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Free Trade

  Free trade, in economics, is open trade between countries without any barriers imposed by governments, such as tariffs, quotas, subsidies or bureaucratic tangles (for example, safety rules designed to favour domestic manufacturers). Advocates of free trade think that an open trading system encourages a fast growth in world trade which generates fast growth in output, and, by increasing competition, fast improvements in efficiency. Most economists favour free trade because the benefits can accrue to all as total world output increases according to the principle of comparative advantage.

Historically, free trade has been a rare commodity. In the 1930s retaliatory increases in tariffs cramped trade and led to worldwide recession. With this in mind, in 1945, the Western powers set up the General Agreement on Tariffs and Trade (GATT), to negotiate and regulate commercial policies and gradually reduce tariffs and other barriers.

Thanks to successive ‘rounds’ of GATT negotiations, tariffs on manufactured goods have fallen quickly, with the average tariff for industrial goods by 1982 at 5% for the EEC, 4.5% for the US and 4% for Japan. World trade grew by, on average, 5.9% a year in the 1950s, 8.5% a year in the 1960s and 6.4% a year in the recession-hit 1970s. But growth then slowed to 2.3% in 1980, and trade actually shrank in 1981. There was a swing back towards protectionism in the US and Europe in the early 1980s; not actually going so far as to restore tariffs, but by raising administrative barriers to trade, and demanding ‘voluntary restraint agreements’ on exports from Japan and other Far Eastern suppliers. However, in 1986 governments agreed on a new round of GATT negotiations, which may slow or halt the drift to protectionism. Note, also, that protectionism ebbs and flows with movements in exchange rates if these do not reflect trade competitiveness. Two periods when the dollar became overvalued—1970-71 and 1981-84—coincided with the fiercest bouts of US protectionism since 1945, because other countries\' exports, especially Japan\'s, became supercompetitive.

Arguments against free trade and for protection generally are political and lack an economic basis, the primary exception being the infant industry argument. In order to nurture a new, ‘infant’ industry, and to allow time for a country to build up the infrastructure necessary to make the industry internationally competitive takes time, and heavy fixed costs, so short-term protection can be justifiable. The question is when should a country decide to dismantle trade barriers and force its protected industry to compete. TF



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