Tariff

From Wikipedia, the free encyclopedia

Average tariff rates for selected countries (1913–2007)

 

Tariff rates in Japan (1870–1960)

 

Average tariff rates in Spain and Italy (1860–1910)

 

Average tariff rates (France, UK, US)

 

Average tariff rates in US (1821–2016)

 

US Trade Balance and Trade Policy (1895–2015)

 

Average tariff rates on manufactured products

 

Average Levels of Duties (1875 and 1913)

 

Trade Policy, Exports and Growth in European Countries

 

A tariff is a tax on imports or exports between sovereign states.

History

Tariffs in United States history

According to Michael Lind, protectionism was America's de facto policy from the passage of the Tariff of 1816 to World War II, "switching to free trade only in 1945, when most of its industrial competitors had been wiped out" by the war.^[1] It has been argued that one of the underlying motivations for the American Revolution itself was a desire to industrialize, and reverse the trade deficit with Britain, which had grown by a factor of ten in the space of a few decades, from £67,000 (1721–30) to £739,000 (1761–70).^[2]

Paul Bairoch states that since the end of the 18th century, the United States has been "the homeland and bastion of modern protectionism". In fact, the United States never adhered to free trade until 1945. A protectionist policy was adopted during the presidency of George Washington by Alexander Hamilton, the first US Treasury Secretary. Hamilton wrote the Report on Manufactures, which called for customs barriers to allow American industrial development and to help protect infant industries, including bounties (subsidies) derived in part from those tariffs. This text was one of the references of the German economist Friedrich List (1789–1846). This policy remained throughout the 19th century and the overall level of tariffs was very high (close to 50% in 1830). The victory of the protectionist states of the North over the free trade southern states at the end of the Civil War (1861–1865) perpetuated this trend, even during periods of free trade in Europe (1860–1880).^[3]

Hamilton explained that despite an initial “increase of price” caused by regulations that control foreign competition, once a “domestic manufacture has attained to perfection… it invariably becomes cheaper.” George Washington signed the Tariff Act of 1789, making it the Republic's second ever piece of legislation. Increasing the domestic supply of manufactured goods, particularly war materials, was seen as an issue of national security. Washington and Hamilton believed that political independence was predicated upon economic independence.^[4]

In the 19th century, statesmen such as Senator Henry Clay continued Hamilton's themes within the Whig Party under the name "American System." The fledgling Republican Party led by Abraham Lincoln, who called himself a "Henry Clay tariff Whig", strongly opposed free trade, and implemented a 44-percent tariff during the Civil War—in part to pay for railroad subsidies and for the war effort, and to protect favored industries.^[5]

From 1871 to 1913, “the average U.S. tariff on dutiable imports never fell below 38 percent [and] gross national product (GNP) grew 4.3 percent annually, twice the pace in free trade Britain and well above the U.S. average in the 20th century,” notes Alfred Eckes Jr., chairman of the U.S. International Trade Commission under President Reagan.

In 1896, the GOP platform pledged to “renew and emphasize our allegiance to the policy of protection, as the bulwark of American industrial independence, and the foundation of development and prosperity. This true American policy taxes foreign products and encourages home industry. It puts the burden of revenue on foreign goods; it secures the American market for the American producer. It upholds the American standard of wages for the American workingman.”

Tariff and the Great Depression

Most economists hold the opinion that the tariff act did not greatly worsen the great depression:
Milton Friedman held the opinion that the Smoot–Hawley tariff of 1930 did not cause the Great Depression, instead he blamed the lack of sufficient action on the part of the Federal Reserve. Douglas A. Irwin wrote: "most economists, both liberal and conservative, doubt that Smoot–Hawley played much of a role in the subsequent contraction."^[6].

Peter Temin, an economist at the Massachusetts Institute of Technology, explained that a tariff is an expansionary policy, like a devaluation as it diverts demand from foreign to home producers. He noted that exports were 7 percent of GNP in 1929, they fell by 1.5 percent of 1929 GNP in the next two years and the fall was offset by the increase in domestic demand from tariff. He concluded that contrary the popular argument, contractionary effect of the tariff was small.^[7]

William Bernstein wrote "most economic historians now believe that only a minuscule part of that huge loss of both world GDP and the United States' GDP can be ascribed to the tariff wars "because trade was only nine percent of global output, not enough to account for the seventeen percent drop in GDP following the Crash. He thinks the damage done could not possibly have exceeded 2 percent of world GDP and tariff "didn't even significantly deepen the Great Depression." (A Splendid Exchange: How Trade Shaped the World)

Nobel laureate Maurice Allais maintained that tariff was rather helpful in the face of deregulation of competition in the global labor market and excessively loose credit prior to the Crash which, according to him, caused the crisis in financial and banking sectors. He noted higher trade barriers were partly a means to protect domestic demand from deflation and external disturbances. He observes domestic production in the major industrialized countries fell faster than international trade contracted; if contraction of foreign trade had been the cause of the Depression, he argues, the opposite should have occurred. So, the decline in trade between 1929 and 1933 was a consequence of the Depression, not a cause. Most of the trade contraction took place between January 1930 and July 1932, before the introduction of the majority of protectionist measures, excepting limited American measures applied in the summer of 1930. It was the collapse of international liquidity that caused of the contraction of trade.^[8]

Etymology

The small Spanish town of Tarifa is sometimes credited with being the origin of the word "tariff", since it was the first port in history to charge merchants for the use of its docks.^[9] The name "Tarifa" itself is derived from the name of the Berber warrior, Tarif ibn Malik. However, other sources assume that the origin of tariff is the Italian word tariffa translated as "list of prices, book of rates", which is derived from the Arabic ta'rif meaning "making known" or "to define".^[10]

Customs duty

A customs duty or due is the indirect tax levied on the import or export of goods in international trade. In economic sense, a duty is also a kind of consumption tax. A duty levied on goods being imported is referred to as an import duty. Similarly, a duty levied on exports is called an export duty. A tariff, which is actually a list of commodities along with the leviable rate (amount) of customs duty, is popularly referred to as a customs duty.

