world was not merely an act of conquest and plunder, but also a temporary phase of dominion and organisation which aided the future development of free commerce. For as underdeveloped regions became organised and integrated in the global market system, further acts of military coercion became unnecessary and unprofitable.

A good example of this phenomenon was Great Britain s experience with its American colonies. When the American colonists declared independence in 1776, Britain attempted to forcibly regain control over America. Though, as Adam Smith noted, Britain s war against the colonists was economically counterproductive. According to Smith, if Britain let the colonies go, it could still obtain the economic benefits from trade with America, and yet not incur the massive costs of administering and defending them.

Later events would prove Smith correct. Britain lost control of America, but continued to prosper, despite of this loss. After Britain s defeat, America and Britain continued to maintain a mutually enriching trading relationship, while Britain saved on the costs of defending and administering its American colonies.

By the nineteenth century, Britain was at the forefront of the industrial revolution. British foreign policy in the nineteenth century aimed at maintaining a network of free trade and ensuring the continuance of a stable balance of power on the European continent. The long period of peace which resulted from this policy has rightly been celebrated as the era of the “Pax Britannica.” Although the Pax Britannica has been attributed largely to Britain s dominance in naval power, an equally important component of the peace was the set of incentives offered to other states by the free trade system established by the British. By allowing full access to British markets, providing a steady flow of capital to other parts of the world, and by generally upholding international property rights, Britain provided opportunities for other states to develop and increase their wealth by peaceful means.

Implications of World War One and it s aftermath

The decline in British power in the late nineteenth/early twentieth centuries, and the inability of the European balance of power system to accommodate the changes caused by the growth in German power, as well as the decline of the Austrian and Ottoman empires, contributed to the outbreak of the First World War (1914-1918). It must be admitted that this war broke out despite the existence of fairly vigorous international trade flows. Thus, free trade cannot be counted on to prevent war in all cases, particularly when issues of power and nationalist pride are involved.

Nevertheless, the First World War did demonstrate beyond all doubt that there was little to be gained materially from warfare. Both victors and defeated emerged from the war, worse off than before. Moreover, events in the post-war era would prove that free trade is a vital component of a stable and lasting international peace. This fact was overlooked by the statesmen who gathered at the Versailles peace conference to discuss the shape of the post-war world, and the results of this neglect were disastrous for the cause of peace.

In theory, President Woodrow Wilson, the leading statesman at Versailles, was an advocate of free trade policies. One of the platforms in his famous Fourteen Points speech called for a lowering of economic barriers between states. However, at the Versailles peace negotiations, Wilson was hampered by the consideration of other problems he deemed more pressing, and the free trade plank was pushed aside. In fact, Wilson s promise of a generous and enlightened peace for victors and defeated alike, with no damages, was also abandoned. Despite having a new democratic government set up in the closing days of the war (the “Weimar Republic”), Germany was forced in the Versailles Peace Treaty to surrender a good portion of its territory and pay massive reparations to the victors.

The economic irrationality of massive reparations had already been exposed by such thinkers such as Norman Angell and John Maynard Keynes. Echoing the writings of Adam Smith and David Hume, Angell and Keynes argued that prosperity could be obtained not through the impoverishment of other states, but through their flourishing.

Keynes argued that Germany was the vital centre of European post-war recovery, and that massive reparations would only exacerbate the economic disruptions caused by the war. With remarkable preciseness, Keynes noted that economic prosperity was the key to a stable peace in Europe, and that such a goal could be obtained not through the ruin of Germany but through the promotion of general economic recovery, among friends and former enemies alike, based on the cancellation of war debts and the creation of a European free-trade zone. Keynes s advice was rejected by the victors.

Germany, already burdened with substantial war debts, was unable to pay its reparations on schedule. It resorted to printing money as a way out of the crisis, resulting in hyper-inflation, destroying the savings of the middle class and diminishing the supply of working capital in Germany. Even when reparations were subsequently reduced and the German economy began to recover in the mid-1920s, the structural damage done to the German economy and society remained.

The October 1929 stock market crash in the United States gave birth to an economic downturn which quickly became world-wide. The Great Depression affected the United States and Germany most severely, but few countries emerged from the 1930s without some serious economic setbacks. The depression assumed deep, world-wide proportions partly because domestic economic problems in one state tended to affect other states, but also because the structure of the international economy itself was beset with flaws which turned a temporary, if severe, business turndown into a global meltdown.

During the First World War, Europe had acquired massive debts, most of which were owed to the United States. However, as mentioned previously, American statesmen had rejected plans for economic recovery in Europe based on the cancellation of war debts and the formation of a free trade zone. Europe s ability to repay its loans depended on its ability to export goods to the United States, yet, the U.S. had erected tariff barriers to prevent a large flow of imports. It was not merely the U.S. which hampered economic recovery with protectionist policies. The First World War had temporarily disrupted trading patterns throughout Europe, as each country sought to provide for itself during hostilities. The trend toward national autarky was partially reversed after the war ended, but a full transition to free trade was never made. In fact, shortly after the 1929 crash, countries around the world implemented additional trade barriers, worsening the crisis.

Some attempts were made to halt the self-defeating proliferation of trade barriers. In 1931, Germany and Austria announced the formation of a customs union which other countries would be free to join. However, France, fearful of German power, vetoed the proposal, resulting in another decline of confidence and a deepening of the depression.

For Germany, the Great Depression was a final nail in the eye of Weimar democracy. The prospect of shared economic growth based on international co-operation being no longer credible, many Germans turned to the Nazi Party, which promised a revived Germany based on national socialism and militarist expansion. By 1932, the Nazis became the largest party in the German parliament. Shortly thereafter, Adolf Hitler overturned the Weimar Republic and took control over the country.

