Free trade is a system of international trade based on the absence of non-tariff barriers and the movement of goods and services. Strictly speaking, the concept does not extend to labor movements and capital Minister of Franklin Delano Roosevelt largely behind the return to free trade after the Second World War , it is the principle of non-discrimination applied to trade goods and services.

A container ship and its cargo along the docks of Hamburg.

Practice

Historically, free trade is very rare. Each state is defined by its borders and in particular the existence of taxes and all kinds of specific regulations regarding the importation and exportation, erecting so many barriers. Economic Thought rudimentary animating the old EU leaders always prefer to lead them, between two similar properties, that produced by their nation to that of imports. Forcing foreigners to open their business, lower their barriers and tariffs, while trying to keep his, is a usual policy of international relations, possibly backed by military threat or obtained at the end of a war. Due to these practices, international trade can be for a significant part in smuggling , illegal circumvention of the rules on imports, more profitable than these rules are more costly.

Free trade is therefore in practice the rare fruit and small (bearing in general on certain goods) of international agreements, by which states agree to reduce all or part of the specific process they apply to foreign goods and that handicaps them in their market.

• unequal treaties imposed on a weaker nation by a stronger nation, forcing the first to admit goods produced by the second;
• treaties into reciprocal bilateral trade between two friendly countries, to a greater or less extent of property;
• and, in the context of globalization modern, multilateral agreements negotiated at the global body ad hoc: the WTO ;
• free trade zones , where the free trade treaty involves several countries and extends to all property (with possible exceptions for certain goods).

This presentation reflects the national protection as standard and free trade as the exception, which is consistent with the historical truth. But free trade agreements are only necessary because states were first erected barriers. In this sense, free trade is contrary to the natural state of the economy, before any state intervention.

History of the theory

Genesis

The first rigorous analysis of free trade is due to Henry Martyn in Considerations on trade with the East Indies ( 1701 ), in the preface, he warns: "Most of the ideas in this work are directly opposed to the views received. "Martyn opposes both the monopoly of the Dutch East India Company and restrictions on imports of manufactured goods from the India. He says free trade will decrease the pension merchants already established, and increase the volume to benefit the entire nation. Martyn is also the first to apply the principle of division of labor in international trade.

In 1720 , Isaac Gervaise wrote The system or theory of world trade (The System Theory of the Golden Trade of the World), and employs the principle of opportunity cost to doubt the ability of state intervention to increase national wealth . Applied to international trade, he concludes that this principle grows factories protected extend beyond their natural capacities, at the expense of other activities.

In the eighteenth ^century , the Physiocrats French consider a policy to reduce the price of agricultural commodities to promote manufactures - as envisaged by some mercantilist - would lead to ruin .

Adam Smith and the classical model

Adam Smith founded the foundation of modern economic analysis in 1776 with his Inquiry into the Nature and Causes of the Wealth of Nations. In Book IV, he introduced a new criterion for evaluation of economic policy: its impact on real income of the country (an idea that is found today in the form of gross domestic product ).

"By advantage or gain, I do not mean an increase in the quantity of gold and silver of the country, but an increase in the exchange value of the annual produce of its land and its work, or a increase in the income of its residents. "

With this criterion, we can not simply evaluate the impact of protectionist policies limiting itself simply to the study of the use and production of the protected area. Thus,

"There is no doubt that this monopoly in the market often does a great encouragement to the particular species of industry which enjoys it, and that he often turns to do this kind of work a portion of the work and capital of the country, greater than that which may have been used otherwise. - But what is perhaps not quite so clear is whether it tends to increase the general industry of the company, or to give the direction most advantageous. "

How optimization of national income is it? Smith responded that this is the result of the aggregation of individual decisions:

"(...) Every individual who employs his capital to enforce the domestic industry, will necessarily lead this industry to ensure that the product is that it gives the greatest possible value. "

The decision to trade with foreign countries is not natural, and comes only expected profits:

"(...) Each individual task to employ his capital as near him as he can and, consequently, much as he can, he tries to argue the domestic industry, provided he can thereby earning profits that make the ordinary capital, or little less. Thus, equality of profits or almost any wholesaler naturally prefer to trade within the foreign trade of consumption and foreign trade of consumption to the carrying trade. "

It concludes, in one of the most famous passages of the history of economic thought :

"But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing that exchangeable value. Therefore, since each individual task, as he can, 1st to use its capital to enforce the domestic industry, and - 2 to lead this industry to make it produce the greatest possible value, every individual necessarily works to make the largest possible annual income of the company. In truth, his intention, in general, is not it serve the public interest, and it does not even know how far it may be useful to society. By preferring the support of domestic industry to that of foreign industry he intends only to provide greater personal security, and by directing that industry so that its product has the greatest possible value, he intends only his own gain in this, as in many other cases, it is led by an invisible hand to fulfill a purpose that does not in its intentions, and it is not always what 'there are worse for society than this for nothing in his intentions. While seeking only self-interest, he often works in a much more efficient for the benefit of society, that if he really intended to work. I've never seen that those who aspired in their commerce companies to work for the general good, have done many good things. It is true that this great passion is not very common among merchants, and should not be long speeches to heal. "

Smith sees two exceptions to the principle of free trade:

"The first is when a particular kind of industry is necessary to defend the country."

"The second case in which it will be advantageous, in general, to put some burden upon foreign industry to encourage the domestic industry is when the product is loaded it himself in any tax in the inside. In this case, it seems reasonable to establish such a tax on similar products, coming from foreign manufactures. "

Following Smith, economists of the classical school develop ideas and strengthen the presumption that free trade allows a country to obtain a quantity of goods than he could produce by itself . Robert Torrens and David Ricardo are continuing to develop this theory by introducing the concept of comparative advantage between 1815 and 1817 , which allows to demonstrate that no country need to be "the best" in order to obtain gains from trade.

The terms of trade

Between 1833 and 1844 , Robert Torrens is slowly returning to its position of free trade, and developed the first argument "modern" against free trade: when a country can influence the terms of trade (for example, because it is "big", or because he holds a monopoly ), he can choose a level of tariffs optimum, which maximizes the terms of trade in its favor. Torrens concludes that the most desirable policy is then to demand reciprocity in trade: by unilaterally adopting free trade, a country liable to "capture" of some of the gains from trade by its partners. It causes a storm of controversy, until John Stuart Mill installment in its favor by analyzing the mechanisms for determining terms of trade. Torrens's argument is then refined until the version published by Harry Johnson in 1950 , which gives a precise mathematical formula for determining the optimal level of tariffs depending on the elasticity of the curve offers from abroad. To date, the objection Torrens remains the most serious breach of the principle of free trade .

Emerging industries

In his Report on Manufactures (1791), the Secretary of the Treasury U.S. Alexander Hamilton explains another serious objection: left to itself, the U.S. industry is not able to compete on its own territory of British Industry, because of his lack of experience and expertise. Hamilton proposes to temporarily protect infant industries , preferably through grants. In 1834, Scotsman John Rae deepens the analysis of Hamilton, and proposes various methods to promote transfer of technology from abroad. Friedrich List , who was exiled to the United States from 1825 to 1832 where he been imbued with the tradition of protectionist Alexander Hamilton, James Madison and Andrew Jackson, published in 1841 Das Nationale System der politischen konomie (National System of Political Economy), which rejects the analysis classical analysis for the benefit of history , and popularized the principle of protection of infant industries (or "protection of infant industries") by customs barriers , which he calls " protectionism educator. "