Calculation of customs duty

Customs duty is calculated on the determination of the assessable value in case of those items for which the duty is levied ad valorem. This is often the transaction value unless a customs officer determines assessable value in accordance with the Harmonized System. For certain items like petroleum and alcohol, customs duty is realized at a specific rate applied to the volume of the import or export consignments.

Harmonized System of Nomenclature

For the purpose of assessment of customs duty, products are given an identification code that has come to be known as the Harmonized System code. This code was developed by the World Customs Organization based in Brussels. A Harmonized System code may be from four to ten digits. For example, 17.03 is the HS code for molasses from the extraction or refining of sugar. However, within 17.03, the number 17.03.90 stands for "Molasses (Excluding Cane Molasses)".

Introduction of Harmonized System code in 1990s has largely replaced the Standard International Trade Classification (SITC), though SITC remains in use for statistical purposes. In drawing up the national tariff, the revenue departments often specifies the rate of customs duty with reference to the HS code of the product. In some countries and customs unions, 6-digit HS codes are locally extended to 8 digits or 10 digits for further tariff discrimination: for example the European Union uses its 8-digit CN (Combined Nomenclature) and 10-digit TARIC codes.

Customs authority

A Customs authority in each country is responsible for collecting taxes on the import into or export of goods out of the country. Normally the Customs authority, operating under national law, is authorized to examine cargo in order to ascertain actual description, specification volume or quantity, so that the assessable value and the rate of duty may be correctly determined and applied.

Evasion

Evasion of customs duties takes place mainly in two ways. In one, the trader under-declares the value so that the assessable value is lower than actual. In a similar vein, a trader can evade customs duty by understatement of quantity or volume of the product of trade. A trader may also evade duty by misrepresenting traded goods, categorizing goods as items which attract lower customs duties. The evasion of customs duty may take place with or without the collaboration of customs officials. Evasion of customs duty does not necessarily constitute smuggling.^{[citation needed]}

Duty-free goods

Many countries allow a traveler to bring goods into the country duty-free. These goods may be bought at ports and airports or sometimes within one country without attracting the usual government taxes and then brought into another country duty-free. Some countries impose allowances which limit the number or value of duty-free items that one person can bring into the country. These restrictions often apply to tobacco, wine, spirits, cosmetics, gifts and souvenirs. Often foreign diplomats and UN officials are entitled to duty-free goods. Duty-free goods are imported and stocked in what is called a bonded warehouse.

Duty calculation for companies in real life

With many methods and regulations, businesses at times struggle to manage the duties. In addition to difficulties in calculations, there are challenges in analyzing duties; and to opt for duty free options like using a bonded warehouse.

Companies use ERP software to calculate duties automatically to, on one hand, avoid error-prone manual work on duty regulations and formulas and on the other hand, manage and analyze the historically paid duties. Moreover, ERP software offers an option for customs warehouse, introduced to save duty and VAT payments. In addition, the duty deferment and suspension is also taken into consideration.

Economic analysis

Neoclassical economic theorists tend to view tariffs as distortions to the free market. Typical analyses find that tariffs tend to benefit domestic producers and government at the expense of consumers, and that the net welfare effects of a tariff on the importing country are negative. Normative judgements often follow from these findings, namely that it may be disadvantageous for a country to artificially shield an industry from world markets and that it might be better to allow a collapse to take place. Opposition to all tariff aims to reduce tariffs and to avoid countries discriminating between differing countries when applying tariffs. The diagrams above show the costs and benefits of imposing a tariff on a good in the domestic economy.

When incorporating free international trade into the model we use a supply curve denoted as ${\displaystyle P_{tariff}}$ (diagram 1) or ${\displaystyle P_{w}}$ (diagram 2). This curve represents the assumption that the international supply of the good or service is perfectly elastic and that the world can produce at a near infinite quantity of the good. Before the tariff, there is a quantity demanded of Q_c1 (diagram 1) or D (diagram 2). The difference between quantity demanded and quantity supplied (between D and S on diagram 2, respectively) was filled by importing from abroad. This is shown on diagram 1 as Quantity of Imports (without tariff). After the imposition of a tariff, domestic price rises, but foreign export prices fall due to the difference in tax incidence on the consumers (at home) and producers (abroad).

The new price level at Home is P_tariff or P_t, which is higher than the world price. More of the good is now produced at Home – it now makes Q_s2 (diagram 1) or S* (diagram 2) of the good. Due to the higher price, only Q_c2 or D* of the good is demanded by Home. The difference between the quantity supplied and the quantity demanded is still filled by importing from abroad. However, the imposition of the tariff reduces the quantity of imports from D − S to D* − S* (diagram 2). This is also shown in diagram 1 as Quantity of Imports (with tariff).

Domestic producers enjoy a gain in their surplus. Producer surplus, defined as the difference between what the producers were willing to receive by selling a good and the actual price of the good, expands from the region below P_w to the region below P_t. Therefore, the domestic producers gain an amount shown by the area A.

Domestic consumers face a higher price, reducing their welfare. Consumer surplus is the area between the price line and the demand curve. Therefore, the consumer surplus shrinks from the area above P_w to the area above P_t, i.e. it shrinks by the areas A, B, C and D. This includes the gained producer surplus, the deadweight loss, and the tax revenue.

The government gains from the taxes. It charges an amount Pt − Pt* of tariff for every good imported. Since D* − S* goods are imported, the government gains an area of C and E. However, there is a deadweight loss of the triangles B and D, or in diagram 1, the triangles labeled Societal Loss. Deadweight loss is also called efficiency loss. This cost is incurred because tariffs reduce the incentives for the society to consume and produce.

The net loss to the society due to the tariff would be given by the total costs of the tariff minus its benefits to the society. Therefore, the net welfare loss due to the tariff is equal to:

Consumer Loss − Government Revenue − Producer Gain

or graphically, this gain is given by the areas shown by:

${\displaystyle (A+B+C+D)-(C+E)-A=B+D-E}$

That is, tariffs are beneficial to the society if the area given by the rectangle E is greater than the deadweight loss. Rectangle E is called the terms of trade gain.

