05.16.2011 0

Free Trade Has Created a Better World

By Adam Bitely – As the global economy has developed over the past century, no policy has allowed economies and countries to flourish more than when people are allowed to engage in free trade. When governments remove the barriers to trade, such as quotas and tariffs, all countries involved in the trading relationship see a multitude of benefits.

Why is it that free trade leads to a more prosperous society? This has to do with the theory of comparative advantage. David Ricardo, the economist who first stated this theory, is responsible for theorizing how countries act when free trade occurs. His theory of comparative advantage states that a country will specialize in producing goods and services that they have the lowest opportunity cost in producing compared to all other nations.

For example, if there is a lower opportunity cost to making cars in America than Mexico, and Mexico has a lower opportunity cost at making clothing than America, America will spend its resources making cars and Mexico will spend theirs making clothing. The two countries will then engage in trade to acquire the desired goods of the other.

In America, free trade policies over the past century have led to an unbelievable increase in wealth and prosperity that the world has not before seen, and an increase that has helped other countries and economies develop and prosper worldwide.

The father of the study of economics, Adam Smith, was the first person to state how trade benefits countries. In his masterpiece, The Wealth of Nations, Smith described the benefits that countries receive through free trade. As Smith stated, “[a]ll commerce that is carried on betwixt any two countries must necessarily be advantageous to both… [therefore] all duties, customs, and excise [on imports] should be abolished and free commerce and liberty of exchange should be allowed with all nations.”

Adam Smith correctly recognized that trade between nations was mutually beneficial and that restrictions on trade harmed the people in the trading relationship. The restrictions to trade stand in the way of allowing markets to flourish and prevent resources from being put to their best possible uses.

Just consider what happens when a country imposes a tariff.

When a tariff is imposed, the country imposing the tariff always loses. A tariff taxes an imported good which raises the price of that good above the world price. Tariffs are designed to help protect domestic producers, but only harm domestic consumers who are forced to pay more. The only losers after a tariff are put in place are those that enact it.

Unrestricted and unfettered trade occurs daily inside of the United States. No one inside of the U.S. is restricted from trading with other people that are located inside of the same national political borders. There are no restrictions because the government recognizes that free trade between U.S. citizens benefits the country. So too would free trade with anyone around the world.

The benefits that come along with the unfettered ability for free people to trade as they see fit far outweigh any perceived resulting disadvantage. The consumer always wins when they are able to demand a product that is offered in the largest possible market. When the government puts up trade barriers, the most visible result is people losing their wealth to protect a few domestic producers.

A free trade policy is the policy of a free people. To stand in the way of free trade is to stand in the way of progress.

Adam Bitely is the Editor-in-Chief of NetRightDaily.com. You can follow him on Twitter at @AdamBitely.

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