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The principle of 'free trade' was devised in the eighteenth
century by the British economist Adam Smith. Many of today's
politicians and economists say that they support free trade.
What is free trade?
How does free trade work?
If there were free trade, would it be
better to produce food or other goods?
What's the problem with free trade?
How else do countries protect themselves
from free trade?
Why shouldn't countries protect their
own producers from free trade?
Surely, free trade means that countries
should specialise in producing the things that they are most
efficient at producing?
Questions to think about
Trade between various countries of the world has taken place
for many hundreds, perhaps thousands, of years. Originally
trade enabled people to obtain food and materials that they
could not produce for themselves. For example, the UK does
not have a climate suitable for growing bananas, and therefore
needs to import these
from abroad.
More recently, it has been recognised that some countries
are 'better' at producing certain types of product than others.
(By 'better' we mean that the country can produce the good
more cheaply, quickly or efficiently.)
It seems to make sense then, for countries to specialise in
producing the goods that they can produce most efficiently,
and to trade their surpluses of those goods for the products
they cannot produce, or are less efficient at producing. This
is known as the principle of free trade.
Suppose there are two imaginary countries
in the world, Industria and Agriculturia.
Industria is very efficient at producing electronic goods. Agriculturia
is less efficient at producing electronic goods, but very efficient
at producing food.
If each country decides to be 'self-sufficient', i.e. to produce
its own food and its own electronic goods, both countries will
be using some of their resources in a less efficient way.
However, if Industria specialises in producing electronic goods,
and Agriculturia specialises in producing food, each country's
output will be greater than it would otherwise have been.
Each country has made the most efficient use of its available
resources, and the total output of electronic goods and food
has been increased. In principle, the two countries can now
trade their leftover goods to obtain the things that they are
not producing for themselves. Both countries will then be better
off.
As people's incomes increase, they want to buy more luxury goods
(such as electronic goods); but once they have enough food to
avoid being hungry, they do not need to buy extra food.
Therefore, countries that specialise in producing 'luxury' goods
find that the demand for their products grows over time, and
they get richer. Countries that specialise in producing food
find that the demand for their products remains stable, and
their income remains the same. Compared with the countries making
luxury goods, the countries producing food become worse off.
This problem is known as the agricultural
problem.
In real life, no country produces only food or 'luxury' goods,
and we need to remember this when we think about international
trade.
Free trade means competition, and competition can be risky,
particularly when it affects a country's prosperity. Countries
often want to protect themselves against the effects of free
trade. They can make foreign goods more expensive by imposing
taxes ('import tariffs') on them, which means that consumers
have to pay more for them. This protects the people in their
own country who produce those goods, because they do not have
to compete against cheaper foreign imports.
In practice, trade has never been free, because some countries
have taken steps to protect themselves. However, as we shall
see below, trade is freer for some countries than it is for
others.
There are several ways. Countries can place a limit on the number
of imported goods of a particular type that can be imported
during a year. These are known as 'quotas'.
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Example |
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Workers in Mali, Africa, loading cotton onto
a truck.
Photo by Rhodri
Jones. |
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Cotton farmers in
the USA are protected by a quota
system. The US government tries to ensure that these farmers
receive a stable income. If the price of raw cotton in
the USA falls below a certain level, then the government
will begin to limit the amount of cotton imported into
the country.
This makes life difficult for cotton farmers in poorer
countries because they are uncertain from year to year
how much of their cotton will be bought. |
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Another popular solution is to provide subsidies to local producers.
Subsidies
are sums of money given by the government to producers. Because
their production costs are low, these producers can afford to
sell their products more cheaply than foreign goods imported
into their country.
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Example |
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Woman in Haiti working in peanut field.
Photo by James Hawkins / Oxfam. |
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Peanut butter is
popular in the USA. Some countries can grow peanuts very
cheaply – the climate is suitable, and wages are
low.
They could sell their peanuts to the USA, but then US
peanut farmers might go out of business. To prevent that
happening, the US government gives its peanut farmers
money (subsidies). |
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You could say that it's OK for countries to protect their own
producers. However, in that case, all countries should be allowed
to do this. At the moment, the trade rules are unfair. Some
countries are forced to accept goods from abroad, while others
protect their markets with import
tariffs,
quotas
and subsidies.
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Example |
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The European
Union pays subsidies
to sugar-beet farmers. This encourages them to produce
so much sugar that the EU
accounted for 40 per cent of world sugar exports
in 2001. This means that countries such as Mozambique,
which actually produce sugar more cheaply, have trouble
selling their sugar. |
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That's how free trade was supposed to be. However, the system
we have today means that rich countries can protect their markets,
while poor countries cannot.
The consequences of this for people in developing countries
are disastrous. Unable to sell their goods, they cannot make
money through trade. Meanwhile, their own producers are going
out of business because of unfair competition.
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Questions to think about |
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- Can trade ever be free?
- Can trade ever be fair?
- How could the international trading system be made
fairer for poor countries?
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To find out more about the issues, look at The
issues and the Agricultural
problem.
To find out about what you can do, look at
Take action.
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