Question

Are you with free trade or fair trade? Give an example for countries that got worst after free trade

Answer 1

Free trade, enjoying almost unanimous support among economists, has been the subject of severe attacks by politicians around the world. According to the International Monetary Fund's Managing Director, Kristalina Georgieva, the trade conflict between the U.S. and China has taken global trade "to a near-still". And it seems unlikely that governments would listen to economists' advice to knock down foreign trade barriers rather than lift them higher. The point of the protectionist politician is that that tariffs on foreign products shield domestic businesses from unfair trade practices that foreign governments have embraced.

For example U.S. President Donald Trump has accused China of ripping off the U.S. by, inter alia, imposing high tariffs on American goods imported into China, deliberately reducing the yuan's value against the U.S. dollar to promote Chinese exports, and implementing domestic policies that favor local Chinese businesses over American ones. Retaliatory tariffs, it is believed, will help level the playing field and ensure “fair trade”.

Yet the case for free trade does not necessarily rely on the fact that all countries are expected to participate in "fair trade" practices. Trade need not be "equal" for countries to take advantage of it. Indeed, even though other countries fail to do the same, a country that removes all trade barriers on its side will benefit from such trade liberalisation. As economist Paul Krugman wrote, "The free trade case of the economist is basically one-sided: a country serves its own interests by promoting free trade whatever other countries can do." This is because countries which unilaterally remove barriers to trade, such as Hong Kong and Singapore, benefit their consumers, whose living standards are greatly improved by access to foreign goods. By the same token, a country that brings up trade barriers works against its own consumers' interests. If all countries tore down their respective trade barriers, of course, the world would be a richer place, as goods can move around freely. But unilateral free trade, meanwhile, will at least help consumers in countries that want to implement it in full. Nonetheless, tariffs and other barriers to trade are extremely popular among politicians. It can be due to the idea that trade policy has to be measured on the basis of what good it is doing to producers in a country rather than consumers. But, as the economist Claude-Frederic Bastiat remarked, "All economic phenomena, be they good or bad, must be judged by the advantages and disadvantages they bring to the consumer.” Competition between companies is generally considered good because, while it may cause some of them to lose out, it helps customers who can purchase cheaper, better products. And then, when such competition comes from foreign suppliers, it is opposed for no clear economic reason. Some argue that retaliatory tariffs are justified, as foreign governments substantially subsidize domestic producers.

Mr. Trump blamed India and China for abussing the World Trade Organization's "developing country" status to subsidize domestic producers, thus placing American producers at a terrible disadvantage. However, it is foolish to use retaliatory tariffs in a futile effort to shield domestic producers as it prevents American consumers from enjoying the benefits of subsidies provided by foreign government.

The trade deficit is another economic statistic misused to gain support for protectionist trade policies. A trade deficit is seen as a negative thing because it means a country's import value is greater than its export value. But economists like Milton Friedman have questioned the perception that a nation loses resources when it is experiencing a trade deficit. A trade deficit or surplus merely indicates that people in different countries prefer to purchase different things from each other. For example , Americans may prefer Chinese goods over Chinese immovable assets while the Chinese may prefer American financial assets over American goods. This will cause the U.S. to experience a trade deficit with China as it purchases more goods than China sells. And at the same time, it will enjoy a capital surplus as it receives more capital than it sends across to China.  And in no way does a trade deficit represent which side is losing or gaining in a trade. In fact, voluntary trade occurs only within and between countries, because both sides believe that they are gaining from it. Fair trade is often merely an excuse for raising more protectionist barriers to serving special interest groups in the home. If leaders chose free trade over "fair trade" the world would be a richer place.