4.3.3 Free Trade

What are the origins of contemporary economic globalization?

Quotas, tariffs, and dumping are all ways in which a more powerful nation can exert control over a less powerful nation. They are elements of
protectionism
the economic policy of limiting trade by means of tariffs on imported goods, quotas, and anti-dumping laws to protect the industries of a nation; opposite to free trade
protectionism. That is, they protect the industries of the powerful nation and stand in the way of
free trade or trade liberalization
the ability of people to trade with people in other countries without restrictions imposed from governments or other agencies

This can include

international trade of goods and services without tariffs

free movement of labour between countries

free movement of capital between countries

the absence of taxes, subsidies, regulations, or laws that give domestic companies advantage over foreign companies
free trade.

In colonial times, the imperial powers had a great deal of control over how trade was done. Certainly, trade was not "open" or "free". In fact, it was very controlled through
mercantilism
an economic policy in Europe in the 16th to 18th centuries in which national governments increased their prosperity by encouraging exports and discouraging imports through increased tariffs (taxes) on imported goods

This practice fell out of favour with the idea of more free trade among nations although some degree of protectionism is still practised today in many nations.
mercantilism to maintain the wealth and power of the rich countries and their citizens. Although trade with the colonies provided an exchange of wealth among nations, trade benefited the wealthy nations far more than it benefited the poorer colonies of the time.

At least two opposing schools of thought occur concerning trade. Some people think that restrictions are necessary, including tariffs and quotas to protect the economy of each nation. Others such as Adam Smith think no barriers should exist to restrict countries from trading with each other.

Trade Barriers: The United States was still a colony of Great Britain in the 1700s. The British imposed
tariff
a tax on goods that are produced outside the country imposed by the government of the country to which they are exported

Many countries have reduced tariffs as world trade becomes more free.
tariffs on cloth, coffee, wine, and dye. Americans were not allowed to buy rum from anyone but the British, nor could they buy any wine from the French. The British forced Americans to buy their tea through the British East India Company by making it cheaper than tea from other companies. This selling a product for a price lower than its value is called
dumping
the selling of goods ;in another country at prices below their normal value, sometimes below cost of production

Predatory dumping is dumping with the purpose of putting domestic suppliers out of business.
dumping. As well, the company could decide who would sell its tea. The Americans were angered by this position of Britain. In fact, they were so angry that a group of men dressed as Mohawks practised their own form of "dumping" by disposing of crates of tea from three ships into Boston Harbour — an event that became known as the Boston Tea Party. These restrictions on what people could buy and sell, along with other factors, led to the American Revolution and the eventual independence of the United States.

Today, many countries have agreements to make their trade with each other freer.
free trade or trade liberalization
the ability of people to trade with people in other countries without restrictions imposed from governments or other agencies

This can include

  • international trade of goods and services without tariffs
  • free movement of labour between countries
  • free movement of capital between countries
  • the absence of taxes, subsidies, regulations, or laws that give domestic companies advantage over foreign companies
Free trade reduces or eliminates the rules that restrict the buying and selling of products from each other. People who believe in free trade think that fewer rules will lead to more buying and selling and higher profits for everyone. You will learn more about free trade in the next unit.

Boston Tea Party

Boston Tea Party