The Benifits Of Free Trade Essay

2755 words - 11 pages

The Benefits of Free tradeThe long-standing U.S. policy of supporting multilateral trade liberalization is consistent with well-established conclusions from economic reasoning and empirical evidence about the benefits of trade to all participating countries.Benefits from Increased Exports and ImportsThe most-direct economic benefits from international trade arise from the fact that countries are not all the same in their production capabilities. They vary from one another because of differences in natural resources, levels of education of their workforces, relative amounts and qualities of physical capital, technical knowledge, and so on. Without trade, each country must make everything it needs, including things it is not very efficient at producing. When trade is allowed, by contrast, each country can concentrate its efforts on what it does best relative to other countries and export some of its output in exchange for imports of products it is less good at producing. As countries do that, total world output increases. World output may also grow because of greater use of economies of scale, as a factory in one country can serve a market the size of two or more countries rather than one. Trade can benefit countries' economies in a number of other ways as well, such as by expanding the variety of goods available to businesses and consumers, by increasing competition and thereby reducing the extent of monopolistic pricing and the inefficiency that results from it, and possibly by pushing up the rate of productivity growth. Market forces generally ensure that all countries involved in the trade share in the benefits from the increased output.Irrelevance of the Balance of Trade:The growth in trade that results from lowered trade barriers is generally beneficial regardless of its effects on the balance of trade (the difference between the values of exports and imports). Some people believe that trade agreements are beneficial to the extent that they increase exports and harmful to the extent that they increase imports and thus that the benefit or harm of an agreement can be determined from its effect on the trade balance. However, it is the growth in both exportsand importsof each country that allows production to shift to the most efficient producers and thereby expands output. No country would export if it could not import. Exports constitute the giving away of valuable economic commodities in exchange for pieces of paper (currency) or additions to bank accounts that would be worthless if they could not be used at some point to purchase imports.Whatever concern that trade balances merit (which normally is very little) relates to a country's balance with the world as a whole--not its balance with any one country--and trade agreements usually do not have much effect on the U.S. balance of trade with the world. By an accounting identity, the trade balance with the world as a whole (specifically, the current-account balance) is equal to the difference...

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