The Arguments for and against Free Trade

The effects of free trade can be determined by comparing the domestic price without trade to the world price. A low domestic price indicates that the country has a comparative advantage in producing the good and that the country will become an exporter. A high domestic price indicates that the rest of the world has a comparative advantage in producing the good and that the country will become an importer.

When a country allows trade and becomes an exporter of a good, producers of the good are better off, and consumers of the good are worse off. When a country allows trade and becomes an importer of a good, consumers are better off, and producers are worse off. In both cases, the gains from trade exceed the losses.

The other economic benefits of trade are:

Increased variety of goods: Goods produced in different countries are not exactly the same. Free trade gives consumers in all countries greater variety from which to choose.

Lower costs through economic of scale: Some goods can be produced at low cost only if they are produced in large quantities – a phenomenon called economies of scale. A form in a small country cannot take full advantage of economies of scale if it can sell only in a small domestic market. Free trade gives firms access to larger world markets and allows them to realize economies of scale more fully.

Increased competition: A company shielded from foreign competitors is more likely to have market power, which in turn gives it ability to raise prices above competitive levels. This is the type of market failure. Opening up trade fosters competition and gives the invisible hand a better chance to work its magic.

Enhanced flow of ideas: The transfer of technological advances around the world is often thought to be linked to international trade in the goods that embody those advances.

There are various arguments for restricting trade: They are as follows:

– to protect strategic industries – notably agricultural – without which the country would be in danger if there was a war.

– to make imports more expensive than home-produced substitutes, and thereby reduce a balance of payment deficit;

– as a protection against dumping (the selling of goods abroad at below cost price in order to destroy or weaken competitors or to earn foreign currency to pay for necessary imports);

– to retaliate against restrictions imposed by other countries;

– to protect ‘infant industries’ until they are large enough to achieve economies of scale and strong enough to compete internationally.

Economists and the general public often disagree about free trade. In 1933, for example, the United States faced the question of whether to ratify the North American Free Trade Agreement, which reduced trade restrictions among the United States, Canada, and Mexico. Opinion polls showed the general public in the United States about every split on the issue, and the agreement passed in Congress by only a narrow margin. Opponents viewed free trade as a threat to job security and the American standard of living. By contrast, economists overwhelmingly supported the agreement. They viewed free trade as a way of allocating production efficiently and raising living standards in all three countries.

To better understand economists’ view of trade, let’s suppose that the imaginary country of Isoland ignores the advice of its economics team and decides not to allow free trade in steel. The country remains in the equilibrium without international trade.

Then, one day, some Isolandian inventor discovers a new way to make steel at very low cost. The process is quite mysterious, however, and the inventor insists on keeping it a secret. What is odd is that the inventor doesn’t need any workers or iron to make steel. The only input he requires is wheat.

The inventor is hailed as genius. Because steel is used in so many products, the invention lowers the cost of many goods and allows all Isolandians to enjoy a higher standard of living. Workers who had previously produced steel do suffer when their factories close, but eventually they find work in other industries. Some become farmers and grow the wheat that the inventor turns into steel. Others enter new industries that emerge as a result of higher Isolandian living standards. Everyone understands that the displacement of these workers is an inevitable part of progress.

After several years, a newspaper reporter decides to investigate this mysterious new steel process. She sneaks into inventor’s factory and learns that the inventor is a fraud. The inventor has not been making steel at all. Instead, he has been smuggling wheat abroad in exchange for steel from other countries. The only thing that the inventor has discovered was the gains from international trade.

When the truth is revealed, the government shuts down the inventor’s operation. The price of steel rises, and workers return to jobs to steel factories. Living standards in Isoland fall back to their former levels. The inventor is jailed and held up top public ridicule. After all, he was no inventor. He was just an economist.

Text 3

As you read the passage, focus on the WTO origine and its functions.

The WTO

During the worldwide depression of the 1930s, when one nation raised its tariffs to protect its industries, other nations retaliated by raising their tariffs. In 1947, most of the world’s industrialised nations mutually agreed to end the tariff wars by signing the General Agreement on Tariffs and Trade (GATT). The GeneralAgreement on Tariffs and Trade, an internationally organization set up in 1947, had the objectives of encouraging international trade, of making tariffs the only form of protectionism, and of reducing these as much as possible. The most favoured nation clause of the GATT agreementspecified that countries could not have favoured trading patterns, but had to grant equally favourable conditions to all trading partners. The final GATT agreement – including services, copyright, and investment, as well as trade in goods – was signed in Marrakech in 1994, and the organization was superseded by the World Trade Organization (WTO).

It took nearly 50 years to arrive at the final GATT agreement because until the 1980s, most developing countries opposed free trade. They wanted to industrialize in order to counteract what they rightly saw as an inevitable fall in commodity prices. They practised import substitution (producing and protecting goods that cost more than those made abroad), and imposed high tariff barriers to protect their infant industries.

