By Paulina Anaya.
Post-World War II, free trade became important in the rebuilding and stabilizing processes of each country, pushing for globalization. We rely on globalization to sustain the current world market, which consists of consumer and producer countries. The richer nations are usually consumers, meanwhile developing countries (most likely with a high unemployment rate, but rich in resources) are the producers. The more we produce, the more we exploit natural resources, land, and the people who live on it, yet we find ourselves calling this progress. Perhaps it is in the sense that we are able to supply large demand chains at an unprecedented pace thanks to machines, but that does not mean it is done in compliance with ethical and moral standards. At the mention of human rights violations, many of us become undignified, but many of the items we purchase are products of a meticulous network of human rights violations. Have you ever stopped to wonder how a t-shirt can be as cheap as $5 and still manage to properly pay off materials, shipping, production costs, and maintain the worker who made it? It can’t.
On March 18th, 2017, G20 ministers left a two-day summit in Baden-Baden, Germany, without renewing a pledge to boost free trade. Predictably, the United States was one of the countries that withdrew its support from the pledge as Trump’s “America First” policy begins to take shape. Free trade, apparently, and as Trump believes, is not fair if one party gives more than it receives; this, however, when put into perspective, depends. The United States (US) cannot expect to have the same demand for its products in Bangladesh as the US does for Bangladesh-manufactured products.
Clearly, the United States was one of the most influential members in the meeting, and its protectionist outlook on trade made other countries present acquiescent on the matter; after all, the US is a world power, right? Already the US has pulled out of the Trans-Pacific Partnership (TPP), almost obsoleting that partnership because the US was one the most important parties involved. Additionally, Trump has threatened to add tariffs up to 45% on Chinese goods and 35% on Mexican ones. Trump has made it clear that one of his administration’s priorities will be to return investment and jobs to the US and keep them there. Unfortunately, it is unlikely this will benefit most American families since manufacturing costs in the US are infinitely higher in comparison to those of producer countries, hence raising retail prices on a myriad products. In order to maintain our way of life as it is–fast, consumerist, and cheap–globalization is key. Sorry, Trump!
Preceding years have seen international commitments to free-trade, but as of 2017, several countries in the world officially no longer believe in free trade because of the same reasons that Trump doesn’t, which puts the future of free-trade at risk. While it is understandable that the markets are volatile and jobs are disappearing, closing borders to free-trade will hurt all nations more than it helps. The US leads the way in almost everything regarding international affairs, and other countries usually follow, but if other countries decide to follow their protectionist point of view on trade, 2017 may well mark the end of free-trade around much of the world.
Theoretically, but not realistically, perfect free trade
Comparative advantage, a term coined by 19th century economist David Ricardo, explains how it is possible to have an advantage even if one party is less efficient than the other. In order to understand how comparative advantage works, I must first explain opportunity cost; when a country focuses on the production of a certain product, less is made of other products, this is opportunity cost. Comparative advantage occurs when another country’s production cost of those other items is lower and can thus supply other parties with it, reducing their deficit for that particular product.
If the real world functioned this way, free trade would be perfect to and for all the economic actors involved, but reality holds its share of affecting factors that alter the way in which this all works, how well, and who wins and loses from it. Affecting factors include raw material costs, production costs, worker wages, unpredictable markets, changing trends, moral and ethical considerations, as well as the reputation of the interested nation. In this equation, there are winners and losers, but that does not mean one should lose exponentially more than the other gains from it. It is just a matter of understanding comparative advantage and opportunity cost when making or selling goods.