Political analysis

The tariff has been used as a political tool to establish an independent nation; for example, the United States Tariff Act of 1789, signed specifically on July 4, was called the "Second Declaration of Independence" by newspapers because it was intended to be the economic means to achieve the political goal of a sovereign and independent United States.^[11]

The political impact of tariffs is judged depending on the political perspective; for example the 2002 United States steel tariff imposed a 30% tariff on a variety of imported steel products for a period of three years and American steel producers supported the tariff.^[12]

Tariffs can emerge as a political issue prior to an election. In the leadup to the 2007 Australian Federal election, the Australian Labor Party announced it would undertake a review of Australian car tariffs if elected.^[13] The Liberal Party made a similar commitment, while independent candidate Nick Xenophon announced his intention to introduce tariff-based legislation as "a matter of urgency".^[14]

Unpopular tariffs are known to have ignited social unrest, for example the 1905 meat riots in Chile that developed in protest against tariffs applied to the cattle imports from Argentina.^[15][16]

Within technology strategies

When tariffs are an integral element of a country's technology strategy, some economists believe that such tariffs can be highly effective in helping to increase and maintain the country's economic health. Other economists might be less enthusiastic, as tariffs may reduce trade and there may be many spillovers and externalities involved with trade and tariffs. The existence of these externalities makes the imposition of tariffs a rather ambiguous strategy. As an integral part of the technology strategy, tariffs are effective in supporting the technology strategy's function of enabling the country to outmaneuver the competition in the acquisition and utilization of technology in order to produce products and provide services that excel at satisfying the customer needs for a competitive advantage in domestic and foreign markets. The notion that government and policy would be effective at finding new and infant technologies, rather than supporting existing politically motivated industry, rather than, say, international technology venture specialists, is however, unproven.

This is related to the infant industry argument.

In contrast, in economic theory tariffs are viewed as a primary element in international trade with the function of the tariff being to influence the flow of trade by lowering or raising the price of targeted goods to create what amounts to an artificial competitive advantage. When tariffs are viewed and used in this fashion, they are addressing the country's and the competitors' respective economic healths in terms of maximizing or minimizing revenue flow rather than in terms of the ability to generate and maintain a competitive advantage which is the source of the revenue. As a result, the impact of the tariffs on the economic health of the country are at best minimal but often are counter-productive.

A program within the US intelligence community, Project Socrates, that was tasked with addressing America's declining economic competitiveness, determined that countries like China and India were using tariffs as an integral element of their respective technology strategies to rapidly build their countries into economic superpowers. However, the US intelligence community tends to have limited inputs into developing US trade policy. It was also determined that the US, in its early years, had also used tariffs as an integral part of what amounted to technology strategies to transform the country into a superpower.

essay by Ray | A new era: medicine is an information technology

The impact on health care is bigger than genetics.

 

January 1, 2011
Original link:  http://www.kurzweilai.net/the-new-era-of-health-and-medicine

 
Is it time to rethink the promise of genomics?

There has been recent disappointment expressed in the progress in the field of genomics. In my view, this results from an overly narrow view of the science of genes and biological information processing in general. It reminds me of the time when the field of “artificial intelligence” (AI) was equated with the methodology of “expert systems.” If someone referred to AI they were actually referring to expert systems and there were many articles on how limited this technique was and all of the things that it could not and would never be able to do.

At the time, I expressed my view that although expert systems was a useful approach for a certain limited class of problems it did indeed have restrictions and that the field of AI was far broader.

The human brain works primarily by recognizing patterns (we have about a billion pattern recognizers in the neocortex, for example) and there were at the time many emerging methods in the field of pattern recognition that were solving real world problems and that should properly be considered part of the AI field. Today, no one talks much about expert systems and there is a thriving multi-hundred billion dollar AI industry and a consensus in the AI field that nonbiological intelligence will continue to grow in sophistication, flexibility, and diversity.

The same thing is happening here. The problem starts with the word “genomics.” The word sounds like it refers to “all things having to do with genes.” But as practiced, it deals almost exclusively with single genes and their ability to predict traits or conditions, which has always been a narrow concept. The idea of sequencing genes of an individual is even narrower and typically involves individual single-nucleotide polymorphisms (SNPs) which are variations in a single nucleotide (A, T, C or G) within a gene, basically a two bit alteration.

I have never been overly impressed with this approach and saw it as a first step based on the limitations of early technology. There are some useful SNPs such as Apo E4 but even here it only gives you statistical information on your likelihood of such conditions as Alzheimer’s Disease and macular degeneration based on population analyses. It is certainly not deterministic and has never been thought of that way. As Dr. Venter points out in his Der Spiegel interview, there are hundreds of diseases that can be traced to defects in individual genes, but most of these affect developmental processes. So if you provide a medication that reverses the effect of the faulty gene you still have the result of the developmental process (of, say, the nervous system) that has been going on for many years. You would need to detect and reverse the condition very early, which of course is possible and a line of current investigation.

To put this narrow concept of genomics into perspective, think of genes as analogous to lines of code in a software program. If you examine a software program, you generally cannot assign each line of code to a property of the program. The lines of code work together in a complex way to produce a result. Now it is possible that in some circumstances you may be able to find one line of code that is faulty and improve the program’s performance by fixing that one line or even by removing it. But such an approach would be incidental and accidental, it is not the way that one generally thinks of software. To understand the program you would need to understand the language it is written in and how the various lines interact with each other. In this analogy, a SNP would be comparable to a single letter within a single line (actually a quarter of one letter to be precise since a letter is usually represented by 8 bits and a nucleotide by 2 bits). You might be able to find a particularly critical letter in a software program, but again that is not a well motivated approach.

The collection of the human genome was indeed an exponential process with the amount of genetic data doubling each year and the cost of sequencing coming down by half each other. But its completion around 2003 was just the beginning of another even more daunting process, which is to understand it. The language is the three-dimensional properties and interaction of proteins. We started with individual genes as a reasonable place to start but that was always going to be inherently limited if you consider my analogy above to the role of single lines in a software program.

The structure of DNA. (Image: The U.S. National Library of Medicine)

As we consider the genome, the first thing we notice is only about 3 percent of the human genome codes for proteins. With about 23,000 genes, there are over 23,000 proteins (as some portions of genes also produce proteins) and, of course, these proteins interact with each other in complicated pathways.

