Posted by
Trey Mays on Wednesday, June 18, 2008 10:24:35 PM
Prosperity for all through international free trade! When countries agree to have a free and open exchange of goods and services, all participating nations in the exchange benefit from an increase in prosperity. Free trade is two or more nations coming to an agreement to do business with one another with limited economic barriers (regulations and taxes on exports and imports). Ideally, every nation would agree to have open commerce with each other, but there are people and countries that prefer protectionism. Are those people correct, or should America continue to embrace international free trade?
Globalization and competition have been key contributors to countries opening up their markets to free trade. There are risks to this open exchange, but there are also benefits. When countries have increased competition, they have experienced more productivity. What are some ways to open markets around the world to increase productivity? Nations can freely allow businesses to compete with one another across international borders to enhance their output. Increased competition and productivity, through international free trade, is beneficial for America and the world.
Free Trade?
Candido Garcia Molyneux defines free trade as a free market system encompassing the global economy. The United States is freely trading with different countries, such as Israel, Jordan, and Australia. They also freely trade with the North American countries, Canada and Mexico (North American Free Trade Agreement), and a number of the Central American countries including the Dominican Republic (Central American Free Trade Agreement-Dominican Republic).
During this election season, nearly all the Democratic U.S. presidential candidates have criticized existing free trade agreements that the United States has with other countries, and some Republican presidential candidates were open to, yet skeptical about free trade. The North American Free Trade Agreement (NAFTA) has been the most opposed by the Democrats this election season. Steve Chapman, in Reason Online, says that both Democratic candidates have been moving away from NAFTA, even going so far as to say it should be eliminated. Most of the reasons the Democratic candidates cite for opposing free trade are for environmental reasons, labor, and lost jobs overseas. Democrats feel as if they need to put restrictions and mandates on trade for environmental policies to clean the environment, they want to be able to control labor unions, and they have a protectionist tendency about keeping jobs in the United States. The skeptical Republican candidates are primarily concerned with American jobs going overseas. Republicans have always been open to free trade; it has not been until this decade that they too have started to be concerned with keeping jobs in the United States.
Some Republican candidates have adopted a so-called fair trade position. Murray N. Rothbard says that fair trade, or protectionism, can keep Americans from experiencing "high living standards." Rothbard says that with fair trade prices rise, and Americans might not be able to afford higher standard products, but with free trade, they might be able to buy higher standard products for a lower price.
The benefits of free trade are worth the risks. Edwin Feulner, John Hulsman, and Brett Schaefer of The Heritage Foundation say, “The United States and its citizens have overwhelmingly benefited from this policy, which has paved the way for six decades of economic expansion and increased living standards.” Global economic growth has increased both in developed and in developing countries when they have embraced free trade. One of the risks of this free exchange that may affect the United States is that less competitive jobs will be lost to foreign countries. However, the same number, or more, jobs of higher quality and higher pay can be created. The United States is a prime example of this because it has lost some lower income jobs to foreign countries, but has continued to create more high-level income jobs for Americans. Daniel T. Griswold says in “Free Trade Empowers Americans to Better Their Lives,” that open markets benefit Americans because they can buy goods and services at a lower cost, which allows them to buy more affordable food, shoes, and clothing. Americans would be able to keep more of what they earn, and buy more because goods will cost less.
Free trade is the structure that American prosperity is built on. Denise H. Froning in “The Benefits of Free Trade” says that free trade encourages freedom, the rule of law, and strengthens economic growth and development in developing nations. Open commerce encourages freedom by allowing a country’s citizens to freely do business with one another. It encourages the rule of law because there are contracts with conditions that businesses have every reason to obey, which in turn promotes democratic principles and governance. It strengthens economic growth and development by increasing sales, market share, and profit margin after a business takes risks. Free trade also encourages and strengthens personal responsibility and individual freedom by putting people in control of their own lives, and the choices that they make. Buying and selling without restraints spurs innovation and competition, which gives people more choices to choose the superlative products to better their standard of living. International trade and monetary theory specialist Daniella Markheim argues that, “Free trade is about beating poverty and expanding economic opportunity.” Open markets increase competition and stimulate innovation, which creates higher quality products, better paying jobs, and more savings and investment. Ninety-five percent of customers around the world live outside of America; free trade takes America to that marketplace and strengthens her prosperity. There has been a misconception about “free trade” and “fair trade” because free trade is fair trade by allowing nations at different levels of economic growth and development to trade on the international stage with limited control to profit from those differences.
Globalization has been the driving force behind the expansion of international free trade in the 20th and 21st centuries. In a rapidly globalizing world, societies have been coming together. Nayan Chanda says in YaleGlobal Online that the Columbian exchange has been distinguished as a milestone in the account of globalization. The United States has been the biggest supporter of globalization and the connecting world. Paul Masson, in “Globalization: Facts and Figures,” says, “Countries that have embraced openness to the rest of the world have done better than those that have not.” Globalization can lead to extraordinary riches, but there are still citizens stalled in poverty. The more a country develops and opens up its economy to the world, the more likely it will profit most from globalization (Chanda). This happens because embracing globalization and opening up an economy can provide more buyers and sellers with which to trade, which in turn will develop a country.
Competition and Productivity?
