Free Trade Analysis

Overview

The discussion of the issue of free trade within the historical context of the Corn-Laws debate in Great Britain circa 1845 highlights a contentious issue that has caused debate to rage among governments, politicians and economists for centuries. As early as 1662 Gerard de Malynes suggested to King James that:

"That all the said causes of the decay of Trade in England, are almost all of them

comprised in one, which is the want of money; whereof wee finde the abuse of exchange, to bee the efficient Cause, which maketh us to find out so easie a Remedie, whereby the Kingdome shall enjoy all the three essentiall parts of Traffique under good and Politike Government, which will bee Free Trade effectually or in deed. And this will also bee admirable in the eyes of other

Princes..."

As noted by Milton and Rose Friedman in 1997, it is ironic that this debate still rages in spite of overwhelming acceptance by a large majority of the economic community. They go on to note that tariffs have "generally been the rule" in spite of the general economic thought. "The only major exceptions are nearly a century of free trade in Great Britain after the repeal of the Corn Laws in 1846, thirty years of free trade in Japan after the Meiji Restoration, and free trade in Hong Kong under British rule."

Toward the latter part of the 20th century free trade expanded greatly as evidenced by the formation of the European Union, a number of regional free trade associations in the Asian arena and the formation of NAFTA between Mexico, Canada and the United States. In spite of the fairly rapid growth of free trade as an portion of the global economy, and further in spite of some significant levels of evidence that free trade has had a generally beneficial impact on the economies of countries practicing its principles and of the general population within those countries there is still significant disagreement in many quarters concerning the merits of the free trade philosophy.

The issue has become heated recently in the United States as a result of actions taken by President Bush, who also ironically is a free trade believer. As detailed in Fortune Magazine "President George Bush is a free-trader. So is every last one of his economic advisors. "Certainly the rhetoric has been the strongest of any President since Roosevelt in favor of free trade," says Dartmouth economist and trade expert Douglas Irwin. But now, in one of those delicious ironies that makes American politics so maddeningly interesting (think Nixon goes to China), free-trader George Bush appears to be dragging us back to the protectionist past."

The debate separates most often into two camps with widely different vantage points. Those that view the issue from the macro economic mountain top of the greater good most often come down in the camp of free trade. Those that view the world from the micro economic mountain top of fairness to individual people or businesses, or in some cases industries, often come down into the camp of opposing free trade. In George Bush's situation the split is illustrated with the explanation that "George Bush is not the only political leader on the planet who has to answer to an electorate worried about jobs and suspicious of foreigners. Voters abroad also happen to be, as a rule, particularly suspicious of President Bush--for reasons that have little to do with trade--and they are always alert for signs of American hypocrisy. Put it together, and few of Bush's overseas counterparts see any political capital in cutting him slack on trade."

On a global level there are still many less developed countries (LDC) that practice versions of protectionism as a means of protecting certain parties in their societies. As evidence by the Bush quandary cited above there are also many examples of highly developed countries using protective tariffs or regulations to achieve political or economic goals in specific instances.

The Issues

The Friedmans suggest that there are only three arguments that warrant serious consideration as supportable reasons for limiting free trade. These include national security; protection of infant industries and protection from "beggar-thy-neighbor" practices. They go on to discount each of the three possible rationales as failing on complete examination and come down firmly on the side of free trade in its most global definition.

In more recent discussion the issues surrounding free trade are slightly more complicated than the three rationales discounted by the Friedmans. As noted in an overview from the conservative Center for Trade Policy Studies at the Cato Institute the maor questions can be grouped into the following general categories:

* Does free trade lead to a "race to the bottom" in workers' rights in less developed countries?

* What are the benefits of free trade for the average person?

* Does globalization give companies/countries and incentive to abuse the environment?

* Is free trade a threat to the U.S. manufacturing base?

The "Race to the Bottom"

The race to the bottom proponents argue that ultimate free trade holds the seeds to the destruction of almost all economies because production will inevitable flow to the lowest price producer which will ultimately force competitors to reduce prices thereby igniting a downward spiral of prices and wages to the point where all parties experience a general reduction in economic welfare. The proponents of the race to the bottom theory do not subscribe to the theories of David Ricardo and other free trade economists that suggest there is a relative advantage principle that would allocate production to countries even when the lowest price of production for all goods occur in one country of a trading group.

The race to the bottom theory fails in two key areas. On an evidential basis it does not seem to be supported by the performance of economies that practice relatively free trade principles. On a more fundamental basis the theory fails due to the fact that its principles would be equally applicable to trade within a country and there is no evidence of the projected impact.

Evidentially it has been shown that free trade has generally proved to be beneficial to the overall economic environment of virtually every country that practices free trade on a regular basis. "Any casual survey of the world