Study Guide

1. What is free trade?

Free Trade: a complete lack of restrictions on international trade

An excellent overview of free trade is available at Wikipedia. It contains much more detailed information than is in this study guide and is well-worth reading.

Free Trade, as an ideal, is a situation where trade between different countries can occur with no interference from governmental or regulatory bodies. In practice, it is unusual to find perfectly free trade. Countries generally corrupt free trade with one of three primary measures:

  • Import tariffs: taxes levied on goods coming into the country
  • Export subsidies: payments made by the government to encourage the export of specific products
  • Export controls: restrictions on what may be exported from a country

2. How do these relate to protectionism?

Obviously, import tariffs and export subsidies are established primarily to cater to protectionism. Protectionism is where a country decides to help a domestic industry by giving it an advantage relative to foreign competition. For instance, a common import tariff in the United States is on foreign-made cars. Cars imported from other countries have an additional tax that domestic car producers do not pay, giving them an advantage.

Because of this artificial tax, domestic consumers end up paying more than necessary for a car. Why, then, would any country allow this sort of protectionist policy? Often times, it is thought that even though consumers pay higher prices, the overall good done to the economy by keeping an industry intact, and therefore people employed, outweighs this cost. Cynics argue that these industries are kept alive only by political lobbying efforts.

Similarly to import tariffs, export subsidies give an advantage to domestic competitors over foreign competitors. One of the most notorious export subsidies in the United States today is agricultural subsidies. Many critics of these subsidies claim that US agricultural subsidies hurt developing nations by giving our domestic farmers a trade advantage over domestic farmers in these developing nations. The foreign farmers are unable to charge as high a price as they normally would, and eventually may be unable to continue farming. When a country with a weak economy becomes dependent on imports for food, there are possibilities of food shortages and low consumer confidence.

However, many see these arguments as a clandestine protectionist policy. Proponents of agricultural subsidies argue that the same reasons developing nations seek to eliminate our subsidies should encourage us to keep the subsidies. The United States should not allow its domestic farming industry to wither away because then we will be the ones dependent on cheap foreign sources of food. It can hardly be disputed that the US's current position as the "breadbasket of the world" gives it tremendous negotiating power with developing nations all over the world.

3. How do export controls fit in?

Export controls, the third major interference to Free Trade, apply primarily to items that may pose a threat to national security if let out of the country. The most common item for export controls to be applied to, of course, is powerful military weaponry, including nuclear, chemical, and biological weapons. However, ever since computers made a large impact in the Manhattan Project, computers and computer-related technology have also been subject to export controls. Indeed, export controls on "supercomputers" were established in 1949 to prevent Soviet bloc countries from achieving the technology necessary to develop their own nuclear weapons. For many years, this was deemed practical and necessary. However, since the explosion in power of personal computers and the advent of software that allows many personal computers to be linked together into a giant cluster capable of supercomputer-like performance, many have argued that these restrictions are outdated and unnecessary.

More recently, strong encryption has been targetted for export controls. Many sources claim that allowing strong encryption to fall into the hands of enemies of the United States, including terrorists, will simply make it easier for them to attack or undermine us. Others argue that strong encryption technology is already available internationally, so what is the point of limiting the export of our own technology? The only purpose of the export controls is seemingly to put American producers of encryption technology at a disadvantage, by making them unable to sell their products on the world market.