If List has been a great popular success, his analysis, based entirely on historical precedents and without any theoretical advance , does not convince economists. It's even John Stuart Mill that legitimizes the doctrine of infant industries "in his Principles of Political Economy ( 1848 ). His bail encounter outright opposition during the following decades ( Alfred Marshall says "its only regrettable failure to sound principles of economic rectitude" ), Mill himself regrets that the protectionists exaggerate greatly the scope of its doctrine, and ends by denying in part 1871. The doctrine is, however, generally accepted in the early ^twentieth century as a legitimate theoretical exception to the principle of free trade, despite the vagueness of its assumptions, and the difficulty to translate into a political industrial concrete. The modern analysis of Mill's doctrine is based on the study of market failures to determine what type of intervention would be most effective service. Thus, James Meade concludes that customs action is not justified: if a firm is able eventually to become profitable, it will always be investors to provide the necessary funds, provided that capital markets are efficient. And if they are not the preferred method of intervention is to correct this clear failure, rather than imposing restrictions on trade . If it has not disappeared, the doctrine of infant industry has lost much of its cachet, and is no longer considered a pure problem of international trade.

Increasing returns to shareholders

In 1923 , Frank Graham tackles another case , which might warrant permanent protection, that of increasing returns. He uses the example of two countries that produce watches and wheat. If industrial production (watches) is subject to increasing returns while agricultural production (wheat) is subject to diminishing returns, a country that specializes in agriculture is exposed to an inevitable erosion of the terms of exchange , and permanent barriers on industrial imports become preferable to free trade.

The following year, Knight Frank identifies a major flaw in the reasoning of Graham: It does not explain the origin of economies of scale, and in particular it makes no difference between internal and external economies at the firm. However, if it is internal economies, they are inherently incompatible with the competitive balance, since in this case a single firm eventually produce everything and becomes a monopoly.

In 1937 , Jacob Viner further study the case of external economies. It shows that the interest of protection depends on whether they come from the size of the global industry or domestic industry. He cited the example of increasing returns in the watch industry, and assumes that they depend on the tools of production: if free trade exists for these tools, then watch manufacturers benefit from increasing returns provided by the tools even if they are less numerous in the interior. Then there is no place to protect them. It also introduces the distinction between economies of scale "technology" (the production function of each firm is directly affected by the production industry) and "pecuniary" (it is affected by upstream producers and downstream). The case of pecuniary economies of scale is also incompatible with the competitive balance. Assumptions Graham found them very small, Viner concludes that the model of Graham is not "no better than a technical curiosity."

Cultural Exception

In 1994 , a provision of cultural exception is passed to the GATT agreements. This clause states that culture is not excluded permanently from the GATT , but for now it is not considered included.

Contemporary debates on free trade and protectionism

According to its proponents, the effects of free trade are similar to those of technical progress in contributing to long-term economic development generally and achieves better efficiency by accelerating the optimal use of production factors by geographic specialization each country (see comparative advantage ). As technological progress, free trade can cause the disappearance of some jobs, but the benefits it provides a way to compensate its victims, so that the overall result can be win-win.

To his critics, calling for an intervention or protectionism , free trade leads to adjustment costs (in terms of jobs, activities, etc..) shocks created by the opening on the external market. It also causes the appearance of an exogenous constraint on economic policies national , which become more difficult to conduct in order to seek to reduce unemployment. Finally, some social groups may be disadvantaged by trade liberalization.

Free trade is it historically a growth factor?

In the nineteenth ^century

According to Paul Bairoch (Myths and paradoxes of economic history, 1994), free trade was an exception in the economic history of the ^nineteenth century , the rule still protectionism. If economic thinking was clearly oriented towards free trade throughout the century, the industrialized world of 1913 is similar to that of 1815, "a sea of liberal protectionism identifying some islets. , With the notable exception of the United Kingdom , and a brief interlude of free trade in Europe between 1860 and 1870. In contrast, "the third world was an ocean of liberalism without protectionist island," Western countries colonized countries and imposing even those politically independent of the treaties known as "uneven" binding to the lowering of customs barriers.

Finally only the United Kingdom have benefited from free trade because it had previously acquired a technological lead that enabled him to win in global markets. Instead, the rest of Europe saw the Great Depression (1873-1896) burst at a time when tariffs were very low, then a return to protectionism would result in a return to prosperity.

One can distinguish two opposite examples. The United States has practiced protectionism without concessions have experienced growth rates among the highest in the world after the Civil War (which also opposes a South free trade protectionism in the North). In contrast to the Third World has been able to grow and some countries have suffered from free trade imposed by Western powers. India, for example, a British colony, has lost a highly developed textile crafts because of trade imposed by Great Britain had given up some of his crops for the development of the cotton industry.

