Written by Yoochan Hwang, 11F

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In 1824, the historian and Whig politician Thomas Babington Macaulay once said, “Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country, unpopular”(Macaulay,1824). His statement highlighted the political challenge faced in pursuing free trade and the benefits that they could have gained if a government forged free trade. Nevertheless, the idea of free trade has proliferated in recent decades. The size of current international trade has been growing to a significant share of the world's GDP. In March 2023, the USA alone had exported $184B and imported $263B worth of goods. (United States (USA) Exports, Imports, and Trade Partners | OEC, n.d.) This clear change in governments’ attitude toward free trade reflects David Friedman’s argument on the welfare gains from free trade. David Friedman, an American economist, explores an interesting concept of international trade between the nations through his thought experiment, known as “the Iowa Car Crop”. In his finding, he argues that growing wheat can be viewed as just another "technology" for manufacturing cars, and under certain circumstances, it can even prove to be a more efficient method. The theory raises a puzzling question: if international trade contains such tremendous potential for economic growth and efficiency gains, why do governments impose trade barriers such as tariffs and quotas? It is argued in this essay that there are complicated economic, political, and social factors that influence governments' decisions. While governments consider not only short-term but also long-term economic consequences of free trade, political and social factors revolving around trade policy also come into play. 

 

The conventional wisdom that has long standed ever since, at least, the age of mercantilism, posits that trade surplus, achieved by government interventions and trade barriers, is key to the wealth and political power of a nation. For example, Mercantilistic countries in Europe back in 16 and 18 centuries pursued trade surpluses by importing cheap raw materials from and exporting the finished products to their colonies at high prices. This allowed the colonists to accumulate their wealth and power over others. The perception of the trade surplus as the only way to achieve successful trade and deficit as a failure has been continued since the 16th centuries and still, some governments impose protectionist policies to maintain the surplus. 

 

However, Adam Smith, also known as the founder of modern economics, presents the ideology of free market and trade, completely changing the way we understand international trade and trade barriers. In his ideology, he defines the free market as a place where “people could make, buy, and sell what they wanted without enormous waste or want.” (The Economics Book, n.d.) His argument highlights that minimum government intervention will ignite the economic activities of individuals because they pursue their own interests. To maximize their profit, firms will implement the division of labour and specialization and the goods and services will be produced in the most efficient way. Smith’s free market is defined as Pareto efficient where resources are efficiently allocated, resulting in the biggest welfare of the economy. This self-governing market, run by the "invisible hand", creates the best output without any intervention or planning.

 

In addition to Smith's theory of invisible hand, David Ricardo emphasized the importance of free trade in national economic development with his idea of comparative advantage. His theory shows that by specialising in one good they are best at producing and trading them to purchase other is the most efficient way of production. Therefore, he suggests that Britain's production of multiple goods that they do not expert in creates relatively large opportunity costs. His statement argues that no matter the value of output and what is being traded, both countries will benefit from the cheapest price and the least waste following the comparative advantage. It is worth noting that the benefits of free trade championed by Adam Smith, David Ricardo and their successors are based on economic analysis in the short term. In other words, they do not consider long-term consequences of free trade might have over the course of a nation’s long-term economic development. 

 

Some economists and policymakers argue that globalization's achievements exemplify the benefits of free trade. In 1995, the former president of Mexico, Carlos Salinas emphasized that “globalization is the fact of economic life” (Salinas,1995), after observing a growth of GDP as international trade had increased. While some argue that developing countries fell behind in the wave of globalization and even experienced stagnated economic development and worsen labour conditions, others contend otherwise. For example, the finding from a study conducted by Dollar & Kraay (2001) clearly presents the accelerated economic growth rates and poverty reduction of the post-1980 globalizers, a group of developing countries that significantly opened up to international trade. The graph below clearly shows the increase of GDP of the globalizers through 1960s to 80s while the rich countries’ GDP actually decreases over time and non globalizers fluctuate. This growth of the GDP also contributes to the reduction of poverty and narrowing the gap of income of the rich and poor. Dollar and Kraay’s finding presents the achievements of globalization as providing compelling evidence for the positive impacts of free trade on economic growth and welfare.