A trait in a complex organism such as a human being is actually an emergent property of this complex and organized collection of proteins. The 97 percent of the genome that does not code for proteins was originally called “junk DNA.”

We now understand that this portion of the genome has an important role in controlling and influencing gene expression. It is the case that there is less information in these non-coding regions and they are replete with redundancies that we do not see in the coding regions.

For example, one lengthy sequence called ALU is repeated hundreds of thousands of times. Gene expression is a vital aspect of understanding these genetic processes. The noncoding DNA plays an important role in this, but so do environmental factors. Even ignoring the concept that genes work in networks not as individual entities, genes have never been thought of as deterministic.

The “nature versus nurture” discussion goes back eons. What our genetic heritage describes (and by genetic heritage I include the epigenetic information that influences gene expression) is an entity (a human being) that is capable of evolving in and adapting to a complex environment. Our brain, for example, only becomes capable of intelligent decision making through its constant adaptation to and learning from its environment.

To reverse-engineer biology we need to examine phenomena at different levels, especially looking at the role that proteins (which are coded for in the genome) play in biological processes. In understanding the brain, for example, there is indeed exponential progress being made in simulating neurons, neural clusters, and entire regions. This work includes understanding the “wiring” of the brain (which incidentally includes massive redundancy) and how the modules in the brain (which involve multiple neuron types) process information. Then we can link these processes to biochemical pathways, which ultimately links back to genetic information. But in the process of reverse-engineering the brain, genetic information is only one source and not the most important one at that.

So genes are one level of understanding biology as an information process, but there are other levels as well, and some of these other levels (such as actual biochemical pathways, or mechanisms in organs including the brain) are more accessible than genetic information. In any event, just examining individual genes, let alone SNPs, is like looking through a very tiny keyhole.

As another example of why the idea of examining individual genes is far from sufficient, I am currently involved with a cancer stem cell project with MIT scientists Dr. William Thilly and Dr. Elena Gostjeva. What we have found is that mutations in certain stem cells early in life will turn that stem cell into a cancer stem cell which in turn will reproduce and ultimately seed a cancer tumor. It can take years and often decades for the tumor to become clinically evident. But you won’t find these mutations in a blood test because they are mutations originally in a single cell (which then reproduces to create nearby cells), not in all of your cells. However, understanding the genetic mutations is helping us to understand the process of metastasis, which we hope will lead to treatments that can inhibit the formation of new tumors. This is properly part of gene science but is not considered part of the narrow concept of “genomics,” as that term is understood.

Indeed there is a burgeoning field of stem cell treatments using adult stem cells in the positive sense of regenerating needed tissues. This is certainly a positive and clinically relevant result of the overall science and technology of genes.

If we consider the science and technology of genes and information processing in biology in its proper broad context, there are many exciting developments that have current or near term clinical implications, and enormous promise going forward.

A few years ago, Joslin Diabetes Center researchers showed that by inhibiting a particular gene (which they called the fat insulin receptor gene) in the fat cells (but not the muscle cells as that would negatively affect muscles) enabled caloric restriction without the restriction. The test animals ate ravenously and remained slim. They did not get diabetes or heart disease and lived 20 percent longer, getting most of the benefit of caloric restriction. This research is continuing now focusing on doing the same thing in humans, and the researchers whom I spoke with recently, are optimistic.

We have a new technology that can turn genes off, and that has emerged since the completion of the human genome project (and which has already been recognized with the Noble prize), which is RNA interference (RNAi). There are hundreds of drugs and other processes in the development and testing pipeline using this methodology. As I said above, human characteristics, including disease, result from the interplay of multiple genes. There are often individual genes which if inhibited can have a significant therapeutic effect (such as we might disable a rogue software program by overwriting one line of code or one machine instruction).

There are also new methods of adding genes. I am an advisor (and board member) to United Therapeutics, which has developed a method to take lung cells out of the body, add a new gene in vitro (so that the immune system is not triggered — which was a downside of the old methods of gene therapy), inspect the new cell, and replicate it several million fold. You now have millions of cells with your DNA but with a new gene that was not there before. These are injected back into the body and end up lodged in the lungs. This has cured a fatal disease (pulmonary hypertension) in animal trials and is now undergoing human testing. There are also hundreds of such projects using this and other new forms of gene therapy.

As we understand the network of genes that are responsible for human conditions, especially reversible diseases, we will have the means of changing multiple genes, and turning some off or inhibiting them, turning others on or amplifying them. Some of these approaches are entering human trials. More complex approaches involving multiple genes will require greater understanding of gene networks but that is coming.

There is a new wave of drugs entering trials, some late stage trials that are based on gene results. For example, an experimental drug PLX4032 from Roche is designed to attack tumor cells with a mutation in a particular gene called BRAF. For patients with this genetic variant, 81 percent of patients with advanced melanoma had their tumors shrink (rather than grow), which is an impressive result for a form of cancer that is generally resistant to conventional treatment.

There is the whole area of regenerative medicine from stem cells. Some of this is now being done from adult autologous stem cells. Particularly exciting is the recent breakthrough in induced pluripotent stem cells (IPSCs). This involves using in-vitro genetic engineering to add genes to normal adult cells (such as skin cells) to convert them into the equivalent of embryonic stem cells which can subsequently be converted into any type of cell (with your own DNA). IPSCs have been shown to be pluripotent, to have efficacy, and to not trigger the immune system because they are genetically identical. IPSCs offer the potential to repair essentially any organ from hearts to the liver and pancreas. These methods are part of genetic engineering which in turn is part of gene science and technology.

And then of course there is the entire new field of synthetic biology which is based on synthetic genomes. A major enabling breakthrough was recently announced by Craig Venter’s company in which an organism with a synthetic genome (which previously existed only as a computer file) was created. This field is based on entire genomes not just individual genes and it is certainly part of the broad field of gene science and technology. The goal is to create organisms that can do useful work such as produce vaccines and other medicines, biofuels and other valuable industrial substances.

You could write a book (or many books) about all of the advances that are being made in which knowledge of genetic processes and other biological information processes play a critical role. Health and medicine used to be entirely hit or miss without any concept of how biology worked on an information level. Our knowledge is still very incomplete, but our knowledge of these processes is growing exponentially and that is feeding into medical research which is already bearing fruit. To focus just on the narrow concepts that were originally associated with “genomics” is as limited a view as the old idea of AI being just expert systems.

