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Free Trade Essay, Research Paper

Is free trade really such a good idea? There are some countries that says it is and others

that rather be left alone and being self-sufficient. An example of this statement would be the

United States who thinks that Free trade is big on improvement by creating new jobs and making

the U.S. the global leader in economy. Whereas, Switzerland refused to join the European

Economic Area (EEA) for personal reasons and China that trades but not freely. Well, what is

free tree trade any ways? According to Microsoft Encarta 1996, free trade is defined as an

interchange of commodities across political frontiers without restrictions such as tariffs, quotas, or

exchange controls. As good as it may sound, free trade, unfortunately as a few negative aspects,

such as the fear of loss of sovereignty, protection of a nation s resources, etc. The purpose of this

essay is to define free trade, give examples of free trade agreements and to find out weather it is

an opportunity or nightmare (in Canada) based on various sources .

The definition of free trade refers to the term tariff which I think needs to be elaborated in

order to get a better understanding of free trade. A tariff is a list or schedule of customs duties

generally imposed by a government on imports and sometimes on exports (Encarta 96). The

reason there are tariffs is to raise a revenue. Tariffs were imposed to protect domestic industries

against foreign competition and to achieve a favorable balance of trade. Tariffs were intensified

early in the world economic depression of the 1930s (Encarta 96). After World War II the trend

toward a worldwide reduction in tariff barriers continued with the establishment of the General

Agreement on Tariffs and Trade (GATT) and the formation or regional custom unions, such as

the European Community (now called the European union). These groups lowered tariffs among

themselves and maintained a common tariff for nonmembers. World trade promotion through

lower international tariffs and the removal of other impediments continues to be utilized by the

GATT. This treaty is being used by most major trading nations, such as the United States,

Canada, Japan, Germany, etc.

The classical theory of trade developed by Smith, Ricardo, and Mill was concerned

primarily with the analysis of the gains from trade. Modern trade theory, however, takes the

principle of comparative advantage for granted. In other words, it is a theory that countries will

benefit from trade if each specializes in its areas of comparative advantage (Canadian Business).

In Canada, for example, export commodities tend to be those in which the country has a

comparative advantage. Classical theorists assumed that differences in comparative advantage

resulted from differences in the productivity of resources, resulting the unequal distribution of

technologies and labor skills among nations (Encarta 96). Differences in the prices of final goods

tend to reflect differences in the prices of productive resources and that the latter are accounted

for mainly by differences in the availability of resources (Canadian Business). Countries specialize

in the production and exports of goods requiring relatively large amounts of those resources that

they possess in abundance, and they import goods requiring relatively large amount of resources

that are limited within their borders.

The oldest free trade association treaty goes back to the 1960s which was called the

European Free Trade Association (EFTA). This trading block was established by Austria,

Denmark, Great Britain, Norway, Portugal, Sweden, and Switzerland as a response to the

creation of the European Economic Community (EEC). Other countries eventually joined such as

Finland in 1961, Iceland in 1970 and Liechtenstein in 1991 . The purpose of EFTA was to work

for the removal of trade barriers and the promotion of closer economic cooperation throughout

Western Europe, including the EEC. By January 1967 EFTA had abolished internal tariffs. EFTA

countries have signed individual trade and tariff pacts with the European Union (EU), and in 1961

the two organizations agreed on a plan to establish a broader common market, called the

European Economic Area (EEA). The EEA went into effect on January 1, 1994, although

Switzerland and Liechtenstein did not join. By 1994 many member nations had left the EFTA to

join the EU. The remaining members included Norway, Liechtenstein, Iceland, and Switzerland.

In December 1994 Slovenia applied for membership into the EFTA because its application into

the EU had been denied (Encarta, 96).

The EU, European Union, has a very detailed and complex historical background which is

why I do not wish to elaborate on and that, furthermore, it is not really the main focus of this

essay. Going back to EFTA, it is governed by a council, consisting of a representative from each

member nation, that meets three times a year (Encarata, 96). The council is responsible for

supervision of the tariff-reduction system. Standing committees assist the council in its operations.

The headquarters of EFTA is located in Geneva.

A more recent free trade agreement is the North American Free Trade Agreement

(NAFTA). This pact calls for the gradual removal of tariffs and other trade barriers on most

goods produced and sold in North America. NAFTA became effective in Canada, Mexico, and

the United States on January 1, 1994 (Infopedia,

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