Competition and productivity are the two ingredients that can work together in an international free trade system. Competition and trade liberalization balance each other to give the participating countries involved in the open exchange of goods and services a level playing field. Trade liberalization is the result of countries limiting, and eventually eliminating, any barriers to trade. When businesses have the freedom to trade across borders, competition increases, and in turn prices will start to go down. Chris Farrell in BusinessWeek says that when nations compete in the global marketplace, they are pushing corporate efficiency and innovation. This is because competing in the global marketplace creates more awareness, which forces businesses to become more efficient in the way they operate, and with more efficiency, a company can innovate easier. The United States and Hong Kong are good examples of efficiency and innovation because they both work to compete in the global marketplace. The Heritage Foundation and Wall Street Journal’s Index of Economic Freedom ranks Hong Kong at number one, compared with other countries, as the most economically free. Being economically free means a country does not have much government intervention in its economy. Index of Economic Freedom ranks the United States as the fifth freest country. The United States has been the most innovative nation in the world. The cause of this innovation is the aggressive entrepreneurial spirit of the American people. When businesses are efficient and innovate, they start to increase productivity.
There are risks that come with competition, but when used properly, productivity can increase. Brink Lindsey says in “10 Truths About Trade” that the risks with competition are that jobs may go overseas to other countries, but if the United States uses competition to its advantage and increases productivity, it will create more jobs at higher income levels. Americans might lose their jobs to overseas countries, but they will find new higher quality and higher paying jobs because of competition and trade liberalization.
When competition increases, productivity increases because companies can invest in new production methods and technologies. Griswold argues that if Americans can have the freedom to work in their specialized industry, free trade increases the United States’ productivity. For example, the United States’ lower and middle classes are shrinking, while the upper class is growing, as productivity grows. The United States could lose jobs in less competitive industries, but with competition, it will create a greater number of specialized jobs, and will increase its productivity.
Solutions to a Freer World?
There are solutions for America and the world to move toward a freer global economy with one another. Feulner, Hulsman, and Schaefer say there are three conventional paths that the United States uses to encourage trade liberalization around the world: bilateral, regional, and multilateral, which have their strengths and weaknesses. The United States should support all avenues to achieve a pure free trade.
The bilateral free trade agreement is one solution, where there are two participants. The free trade agreements the United States have with Israel, Jordan, and Australia are bilateral. A bilateral free trade agreement has the strength of flexibility and it is a self-paced agreement. In other words, it allows the United States to choose its trading partners, and the slowest partner does not bog them down. Flexibility is also a weakness because it allows countries to leave out whole sectors of the economy. In bilateral free trade agreements sectors, such as agriculture, can be ignored or left out of the agreement. For example, the service sector could be completely free to trade, but the agriculture sector could have government restrictions. Because it is bilateral, it can be a slow process, one country at a time.
The regional free trade agreement, where the nations within a certain region openly exchange with each other, is another solution in use today. The free trade agreements the United States have with the Central American countries, the Dominican Republic, and the North American countries are regional. Regional free trade agreements turn bilateral free trade agreements’ weakness of one-by-one to a strength because it widens the range of expanding markets. Unfortunately, they are dependent on the slowest participant of the negotiations. In other words, more developed countries might be able to commit to the agreement’s requirements faster than less developed countries. Therefore, until the less developed countries are finished making their commitments, the participating nations will not feel the benefits of a pure free trade for a while.
Multilateral free trade agreements, such as the World Trade Organization (WTO), are a large group of nations that try to eliminate tariffs and non-tariff barriers to trade. The Doha Round is the latest trade liberalization negotiation that is going on in the WTO. The Economist in “Deadlocked in Doha,” says that the Doha Deal missed its deadline because of September 11, 2001. Because of the terrorist attacks, dealing with terrorism sidetracked the United States and other countries, and put trade liberalization on hold. This is important because it delayed the elimination of trade barriers around the world. The United States was able to encourage other nations to advance free trade as a means to fight global terrorism. Multilateral free trade agreements are the superlative way to encourage trade liberalization. Even though the WTO has dramatically decreased trade barriers, participation by members in true free trade is not mandatory.
Feulner, Hulsman, and Schaefer also point out that there is another voluntary solution, which would complement the conventional ways. A Global Free Trade Alliance (GFTA) is a solution that The Heritage Foundation developed to make it easier for nations to freely trade with each other. The GFTA would be a perfect complement to existing trade strategies because it would not take much negotiation to join, it would be implemented faster because it would not be subject to congressional approval (only legislative requirements), and each nation involved in the GFTA would still have its sovereignty. The GFTA would also be an incentive-based trade strategy, and it would be an invitation to all countries to join in a pure free trade. The GFTA would be an alliance of the willing, not negotiated agreements. There are only twelve nations that are eligible for membership in the GFTA, including the United States. The U.S. Congress would only have to pass legislation to form the GFTA, and there does not have to be any additional legislation to grant qualifying nations membership. The United States Trade Representative (USTR) just needs to certify to Congress about qualifying nations giving U.S. goods and services clearance to enter its markets. There is no concrete evidence of this solution working yet because the U.S. Congress and President have not proposed it or legislatively formed it.
International free trade is an issue that needs careful thought and consideration. In a world where there is rapid globalization, countries that try to protect themselves and do not open their trade to other countries, may find themselves closed off from the benefits of working together. Though there are risks in trading freely with other nations, the benefits of competition and productivity far outweigh them.