Free trade

The free trade is a system of International business resting on the absence of tariff barriers and noncustoms with the circulation of the goods and the services. In a strict sense, the concept does not extend to the movements of workers or capital.

The international agreements supporting this objective primarily rest on

bilateral treated S of commercial reciprocity between two countries
of the agreements creating of the free exchange zones
and, within the framework of the Mondialisation, the multilateral agreements negotiated on the level of a world organization: OMC

This presentation reveals national protection as the standard and free trade like the exception, which is in conformity with historical truth. But the agreements of free trade are necessary only because the States initially set up barriers. In this direction, free trade is on the contrary the natural state of the economy, before any official intervention.

History

Genesis

The first rigorous analysis of free trade is due to Henry Martyn in Considérations on the trade with the Eastern Indies (1701); as of the foreword, he prevents: “the majority of the ideas in this work are directly opposed to the received opinions. ” Martyn is opposed at the same time to the monopoly Compagnie Dutchwoman of the Eastern Indies and to the restrictions on the importations of goods manufactured coming from the India. He explains why the freedom of trade will decrease the Rente of the already established merchants, and will increase volume for the benefit of the very whole nation. Martyn is also the first to apply the principle of the Division of the labor to the International business.

In 1720, Isaac Gervaise written the system or theory of the trade of the world ( The System gold Theory off the Trade off the World ), and employs the principle of the Opportunity cost to question the capacity of the intervention of the State to increase the national wealth. Applied to the international business, he concludes that this principle pushes manufactures protected to extend beyond their natural capacities, at the expense of the other activities.

At the 18th century, the physiocrats French consider that a policy aiming at reducing the price of the agricultural food products in order to promote manufactures - such as some consider it mercantilists - would lead to the ruin.

Adam Smith and the traditional model

Adam Smith bases the bases of the modern economic analysis in 1776 with its Recherche on the nature and the causes of the richness of the nations . Into book IV, it introduces a new criterion of evaluation of an economic policy: its impact on the real income of the country (idea that one finds today in the form of the Gross domestic product).

“By advantage or profit, I do not intend to say an increase in the quantity in gold and the money in country, but an increase in the exchangeable value in the annual product in his grounds and his work, or an increase in the income in his inhabitants. ”

With this criterion, one cannot be satisfied any more to evaluate the impact of a protectionist policy while limiting oneself simply to the study of the use and the production of the protected sector. Thus,

“It does not have there a doubt that this monopoly in the interior market often does not give a great encouragement to the particular species of industry which enjoys it, and which often it does not turn towards this kind of employment a portion of work and capital of the country, more large than that which would have been employed there without that. - But what is perhaps not completely also obvious, it is to know if it tends to increase the general industry of the company, or to give him the most advantageous direction. ”

How the optimization of the national revenue done is? Smith answers that it is about the result of the aggregation of individual decisions:

“(...) each individual who employs his capital to be put forward national industry, necessarily tries to direct this industry so that the product which it gives has the greatest possible value. ”

The decision to trade with the foreigner is not natural, and comes only from the awaited profits:

“(...) each individual tries to as employ his capital close to him as it can it and, consequently, as much as it can it, it tries to put forward national industry, provided that it can gain by there the ordinary profits which return the capital, or hardly less. Thus, with equality of profits or about, any wholesale dealer will naturally prefer the domestic trade with the foreign trade of consumption, and the foreign trade of consumption to the trade of transport. ”

He concludes, in one of the most famous passages of the Histoire of the economic thinking:

“But the annual income of any company is always precisely equal to the exchangeable value of all the annual product of its industry, or rather it is precisely the same thing as this exchangeable value. Consequently, since each individual tries, more than it can, 1° to employ its capital to be put forward national industry, and - 2° to direct this industry so as to make him produce the greatest possible value, each individual necessarily works to return as great as possible annual income of the company. With the truth, its intention, in general, is not in that to serve the public interest, and it does not even know up to which point it can be useful for the company. By preferring the success of national industry to that of foreign industry, he only thinks of giving himself a greater safety personally; and while directing this industry so that its product has the most possible value, he thinks only of his own profit; in that, as in much of other cases, it is led by an invisible hand to fill an end which enters its intentions by no means; and it is not always what there is moreover more badly for the company, which this end does not enter for nothing its intentions. While seeking only its personal interest, it often works in a way much more effective for the interest of the company, than if the purpose of it were really to work there. I never saw but those which aspired, in their companies of trade, to work for the general good, did many good things. It is true that this beautiful passion is not very common among the merchants, and that one would not need long discourses for curing some. ”

Smith considers two exceptions to the principle of free trade:

“the first, it is when a particular species of industry is necessary to the defense of the country”.