Free trade

From Wikipedia, the free encyclopedia

Free trade is a free market policy followed by some international markets in which countries' governments do not restrict imports from, or exports to, other countries. In government, free trade is predominately advocated by political parties that hold right-wing economic positions, while economically left-wing political parties generally support protectionism.

Most nations are today members of the World Trade Organization (WTO) multilateral trade agreements. Free trade is additionally exemplified by the European Economic Area and the Mercosur, which have established open markets. However, most governments still impose some protectionist policies that are intended to support local employment, such as applying tariffs to imports or subsidies to exports. Governments may also restrict free trade to limit exports of natural resources. Other barriers that may hinder trade include import quotas, taxes, and non-tariff barriers, such as regulatory legislation.

There is a broad consensus among economists that protectionism has a negative effect on economic growth and economic welfare, while free trade and the reduction of trade barriers to trade has a positive effect on economic growth.^{[5][6][7][8][9][10]} However, liberalization of trade can cause significant and unequally distributed losses, and the economic dislocation of workers in import-competing sectors.^[6]

Features of free trade

Free trade policies generally promote the following features:

• Trade of goods without taxes (including tariffs) or other trade barriers (e.g., quotas on imports or subsidies for producers)
• Trade in services without taxes or other trade barriers
• The absence of "trade-distorting" policies (such as taxes, subsidies, regulations, or laws) that give some firms, households, or factors of production an advantage over others
• Unregulated access to markets
• Unregulated access to market information
• Inability of firms to distort markets through government-imposed monopoly or oligopoly power
• Trade agreements which encourage free trade.

Economics of free trade

Economic models

Two simple ways to understand the proposed benefits of free trade are through David Ricardo's theory of comparative advantage and by analyzing the impact of a tariff or import quota. An economic analysis using the law of supply and demand and the economic effects of a tax can be used to show the theoretical benefits and disadvantages of free trade.^[11][12]
Most economists would recommend that even developing nations should set their tariff rates quite low, but the economist Ha-Joon Chang, a proponent of industrial policy, believes higher levels may be justified in developing nations because the productivity gap between them and developed nations today is much higher than what developed nations faced when they were at a similar level of technological development. Underdeveloped nations today, Chang believes, are weak players in a much more competitive system.^[13][14] Counterarguments to Chang's point of view are that the developing countries are able to adopt technologies from abroad, whereas developed nations had to create new technologies themselves, and that developing countries can sell to export markets far richer than any that existed in the 19th century.

If the chief justification for a tariff is to stimulate infant industries, it must be high enough to allow domestic manufactured goods to compete with imported goods in order to be successful. This theory, known as import substitution industrialization, is largely considered ineffective for currently developing nations.^[13]

The economics of tariffs

The pink regions are the net loss to society caused by the

existence of the tariff.

The chart at the right analyzes the effect of the imposition of an import tariff on some imaginary good. Prior to the tariff, the price of the good in the world market (and hence in the domestic market) is P_world. The tariff increases the domestic price to P_tariff. The higher price causes domestic production to increase from Q_S1 to Q_S2 and causes domestic consumption to decline from Q_C1 to Q_C2.

This has three main effects on societal welfare. Consumers are made worse off because the consumer surplus (green region) becomes smaller. Producers are better off because the producer surplus (yellow region) is made larger. The government also has additional tax revenue (blue region). However, the loss to consumers is greater than the gains by producers and the government. The magnitude of this societal loss is shown by the two pink triangles. Removing the tariff and having free trade would be a net gain for society.

An almost identical analysis of this tariff from the perspective of a net producing country yields parallel results. From that country's perspective, the tariff leaves producers worse off and consumers better off, but the net loss to producers is larger than the benefit to consumers (there is no tax revenue in this case because the country being analyzed is not collecting the tariff). Under similar analysis, export tariffs, import quotas, and export quotas all yield nearly identical results.^[11]

Sometimes consumers are better off and producers worse off, and sometimes consumers are worse off and producers are better off, but the imposition of trade restrictions causes a net loss to society because the losses from trade restrictions are larger than the gains from trade restrictions. Free trade creates winners and losers, but theory and empirical evidence show that the size of the winnings from free trade are larger than the losses.^[11]

Trade diversion

According to mainstream economic theory, the selective application of free trade agreements to some countries and tariffs on others can lead to economic inefficiency through the process of trade diversion. It is economically efficient for a good to be produced by the country which is the lowest cost producer, but this does not always take place if a high cost producer has a free trade agreement while the low cost producer faces a high tariff. Applying free trade to the high cost producer (and not the low cost producer as well) can lead to trade diversion and a net economic loss. This is why many economists place such high importance on negotiations for global tariff reductions, such as the Doha Round.^[11]

Opinion of economists

The literature analysing the economics of free trade is extremely rich with extensive work having been done on the theoretical and empirical effects. Though it creates winners and losers, the broad consensus among economists is that free trade is a large and unambiguous net gain for society. In a 2006 survey of American economists (83 responders), "87.5% agree that the U.S. should eliminate remaining tariffs and other barriers to trade" and "90.1% disagree with the suggestion that the U.S. should restrict employers from outsourcing work to foreign countries."^[19]

Quoting Harvard economics professor N. Gregory Mankiw, "Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards."^[20] In a survey of leading economists, none disagreed with the notion that "freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment."^[21]

Most economists would agree^{[citation needed]} that although increasing returns to scale might mean that certain industry could settle in a geographical area without any strong economic reason derived from comparative advantage, this is not a reason to argue against free trade because the absolute level of output enjoyed by both "winner" and "loser" will increase with the "winner" gaining more than the "loser" but both gaining more than before in an absolute level.

History

Early era

David Ricardo

The notion of a free trade system encompassing multiple sovereign states originated in a rudimentary form in 16th century Imperial Spain.^[22] American jurist Arthur Nussbaum noted that Spanish theologian Francisco de Vitoria was "the first to set forth the notions (though not the terms) of freedom of commerce and freedom of the seas."^[23] Vitoria made the case under principles of jus gentium.^[23] However, it was two early British economists Adam Smith and David Ricardo who later developed the idea of free trade into its modern and recognizable form.

