Essay on "Free Trade and International Economics System"

Essay 5 pages (1559 words) Sources: 8 Style: MLA

[EXCERPT] . . . .

Free Trade

There are few issues in the world today as polarizing as free trade. Proponents view free trade as the ultimate tool in building the global economy. Opponents argue that the outcomes are skewed towards big business and wealth countries. Trade, of course, is not free. Even within the framework of modern free trade agreements, there are barriers, tariffs and other impediments to truly free trade. Some of the adverse consequences of free trade stem from these barriers. Protectionism is a major issue in free trade agreements, particularly in terms of agriculture, where nations seek to protect their own food supply. Another key issue in free trade today is the sentiment that the benefits of free trade largely accrue to the wealthier stakeholders, who are seen to set the rules that ultimately favor their interests. Human rights is another major free trade issue, particularly with regards to nations such as China and Nigeria. The concept of intellectual property rights - a cornerstone of the Western economic system- has become a significant issue in recent years as well. This paper will explore these key issues and attempt to determine why these issues are so important to the expansion of free trade.

Protectionism

When negotiating free trade agreements, nations often build in protections for industries that they feel are sensitive. Norway's desire to protect its heavily-subsidized agriculture sector has kept it out of the European Union, for example. Agriculture subsidies in the United States and the European Union were key sticking points during the Doha round of the World Trade Organization (WTO) free trade discussions (Markheim & Riedl, 2007). The European Union balked at surrendering its agricultural protections and the United States refused to put its domestic agricultural support programs on the table at all. The result was that many other countries refused to lower protective trade barriers on their key manufacturing industries.

Nations protect industries for a wide variety of reasons. Some are strategic - nations feel they must protect their interests in food supply, water, transportation, weapons, energy and other industries considered vital to the strength of the nation. Some reasons are economic. Certain industries can be critical employers and damage done to those industries would catastrophic impacts on the national economy. Other times trade protections exist for infant industries, providing a safe environment for future strategic industries to grow until they are strong enough to compete on the world stage.

The infant industry argument is one of the most contentious debates in free trade. Developing nations feel pressure from bodies such as the International Monetary Fund (IMF) to abolish infant industry protections. The argument is that exposure to greater competition will strengthen those industries more quickly. The results, however, do not bear out this theory. The United States and Great Britain became industrial powers in part because of protectionist trade policies. Economic development is a process that takes several decades. It can take a generation or more for investments in infrastructure and education to pay dividends, as exemplified in the Japanese and South Korean experiences. Liberal trade reforms were implemented more thoroughly in Latin America and sub-Saharan Africa than in nations such as India and China. Before trade liberalization reduced protectionism in Latin America, economic growth in the region was at 3.1% per year; after it was 0.5% per year. Africa's living standards have fallen since trade liberalization was implemented (Chang, 2007).

Income Distribution

The protectionist arguments stem from this apparent paradox of free trade. The liberalization of trade produces more winners and more losers, according to most models (Suranovic, 2007). It is increasingly viewed that the winners are invariably large corporations and economically powerful nations. Increasing GDP does not necessarily equate to increased wealth for the entire nation. Even within wealthy nations, free trade has winners and losers. The issue at hand should ideally focus on what governments can do to protect the "losers." Paul Krugman advocates better assistance for U.S. workers who have lost their jobs, and universal health care as well (Krugman, 2004). The same can be said for workers in many other countries, whose leaders have adopted trade policies that provide them with jobs, but do not provide protections against sweatshop conditions. It can be argued that the lack of worker protections helps nations to build their economies. Nations with no unemployment insurance, no universal health care and no old age pensions often have higher savings rates, for example. The Solow model shows us that higher savings rates equate to higher economic growth, and this has been borne out in nations such as South Korea and China in recent decades. Ultimately, however, free trade is merely an income generation mechanism; distribution of that income within a given economy is the role of the government. Despite this, income distribution has become a major issue in the discussion of free trade today.

Human Rights

Another social issue in free trade today is that of human rights. Nations seeking to improve their economies sometimes do so without granting their citizens basic human rights. The issue is especially topical in relation to China, whose issue on human rights is deplorable. Increasingly, however Western nations face political and social pressure to tie their trade policies with social policies. Bill Clinton was criticized for granting most favored nation trading status to China, for example. The basic economic case is that historically human rights have followed wealth. The right to trade is an essential human right as well, and human rights should be off the table at trade discussions.

Indeed, liberalization of trade is a key stepping stone to improved human rights (Dorn, n.d.).

Intellectual Property Rights

Among the many core components of the Western economic system is the rule of law. The most pressing legal issue in international trade today is that of intellectual property rights. The protection of international property rights is a critical issue in free trade because such protections are crucial to economic development. Poor protection of intellectual property rights reduces incentive for firms to invest in research and development, thereby reducing growth potential (Goh & Olivier, 2002). Many countries have notoriously lax protection of intellectual property rights, which is viewed as a detriment to Western firms. However, the issues of counterfeiting and property rights date back to the 19th century, when nations such as the U.S. And Germany dismissed these rights in order to help their economies grow at the expense of other nations (Chang, 2007). Moreover, creation and enforcement of Western-caliber intellectual property right regimes is viewed by developing nations as an unnecessary burden (Hornbeck, 2005).

Environment Issues

These issues are heavily politicized in the West, but are a point of contention for developing nations (Hornbeck, 2005). Environment protections represent an added cost to business, which can be an impediment to growth. Developing nations take the view that they should be allowed to grow in their own way, not a manner prescribed to them by developed powers. However, the environmental degradation wrought by developing nations, in particular those that have massive populations and rely on coal power, has a profoundly negative impact that is not included in calculations of economic progress.

Conclusion

Most of the issues surrounding free trade today stem from politics rather than economics. The main economic issue is with regards to protectionism. Historical evidence shows that protectionism is beneficial to a certain point in a nation's economic development. Moreover, there are strong political associations with protectionism. The protectionist bent of incoming President Obama shows that when jobs are equated with votes, economic sense becomes replaced with political expediency. The other major issues are almost entirely political. Human rights and income distribution are not issues to be discussed at free trade bargaining tables; rather, they are a distraction to the core issue of trade liberalization. Were it not for political interference in the… READ MORE

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