Free trade

Free trade is a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports) or quotas. According to the law of comparative advantage, the policy permits trading partners mutual gains from trade of goods and services.

Economic arguments against free trade

Free trade in raw materials retrogrades development
The argument that a country could get locked into serving the needs of the world market in raw materials, and therefore not develop industrially was first advanced by Friedrich List in 1841, and received empirical support in the 20th century. It was discovered that African and Arab nations rich in natural resources (e.g., diamonds or oil) developed less rapidly than those nations without such 'bounty'. This is also a sociopolitical argument against free trade, because it is said that: 1. The regimes exporting such valuable commodities to the west tended to be autocratic, and remain in unpopular power because of the massive payment streams from exports that flow to the state either because of state control of the means of production or increased tax revenue. 2. The reason that civil wars and violence are correlated with the discovery of mineral wealth in the developing world is the world market for the commodities. This is one area of free trade which has few supporters, and conflict diamonds cannot be openly imported into any country. It was also discovered that developed nations uncovering natural resources could suffer as a result of free trade, and for similar reasons. The massive capital influx to the Netherlands after it started exporting natural gas increased prices in the Dutch disease.

International trade requires more resources to distribute

Delivering food produced on the other side of the world to a supermarket has an environmental impact because it requires the use of fossil fuel in delivery from overseas, as compared to local delivery. In a perfectly efficient market, the costs of the fossil fuel would include the externalities associated with their consumption. Thus the full impact of their transportation costs would be reflected in the market price of the good. In the real world, there are no perfectly efficient markets. Much of the true costs of transporting goods around the world and consuming fossil fuel must be paid in the future dealing with the health and environmental effects of pollution. It is also likely that economic disruptions will be caused by future shortages of fossil fuel energy and spikes in fuel prices since it is a finite resource that is being depleted.

Sheltering young industries may pay off later

New Trade theorists challenge the assumption of diminishing returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries will then allow those sectors to dominate the world market. Less quantitative forms of the infant industry argument against totally free trade have been advanced by trade theorists since at least 1848.

Free trade favors developed nations in certain areas

Some services exported by developed nations are intangibles, such as medicinal formulae, trademarks, software, and entertainment. The value of this intellectual property is derived from legal protection against

unauthorized reproduction. Some advocates of the poor claim that the reason IP-rights are strongly protected in International trade is the power developed nations have to protect the interests of intellectual property owners during trade negotiations. WTO-signatory nations renounce the right to produce generic copies of life-saving drugs, the only affordable treatment in developing nations.

Influence of foreign firms

Within developing countries, the local populace often stages protests against multinational corporations. Protesters insist that once allowed free rein the corporations will use their superior resources and experience to sway the political establishment of a country in favor of excessive concessions (tax holidays, underpaying for property, etc.) and try to influence the political system to fulfill corporate interests, which may or may not be shared by the citizenry. The concessions sought by these multinational corporations in turn collide with the free trade idea that subsidies should not be used to prop up corporationsin other words, subsidizing local corporations invites accusations of Protectionism by free trade proponents, while concessions to foreign corporations are portrayed as mere rational incentives.

Free trade benefits only the wealthy within countries

Some (like Friedrich List) argue the following: The wealthy own more capital, which increases in value as companies are able to produce at the lowest cost in the world. As the world's markets merge into a single global market the number of market-leading companies worldwide drops, with takeovers of smaller local corporations by larger multinational corporations. This process concentrates wealth in fewer corporations. Free trade replaces low-skilled jobs often done by the poor more easily than high-skilled jobs. This implication of the Stolper-Samuelson theorem is challenged on the basis that technology makes offshoring high value-added work feasible and more profitable than moving low-skilled jobs.

Free trade increases offshoring

Free trade allows companies the possibility of "outsourcing" the production of goods for domestic sale. Environmental and labor standards imposed upon these companies can be less in foreign production. Labor and environmental advocates argue that free trade thereby creates conditions that allow companies to circumvent domestic regulations by producing elsewhere. As free trade increases, the balance of power shifts in favour of companies and away from governments. This is considered to pose a threat to democratic self-determination by anti-globalizers and authoritarian control by totalitarian states. It has also been argued that free trade hurts developed nations because it causes jobs from those nations to move to other countries, and accelerates the "race to the bottom". As well as reducing rich-country GDP through lost jobs, competitive pressures will undermine democracy by creating pressures to lower wage demands, and protections like environmental and safety standards. The "race to the bottom" is blamed on international competition to attract traded-goods production, which, with Free Trade, can be sited anywhere.

