Trading Education: A Look at Free Trade

Written by Greg Jensen on . Posted in Instructors Blog

Free Trade reduces obstacles to American exports and guards the countries trading interests. Free Trade Agreements outline the negotiations between partner countries, detailing rules on importing or exporting product or services. By increasing the productivity of ally countries, FTA can also increase the rule of law within foreign territory. With these limited trade barriers, trade becomes more consistent and honest. It also increases transparency within the market. Free trade makes import and export of goods much more economical and enables trading partnerships from multiple countries.

 Trading Education: A Look at Free Trade
Image via Wikipedia

 

Features of Free Trade

  • Trading without taxing
  • Trading-in without taxing
  • Free markets
  • Free market information
  • Free Labor Trade
  • Free Capital Trade
  • No Market Distortion
  • No Trade-distorting policies

Features of free trade include trading or trading in without taxing, barriers, tariffs or quotas for producers on goods. Also, there will not be any policies that may put one producer at an advantage over another. Again, this means no taxes, barriers, tariffs, quotas or subsidiaries, laws or general regulations that may make one producer more appealing than another. Free trade also means that producers can move their labor and capital from country to country. Producers within a free market should have full access to their market and honest information about the market they are in. Because of this, monopolies and distorted information are strictly forbidden.

History of Free Trade

The General Agreement on Tariffs and Trade was formed in 1948 to reduce tariffs on all customs in Cuba. This helped to produce free trade and caused 45,000 tariff concessions. After five more drops in tariffs, trade with Germany and Japan drastically increased. Free Trade Organizations began in Europe around the 1960’s. Oxfam’s Dutch division began producing goods through developing areas. Twenty years later there were already more than a thousand different third world producers within Europe. In 1995 the World Trade Organization overpowered GATT, forcing clearer mandates on free trade. There are currently 153 members of the World Trade Organization, engaging in free trade throughout the globe.

Economics of Free Trade

Tariffs have played many roles in world history, but the role tariffs play in trade is one of insulation and preservation. Basically, if a country produces a product at a price slightly higher than what another country might charge, the country importing the product to meet demand can place a tariff (or tax) on that product to raise the price for the consumer. While this practice by anti-free trade advocates may seem inherently dishonest, it actually stops other countries from undercutting (and therefore eliminating) a domestic industry. Perhaps it would be best to include an example.

For the sake of argument, let’s say the United States and Mexico both produced similar amounts of coal. The US, by virtue of a higher cost of production brought on by higher wages, insurance costs, and regulatory expenses, produces that coal for 50 dollars a ton. Considering that in 2001 the US burned 965 million tons of coal, American industry spent about 48.25 billion dollars in coal that year. If Mexico could meet that kind of demand and sell their coal, with the cost of production being much lower, at 35 dollars a ton, they would be able to sell 965 million tons of coal for about 33.75 billion dollars, Mexican coal would save American industry about 14.5 billion dollars a year.

The American government, knowing the monetary benefits of domestic coal production (especially in terms of taxes) then would place a tariff of 15 dollars or more per ton of coal, ensuring that American coal was still the coal of choice, at least in America. This not only preserves a rather considerable tax base, but retains American jobs. The loss of certain industries in the US would be catastrophic to far more than coal mining operations, and so the government steps in to protect the interests of its people.

Free trade advocates for the removal of these tariffs, stating that artificial barriers, such as tariffs, “restrict the flow of goods and services between trading nations.” According to the free trade movement, a removal of tariffs would increase production for those commodities in which certain countries have a comparative advantage. Giving a country a larger market within which it would sell its commodities lowers costs and ultimately increases productivity.

Furthermore, the movement states that a removal of tariffs would increase the efficiency with which goods were produced by encouraging new technology, marketing, and distribution solutions.

While those who support tariffs argue that a lowering of the price of goods is not good if domestic production cannot keep up, free trade advocates argue that this is a good thing for the consumer. Consumers can now afford a greater amount and variety of commodities. In terms of supply and demand, according to the free trade movement, each factor rises in direct correlation to the other. People will want more of something while at the same time more of that product is being produced.

Finally, in terms of employment, free trade advocates believe their movement would create jobs or at least provide a means of maintaining its current level. This is because, while they concede that, due to certain industries not being able to compete in terms of price, other industries would thrive, creating an increase in jobs in that market. Therefore, the thriving industry would be able to absorb the unemployed from a recently decimated domestic industry.

Free Trade in the United States

United States business owners hoping to import or export goods or services may require the protection of the US Free Trade Agreements. In fact, according to the FTA, forty-one percent of the United States exported goods were delivered to the partner countries of the FTA. Partners within the FTA have grown at a far more rapid pace, when compared to all other trade agreements in the world, for the past 2 years. The United States has 11 FTA’s with 17 countries in force. Partner countries include Australia, Chile, Jordan, Bahrain, Israel, DR-CAFTA (Dominican Republic, Costa Rica, Guatemala, El Salvador, Honduras and Nicaragua), Morocco, NAFTA (Mexico and Canada), Peru, Singapore and Oman. There are also FTA’s not in effect with Korea, Colombia and Panama. America is in negotiations for the Trans Pacific Partnership. This will be a regional FTA that includes Chile, Brunei Darussalam, Australia, Malaysia, Peru, New Zealand, Vietnam and Singapore.

There are other rights within a common FTA; including United States companies are allowed to bid on government procurements within the trade country. Also, US investors will be paid fairly if the investment toward the FTA partner was expropriated. Naturally, American service suppliers are allowed to provide their product or service within the partner country. Also American-owned property, including intellectual holds its rights within the United States and in the FTA partner country. Owners and exporters also have the right to be included and participate in the general development of their product. The most important aspect of the US FTA is the benefit to export without tariffs. If a partner country were to normally charge a percentile for incoming products, FTA partners will eventually negate all the fees for US partners. This means American business owners can export their product without any fees other than transportation cost. Because of the FTA rights, all companies have a fair chance at international trade and growth.
Please consult the following resources for further information on Free Trade.


OptionsANIMAL gives permission for links to this post. For other requests email info at optionsanimal.com

Options Trading Resources

options trading classes * stock market beginner * learn options trading * trading system * options trading education * online options education trading * learn option trading

 Trading Education: A Look at Free Trade

Comments

comments