Ch. 6 Free Trade Organizing the Marketplace Introduction to International Relations SPRING 2014
Free Trade Agreements: Korea FTAs in effect! Korea-Chile FTA! Korea-Singapore FTA! Korea-EFTA FTA! Korea-ASEAN FTA! Korea-India CEPA! Korea-EU FTA! Korea-Peru FTA! Korea-U.S. FTA Concluded FTAs! Korea-Turkey FTA! Korea-Colombia FTA FTAs under negotiation! Korea-Canada FTA! Korea-Mexico FTA! Korea-GCC FTA! Korea-Australia FTA! Korea-New Zealand FTA! Korea-China FTA! Korea-Vietnam FTA! Korea-Indonesia FTA! Korea-China-Japan FTA! Korea-Japan FTA
What is a Free Trade Agreement? A Free Trade Agreement (FTA) is a pact between two countries in which they both agree to lift most or all tariffs, quotas, special fees and taxes, and other barriers to trade between them.
Why Should All Benefit? The basic economic theory of free trade is that of "comparative advantage," which was coined by British political economist David Ricardo.! Put simply, the "theory of comparative advantage " postulates that that in a free marketplace, each country/area will ultimately specialize in that activity where it has comparative advantage (i.e. natural resources, skilled workers, agriculture-friendly weather, etc.)
Liberal International Economic Order Embodying the traditional liberal preference for free and open trade as a means of promoting economic efficiency and prosperity! American foreign policy objective to minimize impediments to the movement of capital and goods. Economic Nationalism - Policies designed to protect domestic industries from foreign competition, usually by using tariffs, quotas and regulations as barriers to imports. World Bank - Initial function providing aid in the rebuilding of war-torn economies has been replaced by controversial focus on aiding and assisting developing nations.! IMF - Initially set up to help nations deal with balance of payment deficits now plays controversial role in assisting developing nations.! GATT - Created 1947 to reduce tariffs and other obstacles to international trade.! WTO - (Formally GATT) Enforce international trade rules promoting free and open trade. 01
Adam Smith and David Ricardo Opposed to Mercantilism: A set of trade policies designed to increase the wealth of the state by rigging trade rules so as to promote exports and reduce imports.! Argued for the removal of trade barriers because restrictions reduced economic competition, caused inefficiency and caused higher consumer prices.! Both believed in Laissez-Fair : An economic environment in which transactions between private parties are free from government restrictions, tariffs, and subsidies, with only enough regulations to protect property rights. (Literally means: allow to do or leave alone
Adam Smith Considered the father of modern economics! Opposition to Mercantilism! A liberal economist and philosopher who argued for free trade. Coined the famous expression the invisible hand to describe the operation of a free market economy! Famous book A Wealth of Nations 01
David Ricardo English economist known for his defense of international free trade and theory of comparative advantage.! The idea that all nations benefit when they produce those commodities each produces most efficiently. David Ricardo argued that free trade allows nations and consumers to benefit from their different comparative advantages.! Nations should specialize in the production of those things they produce most efficiently and cheaply and trade these things with others who are specializing in what they do best. 01
Comparative Advantage
Comparative Advantage Hours needed to make 1 unit of Opportunity cost of producing 1 unit of Food Clothes Food Clothes Alex 1 2 1/2 2 Betty 10 10 1 1 Let's say that Alex is currently making all of his own Food and Clothes.! If so, Betty can offer 1.5 units of Food to Alex in return for 1 unit of Clothes and Alex will gladly accept.! This deal will clearly benefit both Alex and Betty even though Alex is advanced and Betty is less advanced.
Challenges to Free Trade Short-Term Losers! Free Riders! Non-tariff Barriers! Dumping! Potential security consequences of dependency! Vulnerable infant industries! Predatory and Strategic trade policy 01
Homework: Read Chapter 8!! Next week there will be a quiz.! It will cover Chapter 6