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Evaluation of The Rationality of Free Trade

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Throughout history, Nixon, the 37th President of the United States, who visited China in 1972, gave the first sign of free trade between two countries; Obama, ex-president of the America stressed that the United States strongly supported free trade, so as Trump claimed. Back to almost five decades ago, when China and the United States established diplomatic relations, the bilateral trade volume was almost zero. Thus the development of the free trade between the two countries can be seen obviously. Also, many Europe countries have been staunched advocates of free trade until now, as they gained and still gaining benefits from it. Whereas, these years Trump continuously raised the tariffs and set quotas restraints, which interfere with the free flow of trade among nations. Besides, the UK is on a way to quit the EU, which gives other countries in the EU a negative sign. Therefore, a question has to be raised. Until now, has free trade been doing more good than harm?

With the question above, this thesis is mainly a study on the analysis of the rationality of the free trade, concerning current politics of the Trade War and Brexit.

Literally, free trade is a policy where governments do not restrict imports or exports in international markets. Buyers and sellers from different economies may voluntarily trade without a government applying tariffs (such as quotas), subsidies or prohibitions on goods and services (but not of capital or labor). Politically, a free-trade policy may be the absence of any trade policies. In other words, a government may not need to take specific action to promote free trade. This hands-off stance is referred to as “laissez-faire trade” or trade liberalization. But it is worth mentioning that, the reality is, the governments with free-trade agreements will never abandon all their control of import and export taxation. The “free trade” does not entirely exist because each country has important interests that possibly could be devastated by absolute free trade. Interests that they try to preserve will be protected through various open or surreptitious restrictions.

According to Blinder (2019), there were two economists who have given the clear reasons against mercantilism, and they went for free trade over 200 years ago. Their names were Adam Smith and David Ricardo, whose arguments have convinced virtually every economist ever since, but as far as it is mentioned that the two economists have only made limited inroads with the broader public at that time. Nowadays, there are already several big free trade areas globally like NAFTA, EU, CAFTA, FTAA, etc. And China has also established strategic partnerships with many countries through free trade areas. Thus it can be seen from this trend that there must be some positive effects which countries find profitable. From the results of the existing free-trade implement, the gains can be seen.

Free trade gives rise to fierce competition, which can improve the quality of enterprise services, promoting them to improve management ability. On the other hand, it is a good chance for industries with comparative advantages in a certain country to specialize, and to realize the economies of scale effectively. The enterprises pay more attention to cost reduction. Through trade, the commodity is diversified as well, which makes consumers given by more alternatives, at a lower price. Also, when service providers fully consider the needs of consumers, they will always trying to improve their service quality by all means, bringing consumers as much convenience as they can. Besides these, with more demand from different countries, more job opportunities are created in export countries.

It is been emphasized by Hur and Park that, the relationship between free trade and economic growth is undoubted. They also referred two economists, Grossman and Helpman, who forecasted that if a system of free trade is shaped in a circumstance of which technology transfer happened between the involved economies, production efficiency can be improved, and free trade can therefore ultimately bring on economic growth among FTA signatory countries.

However, practically, benefits always come with drawbacks, which can be seen as an axiom.

It is been found that the effects of FTAs are little on aggregated growth from the first year to ten year later after being launched, but there is a non-ignorable increasing trend in the gap between the growth rates of per capita GDP within a bilateral FTA. This connotes the uneven FTA effects among countries within an FTA. To some extent, free trade shrinks the product competitiveness of import countries, increasing the unemployment of workers in certain industries (with less comparative advantages). Then it will also influence the social construction and development. Industrial structures singleness is also a potential menace. Studies by Ju, have shown that free trade might make the consumer who spends more money on the exporting goods worse off provides an alternative channel for conflict interests in free trade. A more general result has also been proved by Ju: As long as the share of consumer expenditure is greater than that of average expenditure in the ratio of national output of consumption, the policy of free trade will lead to a rise in relative prices, which would hurt certain group of consumers. 

Talking about the unemployment, people’s complaints get even worse. It made people feel more negative towards international trade in the United States:

A CBS poll in 2016 asked Americans, “Over-all, would you say U.S. trade with other countries creates more jobs for the U.S., loses more jobs for the U,S., or does U.S. trade with other countries have no effect on the U.S. jobs?” About 15 percent of respondents gave what economists would call the right answer: trade has little or no effect on the number of jobs. About seven percent were unsure. Among the others, 29 percent thought trade created jobs and 48 percent thought it destroyed them. And in a poll conducted that same year by Bloomberg, which juxtaposed the costs of restrictions on imports and protecting American jobs, trade restrictions won: 65 percent to 22 percent. It seems that Americans favor trade in the abstract but often not in the concrete. And support fades fast if trade is connected to jobs globalization. Most important, in almost every case, public beliefs about international trade differ enormously from the lessons of Economics 101. So if the case for free trade is so compelling, why have economists failed to sell it?