At approximately the same time that Germany was experiencing its upheavals, Japan was undergoing its own problems of reconciling its material needs with international economic realities. Since the late nineteenth century, Japan had been experimenting with Western political and legal institutions as part of its modernisation campaign. Borrowing from the West, it had adopted a parliamentary political system with multiple political parties and a relatively free press. In 1925, Japan granted voting rights to all males over the age of 25. However, Japan s liberalisation campaign was still struggling with older military and feudal elites, who dominated what was an outwardly democratic form of government. These elites campaigned vociferously for a policy of military expansion as a solution to a growing Japan s need for markets and resources.

A small country with few natural resources and limited fertile land, Japan could not even grow enough food to support its own population, forcing it to import large amounts of rice. These imports had to be paid for by exports. However, other countries tariffs limited Japan s ability to export. Emigration was one possible solution to Japan s exploding population, but this option was cut off by restrictions placed by other countries on Japanese immigrants.

When the Great Depression hit, Japan s export markets shrank. When countries put up additional protectionist barriers in the 1930s as a response to the crisis, Japan faced disaster. As a result, Japanese militarists gained the upper hand politically, and they embarked upon a policy of military expansion in the hope of forcibly capturing markets and building an empire as a permanent solution to Japan s economic problems.

The German and Japanese policies leaded to what we know as World War Two. As we all know, both of these countries were defeated and the end of this second World War led to the growth and greater acceptance of free trade policies.

The building of free trade policies after World War Two

When Germany and Japan were defeated in 1945, American policy makers were careful not to repeat the mistakes of the past in constructing a new post-war order. They believed that free trade and general prosperity were formidable deterrents to war, and hoped to create a new international peace based on a revival of free trade. With the right economic incentives, they felt, the forces of militarism could be kept in check or eradicated altogether.

One component of American policy in the period after World War Two, was the temporary aid program known as the Marshall Plan. Although the Marshall Plan has been viewed by many as proof that government aid is a good way of solving social problems, leading to repeated calls for new “Marshall Plans” for other regions of the world or for the American inner cities, it is important to note that the Marshall Plan was in fact merely a temporary measure designed to cover for particular shortfalls in the economies of the countries devastated by the war. As American policymakers were well aware, in the absence of major reforms in the direction of stable currencies, property rights, free markets, and free trade, post-war economic recovery in Western Europe and Japan would not have been possible, no matter how much aid the U.S. poured into its allies.

In fact, the Marshall Plan was explicitly designed so as to promote a free trade zone in Europe, ending the traditional approach of nationalist autarky and beggar-thy-neighbour policies which resulted in so much harm in the past.

The U.S. pressured the states of Europe to establish a permanent Organisation for European Economic Co-operation (OEEC), in order to distribute Marshall Plan aid, co-ordinate European recovery, and gradually lower trade barriers throughout Western Europe.

In Germany, American occupation officials, with the aid of the German economist Ludwig Erhard, issued a new, stable currency and ended controls on the market in 1948. Almost immediately, the economy began to recover. In fact, across Western Europe economic recovery was swift and dramatic. By 1952, production levels in the region exceeded pre-war levels. In such an environment, extremist parties had little to latch on to. Even as increasing tax rates and economic regulation in later decades hindered Europe s growth and job creation, trade barriers in Europe continued to fall, ensuring that the economic disasters of the 1920s and 1930s were not repeated. As predicted, the unprecedented prosperity made possible by means of peaceful exchange made policies of militarist expansion unattractive.

Japan experienced a recovery as dramatic as Europe s. Although Japan never completely liberalised its economy, nor fully opened its domestic economy to foreign manufactures, it was able to insinuate itself into the free-trade system set up by the U.S. Consequently, Japan finally found a reliable market for its exports and a steady source of raw materials to import. In fact, it is not likely that Japan s export-oriented growth strategy could have succeeded at all if the U.S. was not willing to accept Japanese imports. Free trade made all the difference in confirming pacifist intentions in this small, resource-poor, island nation. Although in recent years, the Japanese economy has faltered, the Japanese are well aware that their economic problems are internal, and require internal reforms rather than external expansion.

It has become popular of late to claim that the long peace between liberal-democracies in this century demonstrates the importance of promoting democracy in other countries. However, such a claim overlooks the large role that a system of free trade plays in promoting general prosperity and thereby providing incentives for peace. When opportunities for voluntary exchange with other productive nations are maximised, there are strong incentives to avoid major military conflict. When trade is restricted or denied, nations will more often resort to militarist policies as a solution to their economic plight. Indeed, free trade plays a significant role in ensuring that liberal democracies do not succumb to militarist movements in the first place.

However, the long post 1945 peace cannot be taken for granted. The temptation to erect barriers to trade continues to exist to this day, and democracies are not immune to this temptation. The desire to retreat from the world into nationalist autarky, to defend one s country from the effects of global competition, or to punish other states by denying them trade, are still powerful impulses in the domestic politics of many nations.

Conclusion

This report shows that free trade is beneficiary for countries. Even though there are drawbacks, it seems as though these can be overcome to a large extent. Moreover, free trade seems to provide a more stable and peaceful environment for countries. No longer do they have to go to war to acquire new economical wealth.

Some proof of this can be seen in post-World War times. Western Europe has had a long period of peace and is moving toward integration. Not only is this evident through the EU, one must not forget the monetary union or, for that matter, WEU which is the military co-operation of the western member states, currently being formed.

Many areas of free trade in the world has seen similar positive effects. The NIC (newly industrialised countries) in south east Asia have developed tremendously, with one reason being their free trade policies.

Hopefully, at one time, free trade will be the slogan of the world, possibly putting an end to many conflicts that still exist. This utopia however, will most probably never see daylight but if it is kept as the goal it might still create many more peaceful co-operations and relations between countries and people.