Why is it so difficult to achieve global free trade?

The problem with tariffs is that they are not as important in the real world today. The reason to why tariffs are implemented is that home production would rise and imports would fall and also home consumers face higher prices, which will in turn mean that they will consume less. In the long run if tariffs decrease they can be beneficial as there will be decreasing prices, meaning consumers will spend more.

The diagram shows what effect a tariff would have

Overall looking at the diagram and the table it shows that total surplus falls by triangles D and F, which represents the deadweight loss from the tariff.

Another type of barrier includes Non-tariff barriers, which have increased in importance, as they are the main restraints in achieving free trade. They are barriers, which deny or make market access excessively difficult for goods or services of foreign origin. In America in the 19th century Japanese cars where becoming ever more popular when they where introduced into the USA and where lowering sales for US car manufacturers and one in particular being General Motors. They were very large contributors to the US economy and with their sales lowering due to Japanese cars the government introduced quotas on the number of cars allowed to enter the country. Quotas are the biggest barrier to trade today and can be defined as “a limit on the quantity of a good that can be produced abroad and sold domestically” An import quota is like a tariff and reduces the quantity of imports and moves a market closer to the equilibrium that would exist without trade. If a quota is set above the free trade level it is known as a binding quota and if below otherwise known as a non-binding quota.

Another form of a non-tariff barrier includes export quotas, which are imposed by an exporting country for two reasons. The first so that they can manipulate the world price by holding back on supply, for example OPEC oil where they cut back on supply, which meant it was becoming more scarce, causing the price of it to rise. The second reason being the prevention of exporting “strategic goods” for example military goods and uranium.

When discussing non-tariff barriers, export subsidies are also included as they are “government payments, economic inducements or other financially quantifiable benefits provided to domestic producers or exporters contingent on the export of their goods or services.” Again like tariffs they can come in specific or ad valorem form. These subsidies affect income distribution and distort markets. Taxpayers are the ones that pay for the subsidies and because of the low competition have higher prices to pay. The effects are that home producers gain and the treasury loses and there is a deadweight loss of subsidy. The best example of this is the Common Agricultural Policy.

Voluntary export restraints “(Informal bilateral or multilateral arrangements through which exporters voluntarily restrain certain exports, usually through export quotas to avoid economic dislocation in an importing country and to avert the possible imposition of mandatory import restrictions)” In other words exporting countries voluntary put restraints on the number of products allowed to leave their country before the importing country implements other trade restrictions that could prove to be more un profitable.

Not all of these protection policies are designed to be restraints of trade, but instead may have health and safety objectives and therefore their protective effects may be unintentional or that it is coming across as an operation of restraint. These types of barriers are difficult to avoid and remove and are seen as “non-transparent” An example of this is the BSE crisis whereby health and safety was a first when considering to import or export beef into other countries where it could cause death in the long term. Another trade barrier, which is becoming an increasing importance, is government procurement, whereby governments purchase goods and services which are required for education, defence, health etc, but in some instances will purchase them from their own country despite their higher prices or inferior quality as compared with competitive goods that could be imported and in some way discriminate for domestic companies. The Government Procurement Agreement was negotiated under General Agreement on Tariffs and Trade. As well as government procurement there is marketing and packaging standards, which can also discriminate against imports. An example of this, could be soft drinks be supplied in returnable. The policies listed above show how the government try to protect the domestic markets.

Exchange and capital controls can also operate as barriers to trade, where exchange controls refer to the “restrictions placed on access to foreign exchange and the uses to which it can be put”. Capital controls “refer to the restrictions placed on the free movement of financial capital between countries.” Some examples of exchange and capital controls include exchange rates, controls on payments, control on direct foreign investment, controls on real estate transactions and controls on investors. The cost of trading increases and it becomes difficult and expensive to hedge against risk.

In 1974 Anne Krueger came up with the “Rent-Seeking behaviour theory” where major firms give government money in order to fund them and with a hope to have more of what they want. From this if they do not get what they expect they could bribe the government and would lose money and instead of doing this they could be a more competitive firm and would help to achieve free trade.

There are also non-economic arguments such as a governments Security and Defence and they would be defensive on their domestic strategic goods from other governments who could latter pose a threat e.g. USA passing information to Iraq will not be seen again. An infant industry can grow and when it is experienced costs will fall and will gain a comparative advantage, enabling it to compete internationally and therefore will not need tariff protection, so therefore in the long run everyone will profit from the falling costs. As well as these political arguments, are the tariffs on the distribution of income and without this there will be no distortion in markets and it wont reduce the volume of trade or income. Other political examples are pressure groups influencing the public and the government by lobbying whatever protections they feel are correct and also anti-dumping tariffs. The government also has to protect health and safety, jobs, interests and cultures and in a way acts in its own self-interest. Some self-interest policies include governments using money from tariffs to invest n new technologies to give them an advantage.

Trading blocs such as the European Union and NATFA have a freer trade policy inside these groups but outside the two groups may have trade wars with each other. E.g. to import something from the US is a vast amount more expensive that importing it from inside Europe. Paul Krugman (1995) states that trade blocs do not affect free trade even though there bargaining power is greater as there are more countries together and tariffs can be used more effectively

In conclusion, free trade seems like a philosophy that is imaginable but not in reach. I think it falls in the same categories as world peace and the prevention of global warming. The politics issues seem to get in the way. People, in the economy would prefer to use a tariff structure instead of taxes, because they are not aware of the economics involved. Countries seem to be to involved with their own interests, and this will always prevent free trade. With this in mind, there are so many arguments and so many different cultures, that with all these differences there can be no compromise and therefore no “Global Free Trade.”

Bibliography

Ingham, Barbara (2004) International Economics: A European Focus. Pearson Education

N. Gregory Mankiw (2001) Principles of Economics second edition, Harcourt College Publishers

Krugman, P. R. (1995) Strategic Trade Policy and the New International Economics, Cambridge

Internet sites, listed in the footnotes.

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