Free Trade and Globalization
I. Historical ContextA. LeadersB. Mission
II. Free Trade ArgumentsA. Comparative AdvantageB. Libertarianism
IV. Organizing GlobalizationA. TreatiesB. Institutions
V. The Development GambleA. HypocrisyB. Tradeoffs
The Radicalism of Free Trade
Targets:•State religion
–Anglicanism
•Monopolies–Hudson Bay Co.
•Empire–Ireland–India–Slavery
•Landed gentry–Tenant farming
•Tariffs–Corn Laws, 1815-46
John Bright and Richard Cobden
Irish Potato Famine, 1846-50
• 1 million die
• 2 million flee
Irish Peasants being evicted by police
Free Trade Precepts
1. Comparative Advantage.Specialization, inter-dependency.
2. Libertarianism.Tariffs, taxes, and inherited
privileges are unfair and inefficient.
Free market best expresses the will of the people.
Comparative Advantage• Different from absolute
(competitive) advantage.
• Nations should do what they do best.– Limited number of workers, hours, and
investment dollars.– Need to utilize these resources
efficiently.
• Countries should produce more than they need and trade the extra for the goods they do not make.
Richland v. Poorland
• Richland has the absolute advantage in both areas.
• But Poorland has the comparative advantage in wine. – Poorlanders exchange one loaf of bread for two bottles of
wine. – Richlanders exchange six loaves for the same two bottles of
wine.
• The differing ratios create an opportunity for trade.
• For every bottle of wine the merchants of Poorland export to Richland, they receive three loaves of bread. These three loaves of bread would have taken the bakers of Poorland 30 hours to bake. But the bottle they sold only took them five hours to produce. Net gain: 25 hours of labor per bottle exported. Thus, it makes sense for Poorland to specialize and trade.
Wine Bread
Poorland 5 hours per btl.
10 hours per lf.Richland 3 hours per
btl.1 hours per lf.
Should Shaq mow his lawn?
Shaquille O’Neal• Age: 31• Height: 7’1”• Weight: 355
lbs.• Occupations:
– Basketball– Music– Film– Advertisements
John Deere, Jr.• Age: 16• Height: 5’7”• Weight: 150
lbs.• Occupations:
– School– Landscaping– Fast food
Government and Trade• Tariffs
– Nation taxes imports to protect certain industries.
• U.S. Customs Service
• Debt– Cycle of debt, rising interest rates, recession.
• Currency– Nations tempted to devalue currency to escape
debt.– Results in inflation.
• Supply and demand.• Weak currency means fewer imports.
• Subsidies– State offers direct payments to politically
potent sectors.• e.g. Pay farmers to keep their land fallow.
Organizing Globalization
• Treaties– North American Free Trade
Agreement
• Institutions– European Union– World Bank– International Monetary Fund– World Trade Organization
The Development Gamble
• Hypocrisy– The nations promoting free trade often maintain tariffs on certain products (e.g. agriculture).
• Tradeoffs—Investors insist developing nations lower debt burdens, forcing them to dismantle the governing institutions that will help them become competitive (e.g. education) and manage the inevitable unemployment.
