By Caelan Rafferty
Trade liberalisation in its amorphous forms has dominated both popular media and thought over the last decade, having engendered significant shifts in global perceptions regarding the transfer of goods and services worldwide. The institutions and mechanisms developed for the spread and utilisation of free trade have become a potent force both domestically and internationally, presenting a number of internal benefits. Yet, the adoption of free trade principles by nation states is not without economic and moral criticism by academics and citizens alike. Despite these criticisms, free trade has provided impetus to international wellbeing and has become an essential component of contemporary economics.
The scope and character of free trade is unique given it underpins a number of theoretical and practical economic principles. In overarching terms, the deregulation of both markets and market information is what free trade seeks to encourage. More specifically, this is achieved through the removal of trade barriers for goods and services and the abolition of trade distorting practices which give individuals and firms a market advantage. However, the ambiguity of deregulation makes it hard to define the exact content of free trade precisely. This difficulty is seen in the institutions and mechanisms which serve to promote free trade.
There are a plethora of bodies and instruments which seek to achieve the overarching aim of deregulation. Internationally, the World Trade Organisation manages the rules of global trade with the goal of helping exporters and importers accessing world markets. Yet, in its goals, it seeks only ‘more open’ and ‘more competitive’ trade, not ‘completely open and competitive’, signifying limits do still exist. This illustrates that free trade is not practiced absolutely, even by many OECD countries, and rather acts as a guide for the conduct of nations. The limit on free trade is important nonetheless, as its absolute form can have detrimental effects on emerging domestic industries.
Market-wise, the European Union demonstrates a surplus of practical benefits in its domestic free trade policies – which promote openness and transparency. However, the Union also reveals the detriments, specifically, the destruction of sovereignty; a key feature in the recent Brexit vote. This destruction of sovereignty is also seen in free trade agreements, which absolutely engender innumerable benefits, but sometimes lack precision which can present a number of problems for the effectiveness of a nation’s economy and its legislature. Moreover, domestically, the Australian Constitution provides for the freedom of interstate trade and commerce, yet even this freedom is not absolute. Consequently, while free trade is beneficial for the wider economy, it does present real issues for individuals and nations.
Such concerns are reflected in the arguments proposed in favour of protectionism. The adoption of free trade towards the end of the last century signified a cultural swing from the protectionist era of the past. At its core, protectionism is quite simply the restricting of trade between states. These restrictions are achieved through a multitude of methods, such as tariffs on imported goods, restrictive quotas, taxes and other regulatory devices. Support for these policies in the past was grounded in two perspectives – economics and morality. Economically, trade was seen to hurt the domestic economy through the destruction of local industries, and it was moved that the economic assumptions underpinning free trade did not capture issues such as political stability or human rights. While morally, free trade was seen to contribute to rising income inequality, a race-to-the-bottom mentality and higher unemployment.
While there does exist elements of validity in both arguments, general consensus among economists is that in the long run, the removal of protectionist policies provides significant net gains to society by improving efficiency, innovation and consumer choice. Such conclusions are supported by David Ricardo’s in his theory of comparative advantage. He postulates that tariffs and quotas create deadweight loss which can otherwise be avoided in competitive markets. By removing these regulatory instruments, consumer and producer surpluses are maximised. Moreover, mainstream economics also indicates that tariffs and quotas may contribute to trade diversions, whereby high cost producers with access to free trade are favoured over low cost producers with high tariffs. Thus, while protectionism may serve a function in the short term, in the long run, market deregulation should be the goal for all countries.
Overall, while the usage of free trade may be hard to encapsulate in practice, its proliferation through vague aspirational documents to treaty arrangements over the past few decades indicates the theory is viable component in global policy. The institutions and mechanisms that support this system of trade are invaluable in bridging protectionist doctrines that have dominated the recent past. While free trade may not in itself be the economic utopia, it certainly marks the beginning.