“the second case in which it will be advantageous, in general, to put some load on foreign industry to encourage national industry, it is when the product of this one is in charge itself of some tax in the interior. In this case, it appears reasonable to establish a similar tax on the product of the same kind, come from foreign factory. ”

Following Smith, the economists of the traditional École develop its ideas and reinforce the presumption which free trade makes it possible a country to obtain a quantity of goods higher than what it could produce by itself. Robert Torrens and David Ricardo continues the development of this theory by introducing the concept of comparative Avantage between 1815 and 1817, which makes it possible to show that no country needs to be “the best” to be able to obtain profits with the exchange.

Terms of trade

Between 1833 and 1844, Robert Torrens reconsiders little-with-little his positions free-traders, and develops the first “modern” argument against free trade: when a country can act on the Terms of trade (for example, because it is “large”, or because it holds a Monopole), it can then choose an optimal level of Customs duties, which maximizes the terms of trade in its favor. Torrens from of deduced that the most desirable policy is then to require the commercial reciprocity: by adopting free trade unilaterally, a country is exposed to the “capture” of part of the profits to the exchange by its partners. It causes a sharp polemic, until John Stuart Mill section in her favor by analyzing the mechanisms of determination of the terms of trade. The argument of Torrens will be then refined, to the version published by Harry Johnson in 1950, which gives a precise mathematical formula of determination of the optimal level of the customs duties according to the elasticity of the Courbe of offer from abroad. To date, the objection of Torrens remains the most serious distorsion with the principle of free trade.

Emergent industries

In its Report/ratio on manufactures (1791), the Secrétaire with the American Treasury Alexander Hamilton details another serious objection: delivered to itself, American industry is not able to compete with on its own territory British industry, because of its lack of experience and Savoir-faire. Hamilton proposes to protect the incipient Industries temporarily, preferably via Subvention S. In 1834, the Scot John Rae looks further into the analysis of Hamilton, and proposes various methods to support the Transfert technology coming from the foreigner. Friedrich List publishes in 1841 Das Main road System DER Politischen Ökonomie ( national Système of political economy ), which rejects the traditional analysis with the profit of the historical analysis , and the principle of protection of the emergent industries by Tariff barriers popularizes, which it calls “educational Protectionnisme”.

If List is a great popular success, its analysis, entirely founded on preceding histories and without the least theoretical projection, does not convince the economists. It is still John Stuart Mill which légitimise “doctrines of the emergent industries” in its Principes from political economy (1848). Its guarantee meets a frank opposition during the following decades (Alfred Marshall speaks about “sound only regrettable failure with the healthy principles of the economic straightness”), Mill itself considers it regrettable that the protectionists strongly exaggerate the range of its doctrines, and ends up partially disavowing it in 1871. The doctrines become however generally accepted at the beginning of the 20th century like a legitimate theoretical exception with the principle of free trade, in spite of the blur of its assumptions, and the difficulty of transposing it in a concrete Industrial policy. The modern analysis of the doctrines of Millet rests on the study of the Défaillances of the market in order to determine which type of public intervention would be most effective. Thus, James Meade concludes that the customs intervention is not justified: if a Entreprise is able in the long term to become profitable, it will be always investors to provide him the required funds, provided that the Marchés of the capital are efficient. And, if they are not it, the method of intervention preferable would consist in correcting this precise failure, rather than to impose restrictions on the trade. If it did not disappear, the doctrines of the emergent industries lost most of its seal, and is not regarded any more as a pure problem of International business.

Increasing outputs

In 1923, Frank Graham attacks another case, which could justify a permanent protection to him, that of the increasing outputs. It uses the example of two countries which produces watches and corn. If the industrial production (watches) is prone to increasing outputs while the agricultural production (the corn) is subjected to decreasing outputs, a country which specializes in agriculture exposes to an inescapable erosion of the terms of trade, and permanent tariff barriers on the industrial imports become preferable then with free trade.

The following year, Frank Knight detects a major fault in the reasoning of Graham: he does not explain the origin of the economies of scale, and in particular he does not make a difference between internal or external economies at the firm. However, if they are internal economies, they are by nature incompatible with competing balance, since in this case only one firm finishes by all producing and becomes a Monopole.

In 1937, Jacob To fortify looks further into the study of the case of the external economies. It shows that the interest of protection depends on if those come from the size of world industry or national industry. It takes the example of the increasing outputs in the industry of the watches, and supposes that those depend on the tools for manufacture: if free trade exists for these tools, then the producers of watches profit from the increasing outputs gotten by the tools, even if they are less and less numerous inside the country. It is not necessary then to protect them. It also introduces the distinction between “technological” economies of scale (the Fonction of production of each firm is affected directly by the production of industry) and “pecuniary” (it is affected by producers upstream or downstream). The case of the pecuniary economies of scale is, him also, incompatible with competing balance. The assumptions of Graham are found some very reduced, Viner concludes that the model of Graham is not better “not than a technical curiosity”.

