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Free Trade

Nov 12, 2010 • Developing Economies, International Trade and Finance • 174 Views    No Comments

KORUS has been in the news. The Korea-U.S. Free Trade Agreement, negotiated in 2007 but not ratified by Congress, was in trouble. One reason was Ford.

With a 1% share of the South Korean car market, U.S. automakers want more. One of the bigger sellers of Ford vehicles in South Korea complained about import taxes that make his vehicles so much more expensive than Korean made cars. Ford also said that unfairly high South Korean emissions and safety standards on imports prevent them from competing.

I guess all of this reminds me of China and our chicken feet and Italy and Pecorino cheese. When we put a tariff on their tires, China retaliated against our chicken feet. When the EU unfairly treated our bananas, we taxed their cheese.

The significance? Free trade agreements increase U.S. exports. They stimulate our economic growth. Also, though, whether in South Korea or the U.S., they challenge specific domestic producers and can eliminate domestic jobs. Free trade is one of those issues that has been debated for centuries and will remain controversial.

The Economic Lesson

Combining Adam Smith and David Ricardo, we can see why most economists support free trade. In a factory, Adam Smith says specialize through division of labor. When each worker has a specific task, output multiplies. Increasing output requires bigger markets in order to sell what has been produced.  As mass production enables us to move from local markets to regional specialization to free world trade, as David Ricardo explained, the world benefits.

In a 2006 survey, 87.5% of all PH.D members of the American Economic Association said yes to free trade by agreeing that “the U.S. should eliminate remaining tariffs and other barriers to trade.”

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