Economists who advocated free trade believed trade was the reason why certain civilizations prospered economically. Adam Smith, for example, pointed to increased trading as being the reason for the flourishing of not just Mediterranean cultures such as Egypt, Greece, and Rome, but also of Bengal (East India) and China. The great prosperity of the Netherlands after throwing off Spanish Imperial rule and pursuing a policy of free trade^[24] made the free trade/mercantilist dispute the most important question in economics for centuries. Free trade policies have battled with mercantilist, protectionist, isolationist, communist, populist, and other policies over the centuries.

The Ottoman Empire had liberal free trade policies by the 18th century, with origins in capitulations of the Ottoman Empire, dating back to the first commercial treaties signed with France in 1536 and taken further with capitulations in 1673, in 1740 which lowered duties to only 3% for imports and exports, and in 1790. Ottoman free trade policies were praised by British economists advocating free trade, such as J. R. McCulloch in his Dictionary of Commerce (1834), but criticized by British politicians opposing free trade, such as prime minister Benjamin Disraeli, who cited the Ottoman Empire as "an instance of the injury done by unrestrained competition" in the 1846 Corn Laws debate, arguing that it destroyed what had been "some of the finest manufactures of the world" in 1812.^[25]

Average Tariff Rates (France, UK, US)

Trade in colonial America was regulated by the British mercantile system through the Acts of Trade and Navigation. Until the 1760s, few colonists openly advocated for free trade, in part because regulations were not strictly enforced – New England was famous for smuggling – but also because colonial merchants did not want to compete with foreign goods and shipping. According to historian Oliver Dickerson, a desire for free trade was not one of the causes of the American Revolution. "The idea that the basic mercantile practices of the eighteenth century were wrong," wrote Dickerson, "was not a part of the thinking of the Revolutionary leaders".^[26]

Free trade came to what would become the United States as a result of American Revolutionary War. After the British Parliament issued the Prohibitory Act, blockading colonial ports, the Continental Congress responded by effectively declaring economic independence, opening American ports to foreign trade on April 6, 1776. According to historian John W. Tyler, "Free trade had been forced on the Americans, like it or not."^[27]

In March 1801 the Pope Pius VII ordered some liberalization of trade to face the economic crisis in the Papal States with the Motu Proprio "Le più colte"; despite of this, the export of national corn was forbidden to ensure the food for the State.

Britain waged two Opium Wars to force China to legalize the opium trade and to open all of China to British merchants.

In Britain, free trade became a central principle practiced by the repeal of the Corn Laws in 1846. Large-scale agitation was sponsored by the Anti-Corn Law League. Under the Treaty of Nanking, China opened five treaty ports to world trade in 1843. The first free trade agreement, the Cobden-Chevalier Treaty, was put in place in 1860 between Britain and France, which led to successive agreements between other countries in Europe.^[28]

Many classical liberals, especially in 19th and early 20th century Britain (e.g. John Stuart Mill) and in the United States for much of the 20th century (e.g., Henry Ford and Secretary of State Cordell Hull), believed that free trade promoted peace. Woodrow Wilson included free-trade rhetoric in his "Fourteen Points" speech of 1918:

The program of the world's peace, therefore, is our program; and that program, the only possible program, all we see it, is this: [...]

3. The removal, so far as possible, of all economic barriers and the establishment of equality of trade conditions among all the nations consenting to the peace and associating themselves for its maintenance.^[29]

According to economic historian Douglas Irwin, a common myth about U.S. trade policy is that low tariffs harmed American manufacturers in the early 19th century and then that high tariffs made the United States into a great industrial power in the late 19th century.^[30] A review by the Economist of Irwin's 2017 book Clashing over Commerce: A History of US Trade Policy notes^[30]:

Political dynamics would lead people to see a link between tariffs and the economic cycle that was not there. A boom would generate enough revenue for tariffs to fall, and when the bust came pressure would build to raise them again. By the time that happened, the economy would be recovering, giving the impression that tariff cuts caused the crash and the reverse generated the recovery. Mr Irwin also methodically debunks the idea that protectionism made America a great industrial power, a notion believed by some to offer lessons for developing countries today. As its share of global manufacturing powered from 23% in 1870 to 36% in 1913, the admittedly high tariffs of the time came with a cost, estimated at around 0.5% of GDP in the mid-1870s. In some industries, they might have sped up development by a few years. But American growth during its protectionist period was more to do with its abundant resources and openness to people and ideas.

According to Paul Bairoch, since the end of the 18th century, the United States has been "the homeland and bastion of modern protectionism". In fact, the United States never adhered to free trade until 1945. For the most part, the "Jeffersonians" strongly opposed it. In the 19th century, statesmen such as Senator Henry Clay continued Hamilton's themes within the Whig Party under the name "American System." The opposition Democratic Party contested several elections throughout the 1830s, 1840s, and 1850s in part over the issue of the tariff and protection of industry.^[31]

In the U.S., the Democratic Party favored moderate tariffs used for government revenue only, while the Whigs favored higher protective tariffs to protect favored industries. The economist Henry Charles Carey became a leading proponent of the "American System" of economics. This mercantilist "American System" was opposed by the Democratic Party of Andrew Jackson, Martin Van Buren, John Tyler, James K. Polk, Franklin Pierce, and James Buchanan.

The fledgling Republican Party led by Abraham Lincoln, who called himself a "Henry Clay tariff Whig", strongly opposed free trade and implemented a 44% tariff during the Civil War – in part to pay for railroad subsidies and for the war effort, and to protect favored industries.^[32] William McKinley (later to become President of the United States) stated the stance of the Republican Party (which won every election for President from 1868 until 1912, except the two non-consecutive terms of Grover Cleveland) as thus:

Under free trade the trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man. [It is said] that protection is immoral…. Why, if protection builds up and elevates 63,000,000 [the U.S. population] of people, the influence of those 63,000,000 of people elevates the rest of the world. We cannot take a step in the pathway of progress without benefitting mankind everywhere. Well, they say, 'Buy where you can buy the cheapest'…. Of course, that applies to labor as to everything else. Let me give you a maxim that is a thousand times better than that, and it is the protection maxim: 'Buy where you can pay the easiest.' And that spot of earth is where labor wins its highest rewards.^[33]

During the interwar period, economic protectionism took hold in the United States, most famously in the form of the Smoot-Hawley Tariff Act, which is credited by economists with the prolonging and worldwide propagation of the Great Depression.^[34]:33[35] From 1934, trade liberalization began to take place through the Reciprocal Trade Agreements Act.