(to be followed…)

Contemporary debates on free trade and protectionism

According to its defenders, free trade supports the general Economic development in the long run and makes it possible to obtain a better effectiveness by allowing an optimal use of the factors of production by the geographical specialization of each country and area (see comparative Avantage). It would be then about a system Gain-gaining.

For its detractors, preaching the Interventionism or the Protectionism, free trade causes costs of adjustment (in term of employment, activities, etc) to the shocks created by the opening on the exterior market. It involves also the appearance of an exogenic constraint on the national economic policies , which become more difficult to carry out in order to seek to reduce unemployment. Lastly, certain social categories can be underprivileged by a liberalization of the exchanges.

Is free trade historically a factor of growth?

At the 19th century

According to Paul Bairoch ( Myths and paradoxes of the economic history , 1994), free trade constituted an exception in the economic history of the 19th century, the rule remaining protectionism. If the economic thinking were clearly directed towards free-trade throughout the century, the industrialized world of 1913 is similar to that of 1815: “an ocean of protectionism encircling some liberal small islands. ”, except notable for the the United Kingdom, and of a short bracket free-trader in Europe between 1860 and 1870. On the other hand, “the third world was an ocean of liberalism without protectionist small island”, the Western countries imposing on the colonized countries and even on those politically independent of the treaties known as “unequal” forcing with the lowering of the tariff barriers. Finally only the the United Kingdom would have benefitted from free trade because it had a technological lead acquired before which enabled him to take a lead in the worldwide markets. On the contrary, the rest of Europe saw the Great Depression (1873-1896) bursting at the time when the customs duties were with lowest, then the return to protectionism would have involved a return of prosperity.

One can thus distinguish two opposite examples. The United States which practiced a protectionism without concessions knew growth rates among highest in the world after the American Civil War (which opposes a South free-trader besides to protectionist North). On the other hand the third world could not develop and certain countries suffered from the free-trade imposed by the western powers. India for example, British colony, saw disappearing a textile craft industry very developed because of the trade imposed by Great Britain which had given up its agriculture in favor of the development of cotton industry.

One can however make several remarks with this analysis:

the protectionist countries for the majority tried as much as possible to increase the size of their market, which finally amounts increasing geographical spaces where the products travel without obstacles. Germany constituted itself on the basis of customs union, Zollverein, installation in 1834, while the United States did not cease increasing their territory throughout 19th.
the United Kingdom would have been the only one to benefit from free trade, but it is also the only one to have really practiced it over one long period.
Japan experienced an early and fast economic development after the Westerners imposed the opening to him on the exchanges.

At the 20th century

Is free trade a cause of unemployment?

to also see the article Social dumping

Theoretical aspect

In first half of the 20th century, far from this concern of the “social dumping”, three economists - Eli Heckscher, Bertil Ohlin, and Paul Samuelson - associated their names with the development of a theory of the international business known as “Théorème H.O.S.”. According to this theorem, within the framework of free trade, the nations tend to specialize in the sector which requires the most abundant factors of production on their territory. Thus, the nations strongly equipped in labor will specialize in industries of labor, conversely the countries strongly equipped in capital will specialize in the sectors which require an important capital intensive concentration. One can of course carry out more subtle distinctions: between skilled workers and workers little qualified in the case which interests us.

Which consequence for the countries opening with the international business? The countries of the South will specialize obviously in the most commonplace manufacturing outputs asking for a big number of slightly remunerated workers. Conversely the rich countries will concentrate the activities which require heavy investment or skilled labor. In fact, the world activity tends for example to see the activities of designs being carried out with the North and that of production in the South.

Which impact on the inequalities? In an article of 1941, Paul Samuelson and Wolfgang Stolper deduced that this dynamics of specialization would lead to the reduction of the inequalities and that it was thus necessary to give up the protectionist policies. Indeed, if one considers two distinct factors has and B, if has is very abundant on the national ground compared to B, it follows oneself from there naturally that the law of supply and demand will support the rare factor wrongfully has with the detriment of the factor B. On the other hand if the country trades with another nation having an opposite situation, the inequality will tend to disappear under the effect of specialization. Another logical effect, the remuneration of a factor will tend, in the long run, with becoming similar in the two countries: for the same qualification, the wages of the Chinese workman will be comparable with that of American.