Capital mobility and comparative advantage

Some descriptions of comparative advantage rest on a necessary condition of capital immobility. If financial or labor resources can move between countries, then comparative advantage erodes, and

absolute advantage dominates. For instance, the Heckscher-Ohlin model derives comparative advantage from differing relative abundances of capital and labour between countries. Capital mobility and the competitive drive for the highest return on investment would give all countries identical relative abundances for new investment, eliminating comparative advantage and trade. Other conceptions of comparative advantage are sound in all instances where the factors of production not homogenous between the parties notwithstanding mobility factors. Given the liberalization of capital flows under free trade agreements of the 1990s, the condition of capital immobility no longer holds. David Korten argues that the theory of comparative advantage "is replaced by that of downward levelling". However, capital immobility is only one route to comparative advantage, useful to basic models, but not essential to it. Basic models assuming capital immobility were convenient and not essential to the principle. Although greater capital mobility is likely to reduce comparative advantage, barriers to capital flows are not the only way to derive it. Early qualitative descriptions of the principle were based on the greater ease of producing different commodities in one country than another, and not on capital mobility. The comparative advantage of France over Iceland in wine production is not based on capital immobility. Comparative advantage can be derived from more complicated models including capital mobility (i.e., international borrowing, lending, and labor movement) and often posit movement of capital as analogous to the movement of goods.

Diversification and economic bubbles

It is also suggested that unchecked free trade increases the risk of economic bubbles that may affect entire nations and perhaps the world instead of just individuals. Diversification in personal and corporate investment portfolios is commonly accepted advice to reduce risk; similarly, diversity in economies can also act as a buffer against problems with specific product or product category demand. Some feel free trade will tend to create economies too dependent on narrow specialties, those that are the numeric comparative advantage. When demand for those narrow specialties drops, the adjustment will be much more difficult than if existing diversification was already in place. It is usually much easier to grow an existing specialty than to start one from scratch when changes require it. Diversification of specialties tends to conflict with strict adherence to the theory of comparative advantage.

Sociopolitical arguments against free trade

Free trade undermines cultural diversity
Some French critics argue that food imports competing with French farmers are restricted on the grounds that high food prices are necessary to sustain rural French culture. Throughout the world, forces that many blame on free trade are eroding traditional ways of living and rural cultures. For instance, Sir James Goldsmith attacked free trade for causing the conversion of small-scale agriculture to large-scale agribusiness across the developing world: "The loss of rural employment and migration from the countryside to the cities causes a fundamental and irreversible shift. It has contributed

throughout the world to the destabilization of rural society and to the growth of vast urban concentrations. In the urban slums congregate uprooted individuals whose families have been splintered, whose cultural traditions have been extinguished and who have been reduced to dependence on welfare from the state." Some Canadian nationalists argue that the North American Free Trade Agreementor an extension could harm Canadian culture, due to foreign corporations (magazine publishers, television broadcasters, and satellite providers) challenging Canada's cultural content laws. These laws encourage Canadian content in the media.

Free trade causes excess dislocation and pain

Free trade may cause an employee to seek employment in several fields over his or her lifetime. Once, a farmer could expect to finish his or her life as a farmer, although his or her children might have sought employment in fields outside of agriculture. Now, changes may happen on a sub[ generational level, faster than natural attrition. Coping with these transitions can be difficult, especially for the middle-aged and the elderly due to age itself or age discrimination. A pace of change that matches or exceeds generational cycles may be more palatable to populations. Problems associated with economic adaptation are generally not factored into the calculation of free trade's effects. Welfare economics deals with the issue of the overall benefit to society of changes that harm some and help others. In a utilitarian view, the overall benefit of cheaper goods and services is given equal weight with the concentrated impact of lost jobs. Free trade is generally considered to achieve an overall increase in utility in a society, but it can also create winners and losers. Individuals can be made worse off by an opening of trade but society has a whole should theoretically have more wealth.

Dependency theory
"Free trade" has been accused of being a disguised form of colonialism or imperialism, particularly by proponents of economic nationalism and the school of mercantilism. In the 19th century these largely took the form of attacks on British calls for free trade, seeing these as expansion of the British Empire. Since the 1950s these attacks fall under the rubric of dependency theory.