It may, however, several objections to this analysis:

• Protectionist countries have mostly tried to increase the possible size of their market, which is ultimately to enlarge the geographical areas in which products travel unhindered. Germany has made on the basis of a customs union, the Zollverein, established in 1834, while the U.S. has ceased to expand their territory throughout the ^nineteenth century.
• The United Kingdom was the only one to benefit from free trade, but it is also the only one who actually practiced over a long period.
• Japan experienced an early and rapid economic development after the West have imposed trade openness. But unlike the colonial countries, it remained an independent country, able to manage its policy and in particular to import modern technology.

Furthermore, the description of the world by Paul Bairoch above, even if it is strongly shared by the French public seems marked by a desire to see liberalism everywhere, especially where there are only protectionism. We may note that such trade barriers characterize protectionism: they do not exist in a sea of liberalism but in a sea of protectionism. Similarly imposed trade is not a form of free trade, free trade is characterized by the free consent of the parties.

In the twentieth ^century

According to Todd , the free trade to the Anglo-Saxon what the utilities for the French.

Effects of Trade on the Environment

A cause of unemployment?

see also article Social Dumping

Theory

In the first half of the ^twentieth century , far from the concern of "social dumping", three economists - Eli Heckscher , Bertil Ohlin and Paul Samuelson - have their names associated with the development of international trade theory called " Theorem HOS. According to this theorem in the context of free trade, nations tend to specialize in the area that requires inputs most abundant in their territory. Thus, nations heavily endowed with labor will specialize in industries of labor, conversely, countries with strong capital will specialize in sectors that require a large concentration of capital. You can of course make finer distinctions: between skilled and unskilled workers in our case.

What effect for countries open to international trade? Southern countries will specialize in manufacturing production obviously the most trivial requiring a large number of low-paid workers. Conversely rich countries focus activities that require heavy investment or skilled labor. In fact, the global tends to see such activities take place designs in North and South in the production.

What impact on inequality? In a 1941 article, Paul Samuelson and Wolfgang Stolper deduced that this process of specialization would lead to the reduction of inequalities and therefore it was necessary to abandon protectionist policies . Indeed, if we consider two distinct factors A and B, if A is very abundant on the national soil compared to B, it then follows naturally that the law of supply and demand unfairly favor the scarce factor A to detriment of factor B. By cons, if the countries trade with another nation with a reverse situation, inequality will tend to disappear as a result of specialization. Another logical consequence, the remuneration of a factor will tend in the long term, to become similar in the two countries, according to qualification, the Chinese worker's salary will be comparable to the U.S..

Effects on low-skilled workers

Accordingly, it is commonly accepted that the full opening to international trade would lead to a convergence of wages of unskilled workers from North and South.

According to proponents of free trade, the level at which wages would converge intermediary between the current salary of unskilled workers in the south and that of unskilled workers from the north, so that low-skilled employees would benefit the north at the close borders.

Proponents of free trade, the level at which wages would converge over the current wage of unskilled workers from the north, so that even low-skilled employees would benefit the north at the opening of borders.

David Ricardo had argued in his Principles of Political Economy and Taxation that the importation of foreign goods cheaper allow lower prices in favor of purchasing power. Therefore the companies could reduce nominal wages (without reducing the real wage) and thus make the work more competitive, encouraging the expansion of resident industry and thus define the job.

Empirical Studies

According to a study published by INSEE , the French trade with developing countries would cause maximum loss of 330,000 jobs, relatively low figure given the country's unemployment. But these calculations are disputed. So for the American economist A. Wood , the exchange led to the loss of 9 million jobs in developed countries and would have created 22 million in developing countries. We note that even then the statistics showing the existence of so-called "social dumping" underscore the global scale largely create jobs, but this gain is relativized by quantitative traits qualitatively different from lost employment and created.

Free trade leads there a "race to the bottom"?