It is widely said that the trend of de-globalization is coming to pass. Around the globe, in sum total, many developed countries used to pursue protectionism to protect their manufacturing, services and agriculture. When they accumulated enough wealth to ensure that they could benefit from it, they began to pursue free trade policies. But once they found less profitable or they felt infringement of national interests, they gave up the initial way they traded. To prove this point, for instance (as it is listed by Hughes as an example): Japan and South Korea, China’s main Asian trading partners, have joined the chorus of opposition after finding the competitiveness of yen and won shrink by a declining dollar-pegged Yuan. Interestingly, when the Asian financial crisis occurred in 1990s, they were giving the Chinese government many positive comments for keeping the Yuan pegged after its currency was devalued, thereby a financial crisis across the entire Asia could be avoided. As a result, China lost exports in the short term, but they kept the stability of its currency in the long run. By now, stability is still the determining factor in Beijing’s monetary policy. Despite the influences of free trade itself, every decision of countries is made by people, towards what to trade, whom to trade with and whom to blame when things happen. Namely, the root of the problems in free trade is definitely not the matter of whether countries should keep doing it, but that of the way how they do it.

About the reason why U.S. administration feels confident of making a strong case for the resulting need to impose quotas, Commerce Secretary Carlos Gutierrez once claimed that, “free trade must be fair trade, and we will work to ensure that American manufacturers and workers compete on a level playing field.” (Hughes, 2005) These words have to be seen with suspicion, because in different cases, as a developed country, the United States used completely different ways to clarify their meaning about the “free trade”. However, it is worth mentioned that the “fair trade” is a completely different term from “free trade”, which is the practice of buying goods directly from producers in developing countries. Thus it can be seen that almost every country in this world is trying to cater to the own interests, as it’s referred below. Every policy is reasonable if it is considered in the perspective of the concerned party.

Similarly, does Brexit represent that Britain is turning inward? Needless to say, the answer would be “no”. According to Qingjiang Kong, after Britain leaving the EU, developing partnerships through FTA can help smoothing the soar caused by Brexit. The UK has to lessen its dependency on the EU market, and it will be better to try to have a substitute instead of the Single Common Market. It still needs time to see if a China–UK FTA could lower trade costs or not. Whereas, for both two countries, a free trade relationship could exist to fit both of their needs to its utmost. 

To sum up, just as the saying goes, every coin has two sides; every sword is two-edged, which accords with the “utility” of free trade. If it is used correctly, every party in the game will win the game. It is definitely not a zero-sum game, but a game of cooperation and win-win. In addition, free trade is the matter of the profits of each party, not the matter of right or wrong of the policies. It is not fair to say either the Trade War or Brexit is totally wrong, because the parliament is making policy as they think themselves can benefit from it. Each country has policies for their own interests, which results in some multinational conflicts. According to Hughes, in an ever more integrated global community, such clashes will become more frequent. To avoid an all-out trade war, the American eagle and the Chinese dragon must learn to respect differences and look for common ground in resolving disputes.

Free trade is fair with conditions, at the same time that country gives priority to its own interests as it should be, the others’ interests shall not be encroached. Only under this premise, participants can foster strengths and circumvent weaknesses; meanwhile, they can learn from the specialties of each other. With the developing of globalization and free trade, it’s the common tropism to follow the Principle of Comparative Advantage in participating in international division and corporation.

For the enterprises, undoubtedly they should improve their competitiveness to release the negative impact of free trade; the government should also support their innovation with positive policies. Free trade can not only give domestic economy chances but also challenges. In this world of fierce competition, one should remember “survival of fittest”, which is an invariable truth proved in market competition.

References

  • http://www.businessdictionary.com/definition/free-trade.html
  • 2003. Collins English dictionary, London, HarperCollins.
  • BLINDER, A. S. 2019. The free-trade paradox. Foreign Affairs, 98, 119-128.
  • HUGHES, N. C. 2005. A Trade War with China? Foreign Affairs, 84, 94-106.
  • HUR, J. & PARK, C. 2012. Do Free Trade Agreements Increase Economic Growth of the Member Countries? World Development, 40, 1283-1294.
  • JU, J. 2011. Consumer Heterogeneity, Free Trade, and the Welfare Impact of Income Redistribution. Review of International Economics, 19, 288-299.
  • KONG, Q. 2019. Towards a free trade agreement between the United Kingdom and China in the post-Brexit age. Journal of Contemporary European Studies, 27, 281-289.
  • NIANG, A. 2013. The (In)Commodities of Laissez-faire Integration: Trade and Mobility in a Cross-border Market. African Studies, 72, 41-63.

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