Nowadays the WTO has more than 130 members, with membership conditional on countries following trade policies of a broadly free-trading nature. The WTO is staffed by an international team of trade specialists. It can influence international trade discussions, almost always in a free-trade direction, although on controversial issues member governments are likely to dig in their heels before making any compromises or deals. In the umpiring role, the WTO Dispute Settlement Body can intervene when one country accuses another of breaking agreed WTO rules. It normally does this by initiating some sort of protectionist measure. Like the GATT the WTO provides a forum for multilateral trade negotiations; conducts reviews of member country trade policies; and cooperates with the World Bank and the International Monetary Fund (IMF) in an attempt to achieve greater coherence in global economic policy making.

Ex. 1.Complete the paragraph, use the following terms:

The WTO was set up in 1995 to encourage free trade in the global market place. It is therefore designed to resist … . No new barriers to trade can be set up, and governments cannot set new … or … or increase ones that already exist as there are really taxes that prevent … . Similarly the WTO opposes the use of … since these limit the amount of … coming into a country. This may protect a country’s industry in the short term, but if its trading partners reply with similar measures, then … will suffer. The WTO governs trade in many products and raw materials, but the world of finance is largely outside of its scope, therefore it has no control over … .

Ex. 2. Circle the terms below which encourage the movement of goods across borders, explain your choice.

Favorable exchange rates, customs duties, WTO, tariffs, import quotas, protectionism, free trade agreements.

Ex. 3.Answer the questions about the information in the text.

1. When do most of the world’s industrialised nations mutually agree to end the tariff wars?

a. in 1941;

b. in 1952;

c. in 1947.

2. What objectives did the General Agreement on Tariffs and Trade have?

a. encouraging international trade;

b. making tariffs the only form of protectionism;

c. reducing these as much as possible;

d. all of the above.

3. What did the most favoured nation clause of the GATT agreement specify?

a. that countries could not have favoured trading patterns;

b. countries had to grant equally favourable conditions to all trading partners;

c. both a) and b).

Ex. 4. Dwell on the following issues.

1. What are tariff wars?

2. When was the GATT superseded by the World Trade Organization?

3. What are the functions and the structure of WTO at present?

WRITING

A. Insert the following words in the spaces in the text below.

B.Prepare a written report either defending free trade, or defending the right of the EU to indirectly subsidize Caribbean banana producers on the basis of the text.

The Banana Wars

The progressive reduction of tariff barriers has caused World Trade to increase by several hundred per cent since 1945, and there is no doubt that this has created both work and prosperity. It has also improved products: (1) ………….. the planned economies of the Soviet Union and the Communist block countries created industries that produced nearly as much as Western companies, the products were much less sophisticated, reliable or marketable, (2) …………. they were excluded from competition. Today, most economists argue that nations which try to shelter declining industries behind tariff barriers are simply resisting the inevitable, and that they could use those subsidies to create new jobs in more modern industries. (3) ………….., tariff barriers penalize consumers: the Japanese, (4) …………., pay ten times more for rice than they would if they could buy rice from South East Asia.

(5) …………… for many years, the banana industry had a special status. The European Union allowed former British and French colonies in Africa, the Caribbean and the Pacific islands to export to Europe as many bananas as they wished, at slightly above world prices. Banana production costs are higher in the Caribbean than on American-owned plantations in Latin America, (6) ………… the small size of family-run farms, the difficult terrain, and the climate.

In 1999, (7) ……………., the US-based company Chiquita Brands made a $500,000 donation to the Democratic Party. The very next day, the US government complained to the World Trade Organization about Europe’s banana trade, and put a 100% import tariff on various European goods.

Opponents of the American case pointed out that only 7% of the 2.5 billion tonnes of bananas imported into Europe every year come from the Caribbean. The US’s banana policy only cost American companies abut $200 million a year, (8) ……… trade between the US and the EU is worth about £200 billion.

Half the population of the Caribbean relies on the banana industry to supply their basic needs such as food, shelter and education. Small states such as Dominica depend on banana exports to the EU for around 70 per cent of all export earnings and much of their employment. No other countries in the world have the same degree of dependence on a single product. (9) ……………., if the Caribbean banana industry was taken away without farmers being given enough time to develop other ways of using the land, the counties’ economy would collapse. (10) …………., the results of entirely free trade in bananas could be disastrous.

It could also be pointed out that American, Japanese and European farmers are currently subsidized by billions of dollars every year. (11) ……….., America itself erected massive tariff barriers in the 19^th century. (12) …………., the Americans wanted to end subsidies to Caribbean banana producers, even though the consequences might have included many of the farmers turning to drug production and trafficking, or trying to immigrate illegally to the US.

The ‘banana wars’ ended in July 2001 when the Americans ended their special import taxes on selected European goods after the European Union agreed to import more Latin American bananas from the large US banana companies, while still also buying bananas from their former colonies.

TRANSLATION

A. Translate from English into Russian.

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