Effects on the little qualified workers

Consequently, the wages of the little qualified workers of the rich countries would decrease, those of the skilled workers would increase. Obviously, left the theoretical framework, this evolution seems extremely uneven. But the effect in the poor countries would be opposite: the remuneration of the little qualified workers would increase. It is in fact in a convergence of the wages of the little qualified workers of North and South that one must expect. In the United States, the result would be the fall of the real incomes of these people over the twenty last years; in Europe where the wages are not flexible with the fall, one attends the rise of unemployment.

Conversely, David Ricardo had advanced in his Principes of the political economy and the tax that the product imports foreigners cheaper allowed a fall of the price favorable to the purchasing power. Consequently the companies could decrease the money wages (without reducing the real wages) and thus make work more competitive, supporting rise of industry resident and thus into définif employment.

Empirical studies

According to a study published by INSEE, the French trade with the countries in the process of development would have caused to the maximum a loss of 330.000 employment, quantifies relatively weak within sight of the unemployment of the country. But these calculations are disputed. Thus for American economist A. Wood, the exchanges would have caused the loss of 9 million employment in the developed countries and would have created of them 22 million in the developing countries. It is thus noted that even the statistics showing the existence of the phenomenon known as of “social dumping” stress that it is on a total scale largely creative of employment, but this quantitative profit is relativized by the characters qualitatively different between employment lost and created.

Does free trade cause a “race downwards”?

Controversies about free trade

Today, if there exists a strong consensus between economists of all tendencies in favor of free trade, the general public is in general being wary, even hostile, towards this concept. The economist John Kay estimates that the people tend to estimate themselves capable of economic arguments without having competences of them. This type of considerations - which can seem scorning - is not shared at all, for example, by the Syndicat S, which see in free trade a race with the " lowest bidder social" , of the risks of Social dumping, and a economic Guerre increased enters the workers of the whole world.

All the plays are with null sum

The first belief is that, if there is one gaining with the exchange, there is inevitably also a loser. Combined with “monetary fetishism”, that led to think that exports are “good” while the imports are “bad”. The theory of the comparative Avantage of David Ricardo (1817) tries to invalidate this reasoning.

One finds the same belief in the field of work: it is the Sophisme of a fixed mass of work. Applied to the international business, it pushes to believe that the imports would destroy work, and would be thus harmful.

“Monetary fetishism”

It is the idea, popularized by the mercantilists, that the richness corresponds to the quantity of Monnaie accumulated. The term even was invented by Karl Marx. Into important, a country would thus lose a quantity of money present on its territory, while it would gain some while exporting. Since Adam Smith, the economists agree on the fact that the richness corresponds to the quantity of goods and services available to the population, the currency being useful only as an instrument. The imports make it possible to obtain more different goods, or goods, and it is thus they which are beneficial. Exports are necessary because the imports should well be paid.

One can however note that if it is considered that the currency is not only useful as an instrument of the exchange, but that its abundance can also have effects on the production (in the theory keynésienne for example), then the theory mercantilist is only partially false. Although it is an error to consider that exports are sources of richness (it is in truth the imports), they can according to certain theories stimulate the economic activity of a country by increasing the money supply, the imports having the opposite effect.

Difficulties of perception of the costs and benefit

In general, the costs associated with free trade are concentrated and very visible: Delocalizations, Dismissal S. the profits, them, is diffuse and not very visible: by improving the productivity of the economy, the free trade makes it possible to increase the purchasing power of the whole population, and involves recruitings in the gaining sectors. The Aversion with the risk explains the excessive attention paid to the losses, and the Sophisme of the broken pane of Frederic Bastiat illustrates the difficulty of apprehending the multiple effects of the same cause. However, the problem of compensation for the losers (more generally, of the distribution of the profits of the free trade) is quite real.

Confusion short term and long run

The adjustments imposed by free trade are immediately visible, in particular the rough losses of employment. The tendency is to extrapolate these adjustments ad infinitum, and to conclude that almost all work will disappear. In fact, the economic analysis shows that réallocation of the factors of production occurs only once (until new balance), while the profits of effectiveness are, them, permanent. Thus, the increase in the total demand made possible by the increase in the purchasing power can involve recruitings in all the sectors under development of the economy. Toufefois, the problem of the costs of adjustment is him as well real, and if the “institutional context” is too unfavourable, these costs can absorb a good part of the profits to the exchange.

The “sophism of aggregation”

The economist Jagdish Bhagwati summarized under the expression “sophism of aggregation” what he thinks of the supposed perception of the militants antimondialists (altermondialists), perception which would like that the Mondialisation is a kind of gigantic amalgam whose ideas are indissociable, and which the support for free trade implies necessarily the support for the short-term movements of capital, with the Direct investment abroad, the Immigration without restriction, etc

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