# Pros and cons of free trade

1. Apr 1, 2009

### tormund

Free Trade is obviously an important issue in politics around the world. Could anyone give me reasons for or against free trade between the US and Canada(i.e. the pros and cons)? t'would be much appreciated.

thnx

2. Apr 2, 2009

### natugnaro

Hi
I just saw this post, and also have some questions on free trade.
People that I talk to so far are saying that free trade is working perfectly (people are benefiting from it) when it exist between two countries.
But I think there is a catch here.

3. Apr 7, 2009

### ascapoccia

Yeah! a question for the economics major!

First, it must be explained that each economy produces with a constrained resource set. You only have a certain amount of labor, capital, land, and other resources, the productivity of which is determined by the institutions and technology of the economy. For simplicity sake, most economists describe it as a two good model, but the idea can certainly be extended into much higher order variable sets once the basic model is understood. So, then you have the choice between producing goods A and goods B (lets say, wheat and cars. yes, arbitrary, but for illustration). Then, given your set of resources, you have a boundary curve, called the production possibilities frontier. this curve looks kind of like an inverted parabola, centered above the origin. thus, for every increase in production in good A, you have a corresponding decrease in the production of good B. This relationship has decreasing returns, meaning that a change in 1 unit will be less when good A is at 500 then when good A is at 100. the practical reason for this is that resources and technology are not equally efficient in both sectors (example, you can't use a tractor to make cars, unless you first melt down the metal, resmelt it, etc). All this implies that you cannot consume beyond your production possibilities frontier, unless it shifts due to changes in resources or technology. the economy will then produce whereever demand meets this curve, due to the magic of supply and demand (well, not magic. math, but it will take too long to explain all of their properties here). thus, the economy produces at that point, which lies on the production possibilites frontier.

however, if the economy opens its markets, then it can produce more of whatever it is more efficient at, and trade with another country the difference. it works out so that countries are able to not only trade to make up the difference in production, but to consume past the constraints of thier production possibilites frontier (if not, then it would close itself back off from trade). thus, they are able to consume more than they otherwise would be able to if they did not have trade. that is the theory behind trade (well, Ricardian theory. there are many others, but this is the first one taught in most international trade classes).

given the above model, anything that stops or hinders free trade hurts the consumers of an economy, because it reduces the amount of goods it is able to consume. on a whole, it is generally accepted that free trade makes consumers better off. however, it does not always help producers of the inefficient industry, who have to compete with better or more cheaply made goods from abroad. it is up to the governemnt to decide whose benefit they feel is more important, but the gains from trade tend to be greater than the losses of trade. that is only discussing trade in goods. trade in labor and capital is a little more complicated. but people tend to focus on trade in goods when discussing free trade.

using Canada and the US as an example, we can focus on two goods, say icewine and rice. The United States can grow rice using much less resources than Canada can, while Canada has a comparitive advantage in producing ice wine (made from wine grown in colder climates by letting the grapes freeze on the vine). thus, rather than have each state try to produce both of the goods for themselves, the US would focus on rice growing, while Canada would focus on growing grapes for icewine, and the two would trade to thier mutual benefit.

I say US and Canada above, but actually, it is individual producers within the states who make such decisions, based upon market prices, cost of production, etc. rather delicate supply and demand works in the background.

4. Apr 7, 2009

### CRGreathouse

I actually studied US-Canada trade relations as an undergraduate. You can imagine that trade with the United States is vital to Canada, providing a large majority of imports and exports. You may also know that Canada is the largest trading partner of the United States, so the relationship works both ways. The United States could not fill its demand for lumber or car parts (to pick two large examples) without its neighbor to the north. And the United States very literally feeds Canada with its agricultural surplus.

I'm not sure which way you want to go with this thread, though. Are you more interested in exploring when free trade is good or bad, or more interested in looking at the US and Canada?

On the general question of free trade: It's well-known among the educated that free trade under efficient markets is beneficial to consumers in all countries. Thus if consumer welfare is the goal, the determination comes down to an analysis of the inefficiencies that exist in the markets. There are many studies quantifying the net benefit of free trade; the ones I've read have been very favorable to trade, showing relative consumer benefit of +2000% or so. But those are the 'easy' trade cases from the 70s (the "low-hanging fruit"); smaller trade agreements with more complications will naturally yield lower returns.

