What are the main advantages and disadvantages of global free trade? Does it exist in practice?

should be supported, because they mean more jobs for the exporting country (Frey, 1984: 27). But what happens, if all countries follow this idea of minimising their imports and maximising their exports? If we do not import from other countries, they would not be able to pay for our exports.

The liberal conception was basically formulated by Adam Smith in 1776 in his work An Inquiry into the Nature and Causes of the Wealth of Nations. According to his view, free trade leads to international division of labour and therefore to interdependence between countries. This supports co-operation between countries and results in stability, prosperity and peace for all nations. In contrast to that, any kind of governmental trade restriction leads to diminishing of prosperity both at home and abroad (Tribe, 1995: 24). There are many different arguments concerning economic, political and environmental issues, which support but also criticise free trade. Nevertheless, economic arguments played the most important role in the history of free trade. Firstly, national customers gain from free trade. They can choose the cheapest products from all over the world. This means an increase in turnover for the foreign supplier who offers the cheapest goods. Therefore he can expand his production. Due to the fact that foreign producers use a part of their proceeds on imports from their customers’ countries, they also promote the domestic economy.

Nonetheless, the protectionist view is another one: If customers can decide between domestic and imported products, some domestic suppliers would not be competitive anymore and would not be able to sell their products, because they are either too expensive or low-quality. They would only be able to survive, if they lower their costs of production with no consideration for social and economical losses. This leads to job cuts and therefore to higher unemployment (Wood, 1994, p. 290). Or as Bhagwhati says it in a more general way, protectionists fear that “trade with countries with paupers will produce paupers in our midst” (1995, p. 14). Therefore protectionists think that goods should not be imported if domestic industries get hurt from this (Irwin, 1996, p. 39). However, this pressure of competition can also be seen in the case of domestic trade. Every day, businesses have to close down due to the fact that customers prefer other brands out of the same country. So, why should suppliers be more protected in foreign trade than in domestic trade? And: Isn’t the reason for unemployment in Northern countries rather technical change than trade with the South (Bhagwhati, 1995, p. 16)?

4

Nevertheless, workers get unemployed in fields of economy, which are no longer competitive. Due to the liberal argument this is only a temporary problem. The private sector offers many other much more productive possibilities of work which has a positive result on the national economy. However, in many countries there are too less jobs to absorb the unemployed (Wood, 1994, p. 3).

Apart from consequences of free trade for industrial countries, there are also effects on the economy of developing countries. The example of India shows, that countries which open their economy to international trade enjoy greater economic growth and lesser poor people. Until the economic reforms in June 1991, India has been one of the most protected countries in the world. Since 1991 the highest tariff rate has come down from 355 per cent to 40 per cent. The average annual exports to GDP ratio rised from 5 per cent (1985-1990) to 10 per cent. These shifts mean a growth of economic welfare for the country. “Since 1993-94, the economy has been growing at unprecedented rates of six to seven per cent and is expected to continue to grow at similar rates in the immediate future.” (Panagariya, 1999, pp. 91-92).

Besides the economic discussion of free trade, there are also political arguments, which have to be taken into consideration. Free trade protects national decision-makers against special interest groups and prevents national markets from being more and more isolated. On the other hand, protectionism opens the doors to lobbyists. If an industry is protected against international competition, other industries will demand protection with the argument, that the similar industry is also protected. If both of these industries are situated in the same constituency of one politician, he will be unable to evade this claim, because he fears his election defeat. This could lead to protection of industries which would not have to be protected due to economic reasons.

Free trade can also be used as political instrument of power. Hence, countries with great home markets could achieve the dependence of other countries with opening their home markets. To achieve political or economic goals, these powerful countries could threaten with closing of the market in particular sectors. On the other hand they could use the opening of other fields of industry as a mechanism of incentive. Opponents of global free trade argue, that the expansion of trade endangers the environment. Nevertheless, as Strutt and Anderson show in their case study about Indonesia, “trade policy reforms slated for the next two decades in most cases would improve the environment” (1999, p. 30). Although this study is only focused on one

5