George W. Bush and Hu Jintao of China meet while attending an APEC summit in Santiago de Chile, 2004.

In Kicking Away the Ladder, development economist Ha-Joon Chang reviews the history of free trade policies and economic growth, and notes that many of the now-industrialized countries had significant barriers to trade throughout their history. The United States and Britain, sometimes considered the homes of free trade policy, employed protectionism to varying degrees at all times. Britain abolished the Corn Laws, which restricted import of grain, in 1846 in response to domestic pressures, and it reduced protectionism for manufactures in the mid 19th century, when its technological advantage was at its height, but tariffs on manufactured products had returned to 23% by 1950. The United States maintained weighted average tariffs on manufactured products of approximately 40–50% up until the 1950s, augmented by the natural protectionism of high transportation costs in the 19th century.^[36] The most consistent practitioners of free trade have been Switzerland, the Netherlands, and to a lesser degree Belgium.^[37] Chang describes the export-oriented industrialization policies of the Four Asian Tigers as "far more sophisticated and fine-tuned than their historical equivalents".^[38]

Some degree of protectionism is nevertheless the norm throughout the world. Most developed nations maintain controversial^{[citation needed]} agricultural tariffs. From 1820 to 1980, the average tariffs on manufactures in twelve industrial countries ranged from 11 to 32%. In the developing world, average tariffs on manufactured goods are approximately 34%.^[39] The American economist C. Fred Bergsten devised the ‘bicycle theory’ to describe trade policy. According to this model trade policy is ‘dynamically unstable’, in that it constantly tends towards either liberalisation or protectionism. To prevent falling off the bike (the disadvantages of protectionism), trade policy and multilateral trade negotiations must constantly pedal towards greater liberalisation. To achieve greater liberalisation decision makers must appeal to the greater welfare for consumers and the wider national economy over narrower parochial interests. However, Bergsten also posits that it is also necessary to compensate the losers in trade and help them find new work, as this will both reduce the backlash against globalisation and the motives for trades unions and politicians to call for protection of trade.^[40]

Post-World War II

Since the end of World War II, in part due to industrial size and the onset of the Cold War, the United States has often been a proponent of reduced tariff-barriers and free trade. The U.S. helped establish the General Agreement on Tariffs and Trade (GATT) and later the World Trade Organization (WTO); although it had rejected an earlier version in the 1950s (International Trade Organization or ITO). Since the 1970s, U.S. governments have negotiated managed-trade agreements, such as the North American Free Trade Agreement (NAFTA) in the 1990s, the Dominican Republic-Central America Free Trade Agreement (CAFTA) in 2006, and a number of bilateral agreements (such as with Jordan).

In Europe, six countries formed the European Coal and Steel Community (ECSC) in 1951 which became the European Economic Community (EEC) in 1958. Two core objectives of the EEC were the development of a common market, subsequently renamed the single market, and establishing a customs union between its member states. After expanding its membership, the EEC became the European Union (EU) in 1993. The European Union, now the world's largest single market,^[42] has concluded free trade agreements with many countries around the world.^[43]

Current status

Singapore is the top country in the Enabling Trade Index.

Most countries in the world are members of the World Trade Organization,^[44] which limits in certain ways but does not eliminate tariffs and other trade barriers. Most countries are also members of regional free trade areas that lower trade barriers among participating countries. The EU and the US are negotiating a Transatlantic Trade and Investment Partnership. Initially led by the U.S., twelve countries that have borders on the Pacific Ocean are currently in private negotiations^[45] around the Trans-Pacific Partnership, which is being touted by the negotiating countries as a free trade policy.^[46] In January 2017, the United States pulled out of negotiations for the Trans-Pacific Parternship.^[47]

Degree of free trade policies

Free trade may apply to trade in services as well as in goods. Non-economic considerations may inhibit free trade: a country may espouse free trade in principle but (for example) ban certain drugs (such as alcohol) or certain practices (such as prostitution^[48]), thus limiting international free trade.

Free trade in goods

The Enabling Trade Index measures the factors, policies and services that facilitate the trade in goods across borders and to destinations. The index summarizes four sub-indexes: market access; border administration; transport and communications infrastructure; and business environment. The top 30 countries and areas as of 2016 were:^[49]

1.  Singapore 6.0
2.  Netherlands 5.7
3.  Hong Kong 5.7
4.  Luxembourg 5.6
5.  Sweden 5.6
6.  Finland 5.6
7.  Austria 5.5
8.  United Kingdom 5.5
9.  Germany 5.5
10.  Belgium 5.5
11.   Switzerland 5.4
12.  Denmark 5.4
13.  France 5.4
14.  Estonia 5.3
15.  Spain 5.3
16.  Japan 5.3
17.  Norway 5.3
18.  New Zealand 5.3
19.  Iceland 5.3
20.  Ireland 5.3
21.  Chile 5.3
22.  United States 5.2
23.  United Arab Emirates 5.2
24.  Canada 5.2
25.  Czech Republic 5.1
26.  Australia 5.1
27.  South Korea 5.0
28.  Portugal 5.0
29.  Lithuania 5.0
30.  Israel 5.0

The politics of free trade

The relative costs, benefits and beneficiaries of free trade are debated by academics, governments and interest groups.

Arguments for protectionism fall into the economic category (trade hurts the economy or groups in the economy) or the moral category (the effects of trade might help the economy, but have ill effects in other areas); a general argument against free trade is that it is colonialism or imperialism in disguise. The moral category is wide, including concerns of destroying infant industries and undermining long-run economic development, income inequality, environmental degradation, supporting child labor and sweatshops, race to the bottom, wage slavery, accentuating poverty in poor countries, harming national defense, and forcing cultural change.

