Apr 1, 2015

IR - One Definition A Day: Free Trade

IR - One Definition A Day: Free Trade (p. 183-184, Ref 1)

A trading system between two or more actors. The essence of free trade is that goods are imported without any restrictions, such as tariffs, being placed upon them. 

From an economic standpoint, free trade increases competition and efficiency. Producers have access to foreign markets, while consumers have access to imports. As a result of free trade the greater specialisation occurs in economic activity throughout the system. Individual members become less self-sufficient and more dependent upon others. Consequently, free trade is often associated with the growth of interdependence among actors. As a system of organising economic relations it may be directly contrasted with autarky or self-sufficiency.
The advocacy of free trade is usually associated with economic liberalism, at least in its classical phase. Many of these ideas were resuscitated after 1945 under the Bretton Woodssystem of international economic relations. Under the hegemonial influence of the United States, the major institutional framework for post-war relations was established. 

Similarly the later negotiations for an international trade regime, under the defunct International Trade Organisation (ITO), and the substitute General Agreement on Tariffs and Trade (GATT) reflected the same liberal free trade philosophy. The same outlook influenced the Marshall Plan and post-war tariff-cutting negotiations under GATT. Free trade regimes have been most successful in manufacturing (secondary) sectors of economic activity. Agricultural production has rarely been truly free whilst free trade in service industries is technically difficult to implement. As a result the call for 'fair trade' as opposed to free trade is increasingly heard in these sectors.

The philosophical assumptions behind free trade have been criticized by the compensatory liberals and others. The rise of the Third World has thrown these doubts into sharp relief because the alleged shortcomings are not simply a matter of intellectual fashion or preference. Writers such as Prebisch (1964) have argued that if terms of trade penalize certain economies a system of free trade will leave some states permanently at a disadvantage. If those penalized are those that can least afford it, then free trade can exacerbate and widen inequalities within the system. Demands for a free trade regime that ignore such structural inequalities have been opposed by the Third World. 

The New International Economic Order (NIEO) and the UN Conference on Trade and Development (UNCTAD) have been used by this constituency to press for changes in the trade regime that will recognize and compensate for these difficulties.

(Source: Ref 1, Dictionary of IR, Penguin Reference)

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