5. Apr 8, 2009

### natugnaro

If we have free trade in goods but not free movement of labor I think there is a contradiction.

Let's say I work in company A. By working in that company I'm getting money with which I can buy some product of company C (can be product of any other company including A).
To me this is simply: I'm buying product from company A (paying for it with my work).
Because it is the same thing if company A gives me money and I'm buying a product or company A buys a product from C and gives it
to me for my work.
Now I hear about some product of company D and want to buy it (that is work for company D), but D is in other country in
which I cant get work permit.
This means I can not buy product from company D.
Is this violation of free trade ?

6. Apr 8, 2009

### JakeA

Here's some free trade issues:

1. In America it puts domestic businesses at a disadvantage because of environmental, labor, tax, and tort laws which local but not foreign firms need to follow.

2. America doesn't "trade." It actually borrows. Trade implies equilibrium in flow of goods and services.

3. There's an argument for local self-sufficiency and economic independence. The "free trade" types don't like to bring that argument up because they lose control of economies and thus behavior. You can control commerce much easier than you can control isolated individual behavior. Think the US Constitution "commerce clause" and how it's used to usurp local and individual power.

7. Apr 8, 2009

### ascapoccia

to natugnaro:

if you are working for a company, you are selling your labor to that company, who buys it from you with money and other forms of payment. what you do with that money is your own perogative. I don't really understand what you are trying to argue here. if you want to buy a product from a company in another country, you don't have to have a work permit.

but no, labor is not fluid across borders, but we still have trade in goods and services.

to JakeA :
you bring up a good point. there are those who argue for autarky and don't want to trade. however, look at countries that have taken that route: Soviet union and North Korea are the most extreme examples, but there have been others, such as China in the 50's-60's, and several African states in the Cold War era. these are not shining examples of economics, and they were not even always self sufficient (example, korea in the famine of the 1990's).

most sucessful economies have diversified economies, enough to weather if there were to be a compete catastrophe in economics. they would survive if all of thier trade were to dissapear, even if they would be depressed economically. Many are self sufficient in agricultural and other important industries (which, by the way, was not true before the nineteenth century). also, most keep security technologies/production at home :we don't trade nuclear technology, do we?

as for your idea that the US doesn't trade but borrows, I would like to hear more about it.

8. Apr 9, 2009

### natugnaro

I'm saying that not being able to work in some country could have
the same net effect as not allowing someone to buy certain products even though
two countries have free trade of goods and services.

So, no labor fluidity means weird free trade of good and services.

9. Apr 10, 2009

### JakeA

Ascapoccia, by borrowing I mean we run huge trade deficits. I view "trade" as actual exchange of goods and services, not money. In a macro-economic sense, it's important that countries have equilibriums in trade in goods and services. Otherwise, what are we mortgaging when we don't balance out? How will we ever pay back our debt? With inflation? I guess that's the answer.

I personally think America's economy is diverse enough to withstand the problems of protectionism. USSR had a protectionist economy and a soft currency. Their problem was that there were shortages of goods. I guess the question is whether or not the shortages were because of inferior Soviet goods or because people wanted foreign goods because of the novelty. I think maybe a little of both. America will have no problem with shortages based on quality or diversity.

10. Apr 10, 2009

### Danger

'Free Trade' with the US is a joke, and a one-way street.
Just check on what 'free trade' (meaning 'huge levies') is doing to the BC softwood business.

11. Apr 13, 2009

### ascapoccia

JakeA, I see what you are saying now. And I agree with you, we should balance out a little more. But this lack of balancing has less to do with having free trade than with the spending habits of Americans.Also, you must note that whenever a state has a trade surplus, there is, by definition, another state with a trade deficit.

12. Apr 16, 2009

### mheslep

Nice write up ascapoccia.

The term of art in economics is broadly covering trade is 'Comparative Advantage'. The Wiki article is pretty good for a starter.
http://en.wikipedia.org/wiki/Comparative_advantage

13. Apr 16, 2009

### mheslep

While you are at it Danger check out what Canada has done to imports of US corn, etc, etc.