 

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Fig.1 Real per capita GDP growth - Dollar and Kraay (2001)

 

On the other hand, despite all these claimed benefits that globalisation has brought to the world economy, globalization has never been without criticism and thus raised doubt on the economic benefits of free trade. Criticisms of globalization particularly rest upon the perspective of developing countries. For instance, according to Andre Gunder Frank's Dependency Theory, globalization fosters a hierarchy in the relationship which develops to an exploratory one.  Between developed and developing countries, the developing countries become dependent on the developed for resources, technology, and markets. This dependence of the developing nation,  often supplying raw materials and cheap labour force, slows their prospect of growth and economical independence. As a result, these countries face challenges such as unequal terms of trade, limited access to capital and technology, and vulnerability to external shocks and unexpected decisions. Dependency Theory displays the power imbalances and structural limitations that slows the development and prosperity of developing nations within the context of globalization, offering a critical perspective on the economic implications of the globalized world order. It highlights that globalization can largely hinder developing countries from undergoing structural changes in the long term and thus serve as a constraint on development. 

 

Furthermore, Joseph E. Stiglitz has expressed concerns about the potential negative consequences of globalization and free trade on developed economies. He argues that while globalization is often viewed as inevitable due to technological advancements of the wealthy nations, policy choices made by the government can either promote or hinder its progress. The careful choice of the government regarding the trade barriers and taxation is necessary, to harmonically integrate the foreign products into the nation’s economy and lead to the growth of the nation. Stiglitz's argument highlights the need for careful consideration of the implications of globalization and the pursuit of free trade. 

 

In particular, adding up to Siglitz’s point, the history of economic development in some East Asian countries shows why government-led economies and trade barriers are crucial for the rapid growth of the nation’s economic development. The economic success of the Asian Tigers, including South Korea, Singapore, and Taiwan evidently shows the advantages of government-led economies and trade barriers in fostering economic development (Asian Tiger Economies, n.d.). Through the implementation of a model known as the "developmental state,"(Chalmers Johnson,1992) the governments of these nations directed economic activities, encouraging investments toward infant industries, and promoted technological upgrading of producers . In Korea, this process, undertaken by president Park Jung Hee had transformed Korea into an economically outstanding nation in Asia from an impoverished country after the Korean War. The president and policymakers aimed to industrialize Korea’s economy and fostered a shift of workers from agriculture to the expanding industrial sector, facilitating the skill development through investments in education, and obtaining sustainable growth driven by trade. The graph below clearly demonstrates the tremendous increase of GDP of Korea compared to the other nations. From the 2002 Korea world cup, the rate of increase had skyrocketed and has been continuing its progress.With the help of the government, the East Asian nations were able to specialise in technology- and capital-intensive sectors with the comparative advantage and the firm control of the dependency on other nations was achievable. The success of the Asian Tigers and the remarkable economic growth points out the potential benefits of government-led economies and trade barriers in facilitating economic growth and development. 

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Fig.2 change in percent of GDP-Santacreu, A. M., & Zhu, H. (2022).

 

As a result of the rapid growth of the nations, the interconnectedness of the countries has been rising after with the globalizers. Hence, the conflict and disputes during international trade have driven governments to impose trade barriers for political reasons. Dani Rodrik's concept of the "trilemma" (Rodrick,2011) highlights the challenges governments face from globalization and free trade. The trilema consists of these three factors: market integration, democracy, and independent nation-states. However, only two of these objectives can be achieved simultaneously. The governments often prioritize their political interests and therefore, to survive in the trade war and to sanction other countries, the government may impose trade barriers, such as tariffs and quotas, which interfere with the market integration of foreign goods or services. His critique ultimately emphasizes the importance of recognizing and managing the tensions between globalization, democracy, and national sovereignty. The combination of the two from trilema can drive the nation to prosper or lead them to its demise.