Economic arguments against free trade criticize the assumptions or conclusions of economic theories. Sociopolitical arguments against free trade cite social and political effects that economic arguments do not capture, such as political stability, national security, human rights and environmental protection.

Free trade is often opposed by domestic industries that would have their profits and market share reduced by lower prices for imported goods.^[51][52] For example, if United States tariffs on imported sugar were reduced, U.S. sugar producers would receive lower prices and profits, while U.S. sugar consumers would spend less for the same amount of sugar because of those same lower prices. The economic theory of David Ricardo holds that consumers would necessarily gain more than producers would lose.^[53][54] Since each of those few domestic sugar producers would lose a lot while each of a great number of consumers would gain only a little, domestic producers are more likely to mobilize against the lifting of tariffs.^[52] More generally, producers often favor domestic subsidies and tariffs on imports in their home countries, while objecting to subsidies and tariffs in their export markets.

Real Wages vs Trade as a Percent of GDP

Socialists frequently oppose free trade on the ground that it allows maximum exploitation of workers by capital. For example, Karl Marx wrote in The Communist Manifesto, "The bourgeoisie... has set up that single, unconscionable freedom – free trade. In one word, for exploitation, veiled by religious and political illusions, it has substituted naked, shameless, direct, brutal exploitation." Nonetheless, Marx did favor free trade – solely because he felt that it would hasten the social revolution.

"Free trade" is opposed by many anti-globalization groups, based on their assertion that free trade agreements generally do not increase the economic freedom of the poor or the working class, and frequently make them poorer. Where the foreign supplier allows de facto exploitation of labor, domestic free-labor is unfairly forced to compete with the foreign exploited labor. To this extent, free trade is seen as an end-run around workers' rights and laws that protect individual liberty.

Some opponents of free trade favor free trade theory but oppose free trade agreements as applied. Some opponents of NAFTA see the agreement as being materially harmful to the common people, but some of the arguments are actually against the particulars of government-managed trade, rather than against free trade per se. For example, it is argued that it would be wrong to let subsidized corn from the U.S. into Mexico freely under NAFTA at prices well below production cost (dumping) because of its ruinous effects to Mexican farmers. Of course, such subsidies violate free trade theory, so this argument is not actually against the principle of free trade, but rather its selective implementation.

Research shows that support for trade restrictions is highest among respondents with the lowest levels of education.^[58] The authors find "that the impact of education on how voters' think about trade and globalization has more to do with exposure to economic ideas and information about the aggregate and varied effects of these economic phenomena, than it does with individual calculations about how trade affects personal income or job security. This is not to say that the latter types of calculations are not important in shaping individuals' views of trade – just that they are not being manifest in the simple association between education and support for trade openness."^[58] A 2017 study found that individuals whose occupations are routine-task-intensive and who do jobs that are offshorable are more likely to be protectionist.^[59]

Research suggests that attitudes towards free trade do not necessarily reflect individuals' self-interests.

Colonialism

It has long been argued that free trade is a form of colonialism or imperialism, a position taken by various proponents of economic nationalism and the school of mercantilism. In the 19th century these criticized British calls for free trade as cover for British Empire, notably in the works of American Henry Clay, architect of the American System^[62] and by German American economist Friedrich List.^[63]
More recently, Ecuadorian President Rafael Correa has denounced the "sophistry of free trade" in an introduction he wrote for a book titled The Hidden Face of Free Trade Accords, written in part by Correa's current Energy Minister Alberto Acosta. Citing as his source the book Kicking Away the Ladder, written by Ha-Joon Chang, Correa identified the difference between an "American system" opposed to a "British System" of free trade. The latter, he says, was explicitly viewed by the Americans as "part of the British imperialist system." According to Correa, Chang showed that it was Treasury Secretary Alexander Hamilton, and not Friedrich List, who was the first to present a systematic argument defending industrial protectionism.

Alternatives

The following alternatives for free trade have been proposed: balanced trade, fair trade, protectionism, industrial policy.

In literature

The value of free trade was first observed and documented by Adam Smith in The Wealth of Nations, in 1776.^[64] He wrote,

It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy.... If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.^[65]

This statement uses the concept of absolute advantage to present an argument in opposition to mercantilism, the dominant view surrounding trade at the time, which held that a country should aim to export more than it imports, and thus amass wealth.^[66] Instead, Smith argues, countries could gain from each producing exclusively the good(s) in which they are most suited to, trading between each other as required for the purposes of consumption. In this vein, it is not the value of exports relative to that of imports that is important, but the value of the goods produced by a nation. The concept of absolute advantage however does not address a situation where a country has no advantage in the production of a particular good or type of good.^[67]

This theoretical shortcoming was addressed by the theory of comparative advantage. Generally attributed to David Ricardo who expanded on it in his 1817 book On the Principles of Political Economy and Taxation,^[68] it makes a case for free trade based not on absolute advantage in production of a good, but on the relative opportunity costs of production. A country should specialize in whatever good it can produce at the lowest cost, trading this good to buy other goods it requires for consumption. This allows for countries to benefit from trade even when they do not have an absolute advantage in any area of production. While their gains from trade might not be equal to those of a country more productive in all goods, they will still be better off economically from trade than they would be under a state of autarky. ^[69][70]

Exceptionally, Henry George's 1886 book Protection or Free Trade was read out loud in full into the Congressional Record by five Democratic congressmen.^[71][72] Tyler Cowen wrote that 'Protection or Free Trade "remains perhaps the best-argued tract on free trade to this day."^[73] George discusses the subject in particular with respect to the interests of labor. Although George is very critical towards protectionism:

We all hear with interest and pleasure of improvements in transportation by water or land; we are all disposed to regard the opening of canals, the building of railways, the deepening of harbors, the improvement of steamships as beneficial. But if such things are beneficial, how can tariffs be beneficial? The effect of such things is to lessen the cost of transporting commodities; the effect of tariffs is to increase it. If the protective theory be true, every improvement that cheapens the carriage of goods between country and country is an injury to mankind unless tariffs be commensurately increased.^[74]

George considers the general free trade argument 'inadequate'. He argues that the removal of protective tariffs alone is never sufficient to improve the situation of the working class, unless accompanied by a shift towards land value tax.