The Economics of Free Trade

In principle, free trade on the international level is no different from trade between neighbors, towns, or states..... 

 

However, it allows businesses in each country to focus on producing and selling the goods that best use their resources while other businesses import goods that are scarce or unavailable domestically. That mix of local production and foreign trade allows economies to experience faster growth while better meeting the needs of its consumers.

This view was first popularized in 1817 by economist David Ricardo in his book, On the Principles of Political Economy and Taxation. He argued that free trade expands the diversity and lowers the prices of goods available in a nation while better exploiting its homegrown resources, knowledge, and specialized skills.
 

 

Public Opinion on Free Trade

Few issues divide economists and the general public as much as free trade. Research suggests that faculty economists at American universities are seven times more likely to support free-trade policies than the general public. In fact, the American economist Milton Friedman said: “The economics profession has been almost unanimous on the subject of the desirability of free trade.”

Free-trade policies have not been as popular with the general public. The key issues include unfair competition from countries where lower labor costs allow price-cutting and a loss of good-paying jobs to manufacturers abroad.

The call on the public to Buy American may get louder or quieter with the political winds, but it never goes silent.
 

 

The View from Financial Markets

Not surprisingly, the financial markets see the other side of the coin. Free trade is an opportunity to open another part of the world to domestic producers.

Moreover, free trade is now an integral part of the financial system and the investing world. American investors now have access to most foreign financial markets and to a wider range of securities, currencies, and other financial products.

However, completely free trade in the financial markets is unlikely in our times. There are many supranational regulatory organizations for world financial markets, including the Basel Committee on Banking Supervision, the International Organization of Securities Commission (IOSCO), and the Committee on Capital Movements and Invisible Transactions.