ARGUMENTS FOR FREE TRADE

The debate about how free a trading system should be is an old one, with positions and arguments evolving over time. Free-trade advocate Frederic Bastiat presented the French Chamber of Deputies with a devastating satire of protectionists' arguments in 1845. His petition asked that a law be passed requiring people to shut all windows, doors, skylights and shades during the day, so that the candle industry would be protected from the "unfair" competition of the sun. He argued that this would be a great benefit to the French candle industry, creating many new jobs and enriching suppliers.

While it is undoubtedly true that the candle industry would benefit from a lack of sunlight, consumers would obviously not be happy about being forced to pay for light that they could get for free were there no government intervention.

U.S. free-trade advocates typically argue that consumers benefit from freer trade because foreign competition forces U.S. companies to keep prices low and provides a greater selection of goods and services. Foreign trade also forces U.S. companies to modernize plants, production techniques and technology, which keeps them competitive.

Free-traders argue that imposing protectionist measures, like tariffs, often brings about retaliation by foreign governments, which might seek to restrict sales of U.S. products in their countries. This may increase both inflation and unemployment, as U.S. export industries suffer and prices of imported goods rise. The Smoot-Hawley Tariffs of 1930, which placed high tariffs on both agricultural and manufactured imports, provoked a wave of retaliatory actions by overseas trading partners of the United States. World trade dropped by more than 60 percent, a reduction that deepened the Great Depression of the 1930s.

Another argument for free trade is that the costs of protectionism outweigh the benefits. For example, suppose the United States placed a tariff on imported wrenches that were less expensive than domestic wrenches. The tariff would have four basic costs to the economy:

• wrench-buyers would have to pay more for their protected U.S.-made wrenches than they would have for import- ed wrenches;

• jobs would be lost at retail and shipping companies that import foreign wrenches;

• jobs would be lost in any domestic industries that suffer from retaliatory tariffs; and

• the extra costs of the wrenches will be passed on to whatever goods and services the wrenches are used on. For example, if these particular wrenches are used to tighten bolts in a photocopy machine factory, the prices of those machines will have to include the extra cost of the wrenches.

These costs must be weighed against the number of jobs that the tariff would save.

Finally, an open trading system may create a better climate for investment and entrepreneurship than one in which the fear of governments cutting off access to markets is present.

MEASURES OF TRADE

In order to examine a country's position in international trade, it is useful to consult two of the most frequently used statistics, the balance of trade and the balance of payments. When you hear on the news about the U.S. "trade balance," what you are usually hearing about is the merchandise trade balance, which is the difference between a nation's exports and imports of merchandise. A "favorable" merchandise balance of trade, or trade surplus, occurs when a country's exports exceed its imports. A "negative" balance of trade, or trade deficit, occurs when a country's imports exceed its exports.

From the mid-1970s, throughout the 1980s and into the 1990s, the United States has run persistent trade deficits. Economists disagree as to the effects this has had on the economy, but it is certain that these deficits allowed foreigners to accumulate U.S. dollars earned in payment for products that Americans imported. Many of these dollars were then used to purchase U.S. goods, services and assets, such as real estate and companies.

The balance of trade, however, is not the whole picture; it includes only purchases and sales of merchandise. The complete summary of all economic transactions between a country and the rest of the world—involving transfers of merchandise, services, financial assets and tourism—is called the balance of payments. Simply, any transaction that results in money flowing into the country is a balance of payments credit, and anything that draws money out of the country is a balance of payments debit. Balance of payments deficits, where the amount of money leaving the country is greater than the amount flowing in, need to be financed; extra money has to come from somewhere. Usually, payments deficits are financed by borrowing money from overseas.

The balance of payments for a country is separated into two main accounts: the current account and the capital account. The current account records sales and purchases of goods, services and interest payments. The entire merchandise trade balance is contained in the current account. The capital account deals with investment items, like whole companies, stocks, bonds, bank accounts, real estate and factories. Thus, if you bought a parachute from a factory in Germany, your purchase would be recorded in the current account. But if you bought the entire parachute factory, your purchase would be in the capital account.

The balance of payments is influenced by many factors, including the financial and economic climate of other countries. For example, if other countries want the services of U.S. doctors, bankers, lawyers, accountants, engineers, entertainers and other service-providers, that demand will play a significant role in the U.S. balance of payments. Large amounts of money flow between nations in payment for such services, even if no merchandise is exchanged. In 1991, service exports accounted for over one-quarter of total U.S. exports. Financial conditions also have an effect. If U.S. banks are offering higher interest rates for deposits than banks abroad, foreign deposits will flow to the United States, which improves the U.S. capital account. Conversely, if interest rates are higher abroad, U.S. investors might choose to invest their money in other countries. This would weaken the U.S. capital account.

Date: 2015-12-24; view: 974