14. Apr 18, 2009

### BWV

What gets lost in this discussion is that trade balances are an emergent property from millions of individual decisions, no country "decides" to produce computer chips and import cars, it evolves over time from the success or failure of businesses and the buying preferences from consumers. The key issue is no one knows what the best mix of local vs. imported goods are. Government attempts at protectionism and trade policy are subject to being hijacked by interest groups such as uncompetitive businesses that want subsidies. For example when Bush placed a tariff on steel, it was motivated by the importance of Pennsyvania and Ohio as swing states in the upcoming election while on a purely economic basis, there were something like 12 jobs in industries that consume steel for every steel production job, so cheap steel would in theory benefit more citizens than it harms.

You also see this with agricultural tariffs, there are a few very wealthy sugar producers in the US and we all pay a much higher price for sugar than if we could simply import it from Brazil or the Caribbean. It costs us individually a few dollars every year, so there is no incentive to fight the tariff, whereas sugar producers have millions to pay for lobbyists. This trade policy fed into the corn ethanol boondoggle, as the obivous solution - importing cane-based ethanol from Brazil was made uneconomic from the tariff and the farm lobby and agribusiness saw an opportunity for ethanol to dramatically increase the price of corn and their profits

15. Apr 18, 2009

### ascapoccia

This is usually why economists tend to emphasize free trade, because if you try to use governement policy to dictate the economy, it becomes hijacked by special interest groups, inefficiency, and the major issue of trying to please everyone. Economists, at least in theory, are not politicians. We tell people what would be best for the economy, then other use that information and make decisions, which are usually not based on our policy recommendations.

But, I still argue that free trade benfits more than it hurts. The study of economics has not been really codified and studied indepth until after the Great Depression. Before that, it was always a part of political science (or political economy). Right after the Great Depression, the governement instituted alot of monetary policies that were based on classical economic thought that were really wrong and deepend the Depression. However, they also shut off international trade and capital flows, with high tarriffs, import restrictions, and laws against capital movements. This deepend, as well as spread, the economic crisis. Today, we are not doing that. There are calls for closing international markets by the media, but luckily, they are being ignored for the most part. The role of free trade cannot be underestimated in the world economy.

16. Apr 18, 2009

### CRGreathouse

I see this increasingly in modern American political life. $10 of hurt for$1 of help, but the $1 is concentrated and the$10 is spread out.

Of course both major American parties are guilty of this heinous conduct.

17. May 20, 2009

### mheslep

It's not just the US, this is a general problem of government:
Concentrated versus Diffuse Interests
http://books.google.com/books?id=_e3aAj66xZQC&pg=PA292&lpg=PA292&dq=There+is,+as+it+were,+an+invisible+hand+in+politics+that+operates+in+precisely+the+opposite+direction+to+Adam+Smith%27s+invisible+hand.&source=bl&ots=ll6fHkwu5g&sig=v-DM9sXuU4X2Cs6AgTZ4jCA0U8A&hl=en&ei=qp8TSrubBt6wtgej95WNBA&sa=X&oi=book_result&ct=result&resnum=2#PPA293,M1 [Broken]

Last edited by a moderator: May 4, 2017
18. Jun 6, 2009

### mindsword

pros - it puts people in constant competition

cons - it puts people in constant competition

19. Jul 6, 2009

### AeroFunk

Free Trade is Awesome!!!

Trade is not a zero-sum game. When ever two people engage in an exchange both parties benefit (otherwise they would have agreed to the trade). Trade also expands the division of labor, allowing more specialization, and increased wealth. Any restriction on trade is a form of impoverishment. We build bridges across rivers and dig holes through mountains in order to trade with others, yet we enact artificial barriers like tariffs and quotas in order to "protect" certain companies.

See this article on free trade: http://econlib.org/library/Enc/FreeTrade.html" [Broken]

Last edited by a moderator: May 4, 2017
20. Jul 6, 2009

### bleedblue1234

How is the US in any way improving itself from 'free trade'? We have had the world's reserve currency for the past 60 or so years, and in the last 20 years we have managed to use this leverage to go from the world's largest creditor nation to the nation with the largest debt (in nominal terms) the world has ever seen. We have not 'traded' more than simply pieces of paper to people in the BRIC and emerging countries in exchange for their goods and services. Free trade is extremely beneficial in the long term, I just do not see how it applies to the US as a broad-based ideal, much less reality. We important WAY more than we export, and without the financing of foreign nations and individuals... we would be nowhere.

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