To Tariff or Not To Tariff– The Balance is Shifting: Global Trade Conflict– Free Trade, Fair Trade, Balance Trade, No Trade…

One of the most debated issues in global trade is protectionism; use of tariff, non-tariff measures, currency manipulation… On one hand, most nations believe that certain amount of protectionism is necessary to protect their industries, jobs… On the other, protectionism also invites retaliation from trading partners, blocks free trade. Tariff is essentially a tax; it raises price of imported goods making them more expensive than similar domestic goods…

In most developed countries, average tariffs are less than 10% and often less than 5%… while in lesser-developed countries tariff rates are much higher; ranging from 10% to over 25%, and in Iran at about 28%… In U.S., about 96% of merchandise imports are industrial (non-agricultural) goods, with a weighted average tariff rate of 1.5%… One-half of all industrial goods entering the U. S. enter duty-free… However, tariffs are not the whole story, there are also ‘non-tariff’ measures that countries use to restrict trade…

According to Brent Radcliffe; countries use combination of tariff and non-tariff measures to regulate imports… the non-tariff trade barriers restrict trade through mechanisms, such as; quotas, subsidies, customs delays, technical barriers, other systems preventing or impeding trade... Classical economists like David Ricardo and Adam Smith suggest that since a nation is not a homogenized whole; that free trade, from a political standpoint, actually creates two classes; beneficiaries and victims, i.e.; winners and losers…

In the article Free Trade vs. Protectionism by George Friedman writes: The question of free trade is a pivotal issue and one that transcends ideology… The idea that free trade (trade without tariffs, regulation) is better than protectionism has dominated since WWII… An argument for free trade was made by David Ricardo in early 19th Century– It was based on the theory of comparative advantages… It assumed that every nation has at least one industry in which it has an advantage over other nation;. and with focus on its industry it would maximize the nation’s income…

However, there is no simple solution to the free (non-free) trade debate; each side views trade based on its own interests. Each side shapes the economic landscape for its own benefits… The argument that there is an overall free trade benefit has little value, e.g.; a CEO would oppose a shift in trade policy if it hurt his business, no matter the national good… Also, individuals take the same stand…

In the article Currency Manipulation And Impact On Free Trade by Art Laffer writes: A prosperous economy is created by good economic policy– then just get-out-of-the-way and let companies and citizens work, produce, invest… The perfect pro-growth agenda includes: a low rate tax, spending restraint, sound money, minimal regulation, free trade. The gains from trade come from– differences between countries, not similarities– and greater the differences the larger the potential gains… When a country is not constrained in making products and services to only match domestic demand, then both consumers and producers win…

This is an idea that goes back to Adam Smith, one of the earliest advocates for free, unrestricted trade. As such, Smith was an ardent foe of mercantilism, a system under which the goal of a state was to stockpile gold by exporting as many goods as possible and importing as little as possible… Smith argued that this policy deprived nations of benefiting from skills and abilities found in other nations. Instead he argued, nations benefit better from free and open, not managed, trade.  All nations have unique set of skills and resources that enable them to produce certain goods/services better than others, which is the foundation of trade– taking advantage of unique skill, capabilities, resources…

Smith’s core beliefs remain true but, due to the complexity of today’s interconnected global world, sometimes it creates challenges for a market-based approach; for example, currency manipulation– it’s a potent tool that tempts nations to improve their trade balances, while exporting domestic unemployment to countries that do not manipulate their currencies… According to Peterson Institute for International Economics; more than 20 nations have used currency manipulation policies to keep currencies substantially undervalued, thus boosting their international competitiveness and trade advantage…

In the article Free Trade, Fair Trade, Race to the Bottom by Madeline Madison writes: The free movement of global resources, especially labor… presents serious issues that can potentially devastate not only an economy, but the environment as well– it’s the ‘race to the bottom’ theory, which states; companies are constantly searching for– cheaper wages, lower taxes, weaker environmental regulations… and the theory is that this can produce downward spiral in socio-economic conditions in countries around the world…

A basic view of this theory is that when there are no regulations on trade and no regulatory standards, companies move from country-to-country searching for cheaper resources with less environmental regulations… and over-time this quest for cost-cutting will devastate the economies and the environment of many countries around the world… However, this phenomenon can only occur in the absence of strong trade regulations and restriction on the actions that companies can legally take to lower operating costs… ‘Races to the bottom’ can also occur between administrative regions within nations…

In its early stages a ‘race to the bottom’ can appear to be beneficial to the parties involved as one country sees the benefit of lowered costs and others sees benefit of increased foreign investment… However, the competitive process involved in ‘race to the bottom’ can serves to undermine the ability of governments to improve living and working conditions… and the enforcement of humane labor standards, and funding for social services… The main way to avoid ‘race to the bottom’ is through a policy of ‘fair trade’ with strong regulations and controls that protect an economy and encourage global trade…

Economists say that ‘free trade’ allows countries to take advantage of the ‘comparative advantages’ offered by each country… The ‘comparative advantage’ exists when one country can do something better than another country, e.g.; Central and South America grows bananas better than U.S., and U.S. grows wheat better than them; so trading wheat for bananas makes sense… But, economists also say that low-labor costs and low-environmental protection costs are a ‘comparative advantage’, as well…

They say it’s good for companies to take advantage of countries with governments that exploit labor and the environment, because they offer lower-costs for making things… According to Dave Johnson; buying goods from countries that are low-wage, low-environmental protection means other countries are impacted with trade imbalance; hence, factories close, people laid-off, wages stagnate… In world of free trade– this is a ‘comparative disadvantage’…