 

Furthermore, trade barriers are often used as a retaliation in international conflict. The most evident case of the usage is present in the ongoing trade dispute between China and the United States, started in 2018. The conflict had originated from the Donald Trump administration when they identified China’s theft of intellectual properties and unfair trade measures. This had led the United States to impose tariffs ranging from 2.5 to 25 percent on billions of dollars worth of goods imported from China. As a response, China imposed tariffs on goods from States, ranging from 15 to 25 percent. As a result of this conflict, US tariffs affected around 18% of its imports, equivalent to 2.6% of its GDP, while China's retaliation impacted 11% of its imports, equivalent to 3.6% of its GDP. (Durnate,2022) Apart from the impact it had on the two countries, the event had raised huge concerns to the international trading system. Currently in 2023, the ongoing conflict highlights the fact that trade barriers can be used as a very effective long-term weapon that nations can implement to react to each other’s conflicts and hostilities.

 

Finally, the growing production and the exploitation of resources for global trade raises questions about the social impact: how trade and the environment interact with each other. Developed countries such as the USA often impose  "green tariffs" or "carbon tariffs” to address environmental concerns and protect themselves from potentially harmful imports. These trade barriers not only allow the countries to deal with the nation’s environmental issues but also hinders the wasteful exploitation of resources. By doing so, they aim to ensure sustainable practices and pressure other nations for the development of environmental policies.  

 

To conclude, it is evident that there are complex driving forces that lead governments to impose trade barriers in their nations. By extensively reviewing relevant theoretical ideas and historical examples, participating in international trade and managing their outputs, government should consider both short and long term implications of free trade in economic,political, and social areas. These convoluted factors closely related to each other can hold limitless possibilities that may drive a nation’s economic prosperity or perils of international trade. 

 

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References:

 

1 Samuel Greg, ‘How free trade benefits nations’, Law and Liberty, 5 November 2018.

2 Iqbal, N. (2008). [Review of Free Trade under Fire, by D. A. Irvin]. The Pakistan Development Review,    47(1), 118–120. 

3 United States (USA) Exports, Imports, and Trade Partners | OEC. (n.d.). OEC - the Observatory of Economic Complexity. https://oec.world/en/profile/country/usa

4 Landsburg, Steven E. (1993). Chapter 21. The Iowa Car Crop (pp.197-199). The Armchair

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6 Dollar & Kraay (2001). Trade, Growth, and Poverty. Finance and Development, September 2001,

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10 Michael Sarel Economic Issues 1 -- Growth in East Asia. (1996, September 12).

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11 Dhawan, R. K. (2023, June 13). 'Developmental state' of Korea. Koreatimes. 

12 Santacreu, A. M., & Zhu, H. (2022). How did South Korea’s economy develop so quickly? 

13Woo-Cumings, M. (Ed.). (1999). The Developmental State. Cornell University Press.

14 Rodrik, D. (2011). The Globalization Paradox: Democracy and the Future of the World Economy. W. W. Norton & Company.

15 Alex Durnate How the Section 232 Tariffs on Steel and Aluminum Harmed the Economy. (2023, May 22). Tax Foundation. 

16 Harvey, F. (2022, December 13). Green tariffs: what are they and why do they matter? The Guardian. 

17 Conybeare, J. A. C. (1988). MANAGING INTERNATIONAL TRADE CONFLICTS: EXPLANATIONS AND PRESCRIPTION. Journal of International Affairs, 42(1), 75–91. 

18 Carlos Sánchez, A. B. (1995). México: la primera gran crisis en la globalización financiera. Problemas Del Desarrollo, 26(102), 85–108. http://www.jstor.org/stable/43837522

19 Conybeare, J. A. C. (1988). MANAGING INTERNATIONAL TRADE CONFLICTS: EXPLANATIONS AND PRESCRIPTION. Journal of International Affairs, 42(1), 75–91.