Question

1. Why do economists think free trade is a good idea? Do political leaders agree? If so, why is trade not fully free? If not, why do political leaders disagree with economists? In your answer, explain the basic idea behind free trade (i.e. why economists think it is a good idea). Then discuss whether – and to what degree – free trade is a reality in the world today.
2. What are the arguments for and against buying domestically made products for workers, consumers, businesses, and the national economy? Knowing the arguments for and against buying domestic goods, would you favor domestic products? If so, why? If not, why not?

Answer 1

In the simplest of terms, free trade is the total absence of government policies restricting the import and export of goods and services. Free trade occurs when it is left to its own devices. This means there is no interference with quotas, tariffs, or other restrictions when completing an agreement. The trade is based on market forces and demands instead of being encouraged through subsidies or restricted through taxation. No discrimination occurs. While economists have long argued that trade among nations is the key to maintaining a healthy global economy, few efforts to actually implement pure free-trade policies have ever succeeded.

In reality, however, governments with generally free-trade policies still impose some measures to control imports and exports. Like the United States, most industrialized nations negotiate “free trade agreements,” or FTAs with other nations which determine the tariffs, duties, and subsidies the countries can impose on their imports and exports. For example, the North American Free Trade Agreement (NAFTA), between the United States, Canada, and Mexico is one of the best-known FTAs. Now common in international trade, FTA’s rarely result in pure, unrestricted free trade.

In 1948, the United States along with more than 100 other countries agreed to the General Agreement on Tariffs and Trade (GATT), a pact that reduced tariffs and other barriers to trade between the signatory countries. In 1995, GATT was replaced by the World Trade Organization (WTO). Today, 164 countries, accounting for 98% of all world trade belong to the WTO.

Despite their participation in FTAs and global trade organizations like the WTO, most governments still impose some protectionist-like trade restrictions such as tariffs and subsidies to protect local employment.

Advantages of Free Trade

• It stimulates economic growth: Even when limited restrictions like tariffs are applied, all countries involved tend to realize greater economic growth. For example, the Office of the US Trade Representative estimates that being a signatory of NAFTA (the North American Free Trade Agreement) increased the United States’ economic growth by 5% annually.
• It helps consumers: Trade restrictions like tariffs and quotas are implemented to protect local businesses and industries. When trade restrictions are removed, consumers tend to see lower prices because more products imported from countries with lower labor costs become available at the local level.
• It increases foreign investment: When not faced with trade restrictions, foreign investors tend to pour money into local businesses helping them expand and compete. In addition, many developing and isolated countries benefit from an influx of money from U.S. investors.
• It encourages technology transfer: In addition to human expertise, domestic businesses gain access to the latest technologies developed by their multinational partners.

Disadvantages of Free Trade

• It causes job loss through outsourcing: Tariffs tend to prevent job outsourcing by keeping product pricing at competitive levels. Free of tariffs, products imported from foreign countries with lower wages cost less. While this may be seemingly good for consumers, it makes it hard for local companies to compete, forcing them to reduce their workforce.
• It allows for poor working conditions: Emerging markets and developing countries do not usually have the same laws in place that guard worker salaries and working conditions. Some markets even allow for children to be hired for heavy labor and factory positions that are sub-standard at best. Because free trade puts a point of emphasis on the lack of restrictions, it can promote poor working conditions that people are forced to endure if they wish to earn a living for their family.
• There are reduced IP protections: Intellectual property rights may not be taken as seriously by foreign governments or competitors as they are domestically. Inventions, patents, and processes may be copied in an environment of free trade and that reduces the potential of a company being able to create good jobs at fair wages.

At present times, no country in the world follows the policy of free trade. Every country imposes some restrictions on the import and the export of goods in the broader interest of the country. Finally, as T. Scitovsky has pointed out, free trade can be shown to be beneficial to the world as a whole but has never been proved to be the best policy for a single country.

Domestically produced goods mean products which are made or grown in our own country. When looking for a manufacturer that will provide you with quality, savings, and a quick turnaround, it’s essential to consider the location of our facility. While many companies are moving overseas in search of cheaper production and labor costs, it often pays to keep your company based right here in the United States. In fact, there are numerous benefits to choosing a manufacturer based in the United States over those found abroad––, especially in the long run. Below, we discuss the main advantages of domestically produced goods:

• More Jobs for Americans   Choosing U.S.-based manufacturing means creating jobs here at home for Americans. Many customers value companies that are rooted in their communities and employ their neighbours and friends, and therefore will choose those products over your competitors for that very reason. By keeping your manufacturing in the United States, we can be sure that we’re supporting the local and national economy and helping American families thrive financially, which in turn further stimulates the economy at all levels. Manufacturing currently provides some of the highest wages in the country for industrial workers. Additionally, it’s not just manufacturing jobs that you’ll help create. In 2013, the American manufacturing industry employed about 12 million people, but it also helped create an additional 17.1 million ancillary jobs as well. U.S. manufacturing helps create jobs not only for the individuals who are manufacturing the components and products, but for those who are selling them, distributing them, and using them in other technologies.
• Reduced Cost for Deliveries & Shorter Lead Times : While locating manufacturing facilities abroad as a means of saving labor and production costs has traditionally been a common practice, the logistics costs involved with shipping products, materials, and/or components halfway around the world have climbed exponentially in recent years. When we choose to keep our manufacturing in the United States, we’ll save significantly on inbound and outbound delivery and shipping costs. Not only does manufacturing in the U.S. save we money on logistics costs, but it also saves valuable time in the production process. When goods have less distance to travel to get to their distributor or intended retailer, they can be delivered more quickly to the customer—accelerating the sales process, enabling more agile forecast responses, and getting money in our pocket sooner. Having a shorter lead time is also a sure fire way to increase customer satisfaction.
• U.S. Manufacturers Pay U.S. Taxes : While offshoring has traditionally been a means to save on taxes, the benefits of reshoring or keeping operations in the United States should not be understated. By keeping manufacturing firm in the United States, taxes will support the community that company and the employees livein in terms of infrastructure, social programs, and more. Keeping manufacturing operations in America strengthens the United States’ economy and keeps our government’s financial system secure.

Disadvantages of domestically produced goods:

The dispute over increased industrial production in the US has several dividing points. Opponents believe that manufacturing in the US will increase prices, force workers to learn a whole new set of skills and decrease the variety of goods offered Labor costs abroad are significantly cheaper than the cost of labor domestically. When we factor this expense into the cost of production, outsourcing production becomes the logical and more cost-effective option. Outside of the cost difference, manufacturers might still choose to manufacture abroad because many laborers in the US are untrained in the skills necessary to efficiently produce mass quantities of goods. Ample qualified workers can be found in nations that specialize in this type of production, such as Mexico and China. As for factories, their quantity in the United States is limited, and many do not specialize in the wide variety of techniques that is necessary to produce your goods.

However in the world of free trade, is very difficult to presume to use entire domestically produced goods. There has to be a path where country would specialize in those products in which it has advantage and import those which require foreign expertise.