Others argue that the goal of free trade is to promote competition based on comparative advantage, thereby maximizing global efficiency. Practices such as subsidies or currency manipulation deviate from this competition and can lead to an outcome in which the least efficient producer dominates trade, thereby reducing overall wealth. In these circumstances, a countervailing measure, such as the imposition of a countervailing duty, could restore a “level playing field” in which trade can take place on the basis of comparative advantage. There is ample evidence that outward-looking countries tend to grow faster than inward-looking ones.2 Indeed, one conclusion is that the benefits of trade liberalization can exceed the costs by more than a factor of 10.3 Countries that have opened up their economies in recent years, including India, Vietnam, and Uganda, have experienced faster growth and poverty reduction.4 On average, developing countries, which significantly reduced tariffs in the 1980s, grew faster in the 1990s than those that did not.5 This is happening for some products as a result of multilateral trade negotiations. For example, a country often lowers tariffs on products that are not sensitive to imports – often because they are not manufactured in that country – to a greater extent than tariffs on import-sensitive products. In a free trade agreement whose final outcome is zero tariffs, this would have no effect if the agreement were fully implemented. During the transition period, however, it may well be relevant for certain products. However, apart from this exception, the elimination of tariffs or other barriers to trade increases trade in the product, and that is the intent of the trade agreement. The objective of removing trade barriers is, of course, to increase the level of trade, which should improve economic welfare. Economists often measure economic well-being by the share of total production of goods and services (i.e. the gross domestic product, GDP) that the country produces on average per person.
GDP is the best available measure of economic well-being, but it presents significant conceptual challenges. As Joseph Stiglitz notes, measuring GDP does not capture “some of the factors that transform people`s lives and contribute to their happiness, such as security, leisure, income distribution, and a clean environment – including the factors that growth itself needs to be sustainable.” [10] Moreover, GDP does not distinguish between “good growth” and “bad growth”; For example, if a company dumps waste into a river as a byproduct of its manufacturing, the production and subsequent cleaning of the river helps measure GDP. In the seventeenth and eighteenth centuries, the prevailing thought was that a prosperous nation should export more than it imported, and that the trade surplus should be used to increase the nation`s treasury, especially gold and silver. This would allow the country to have a larger and more powerful army and navy and more settlements. Multilateral trade liberalization, in which all countries simultaneously reduce their trade barriers, is the best way to promote trade on the basis of comparative advantages. However, countries can abuse the system by adopting the policy of every man for himself [4] Bertil Ohlin actually published this theory in 1933. For a brief explanation of the Heckscher-Ohlin theory, see nobelprize.org/educational_games/economics/trade/ohlin.html. What has caused exports to grow faster than production is that firms have shifted from a national orientation to multinational development, and now many have evolved to become global. The first six rounds of GATT trade negotiations had reduced industrialized countries` tariffs on manufactured goods from an average of 40 percent after World War II to less than half that level by the end of the Kennedy Round in 1967. In addition, international communications and transport have improved considerably (the first commercial aircraft crossed the Atlantic in 1958 and the first commercial telecommunications satellite was launched in 1965).
However, they also recognized a role of regional integration, which would allow members of a trading bloc to eliminate barriers to trade among themselves while maintaining a discriminatory tariff on imports from non-member countries. [18] Accordingly, Article XXIV of the GATT provides an important exception to the most-favoured-nation principle, allowing countries to form customs unions or free trade areas (FTAs) that may discriminate against non-members of the bloc. [19] In a customs union, members eliminate barriers to trade between them, but establish a common customs tariff for imports from third countries. Members of a free trade area also remove barriers to trade among themselves, but each retains its own customs code for imports from non-member countries. Integration into the world economy has proven to be an effective way for countries to promote economic growth, development and poverty reduction. Over the past 20 years, world trade has averaged 6 per cent per year, twice as fast as world output. But trade has been an engine of growth for much longer. Since 1947, when the General Agreement on Tariffs and Trade (GATT) was established, the world trading system has benefited from eight rounds of multilateral trade liberalization, as well as unilateral and regional liberalization. The last of these eight rounds (the “Uruguay Round”, concluded in 1994) led to the creation of the World Trade Organization to manage the growing number of multilateral trade agreements.
However, in many other countries, particularly in Africa and the Middle East, progress has been slower. The poorest countries have seen their share of world trade decline dramatically and, if they do not remove their own trade barriers, they risk being further marginalized. Some 75 developing countries and countries with economies in transition, including virtually all least developed countries, fit this description. Unlike successful integrators, they are disproportionately dependent on the production and export of traditional raw materials. The reasons for their marginalization are complex, including deep-rooted structural problems, weak political frameworks and institutions, and protection at home and abroad. A second extremely important caveat is the so-called factor price equalization theorem, which states that international trade leads to the relative returns of factors of production, such as unskilled labor, which balance each other between countries under conditions of free trade. This would mean that for a high-wage country like the United States, wages for unskilled workers would fall, while wages would rise in labor-rich countries. However, factor prices will not tend to balance each other in industries where production costs are falling.
In the context of trade based on product differentiation and economies of scale, several countries may produce the same product in the broadest sense and exchange differentiated parts and products with each other. Thus, the United States could specialize in the production of jeeps, and Europe could specialize in the production of Volkswagen. It is clear that much of the output in the economies of modern advanced economies takes place in industries with increasing economies of scale, and in these industries returns to factors of production would not tend to balance each other as a result of international trade. Indeed, in an economy characterized by labour shortages, labour returns can rise rather than fall, as factor price equalization theory would predict. Not surprisingly, economic theory, as it applies to trade in services, is still being developed.