Common Errors about free trade

Today, if there is a strong consensus among economists of all stripes in favor of free trade, the public is generally suspicious, even hostile, to this notion . The economist John Kay believes that people tend to consider themselves capable of economic reasoning without having the skills. Such considerations are not shared, for example, by the unions , who see free trade race to the "lowest social" risk of social dumping , and an economic war between workers increased worldwide.

Design of the exchange as a zero sum game

The first belief is that if there is a winner in the exchange, there is necessarily also a loser. Coupled with the "money fetishism, this suggests that exports are" good "while imports are" bad ". The theory of comparative advantage of David Ricardo ( 1817 ) attempts to invalidate this reasoning .

The same belief in the field of labor: the fallacy of a fixed mass of work. Applied to international trade, he leads him to believe that imports destroy Labour, and would be harmful. One still finds this belief as a driving force for fair trade , based implicitly on the idea that ordinary commerce would not be "fair", it would benefit only one trading partner.

The "money fetishism"

That's the idea, popularized by the mercantilist , that wealth is the amount of money accumulated. The term itself was coined by Karl Marx. As important, therefore, a country would lose an amount of money on its territory, while it would gain by exporting. Depuis Adam Smith , les conomistes s'accordent sur le fait que la richesse correspond la quantit de biens et services disponibles la population, la monnaie n'tant utile qu'en tant qu'instrument. Les importations permettent d'obtenir plus de biens, ou des biens diffrents, et ce sont donc elles qui enrichissent. Les exportations sont ncessaires car il faut bien payer les importations, et elles sont le signe d'une capacit productive, mais en elles-mmes elles constituent une perte.

On peut toutefois noter que si on considre que la monnaie n'est pas seulement utile en tant qu'instrument de l'change, mais que son abondance peut aussi avoir des rpercussions sur la production (dans la thorie keynsienne par exemple), alors la thorie mercantiliste n'est que partiellement fausse. Bien qu'il soit une erreur de considrer que les exportations soient sources de richesse (ce sont en vrit les importations), elles peuvent selon certaines thories stimuler l'activit conomique d'un pays en accroissant la masse montaire, les importations ayant l'effet inverse.

Difficults de perception des cots et bnfices

En gnral, les cots associs au libre-change sont concentrs et trs visibles : dlocalisations , licenciements. Les gains, eux, sont diffus et peu visibles : en amliorant la productivit de l'conomie, le libre change permet d'augmenter le pouvoir d'achat de la population entire, et entrane des embauches dans les secteurs gagnants. L' aversion au risque explique l'attention excessive porte aux pertes, et le sophisme de la vitre brise de Frdric Bastiat illustre la difficult apprhender les effets multiples d'une mme cause. Toutefois, le problme d'indemni tion losers (more generally, the distribution of gains from free trade) is real.

"This is the origin and foundation of the whole doctrine of free trade. Its blind application and unreserved worldwide has stirred unrest and misery everywhere" (interview of Maurice Allais , price Nobel Prize in Economics, by fakirpresse.info: Against globalism, long live the protectionism !)

Karl Marx said in Brussels in 1848: "But in general these days, the protective system is conservative, while the free trade system is destructive. He dissolved the old nationalities and pushes to the extreme antagonism between the bourgeoisie and the proletariat. In a word, the system of free trade hastens the social revolution. Only in this revolutionary sense, gentlemen, that I vote in favor of free trade. "

Confusion short term and long term

The adjustments required by free trade are immediately visible, particularly gross job losses. The tendency is to extrapolate these adjustments to infinity, and conclude that almost all the work will disappear. In fact, economic analysis shows that the reallocation of production factors occurs only once (until new equilibrium), while the efficiencies are themselves permanent. Thus, the increase in aggregate demand made possible by the increased purchasing power can lead to recruitment in all sectors in economic development. , However, run the problem of adjustment costs is also very real, and if the "institutional environment" is too negative, these costs could absorb much of the gains from trade.

The "fallacy of aggregation"

The economist Jagdish Bhagwati has summarized under the term "fallacy of aggregation" ^References

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