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16.2E: Global Trade- Inequalities and Conflict

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    Global trade (exchange across international borders) has increased with better transportation and governments adopting free trade.

    Learning Objectives

    • Analyze the impact of global trade on society and industry, ranging from mercantilism to free trade orientation

    Key Points

    • While international trade has been present throughout much of history, its economic, social, and political importance has been on the rise in recent centuries as free trade has overtaken mercantilism and governments have reduced tariffs and other barriers to trade.
    • Traditionally, trade was regulated through bilateral treaties between two nations, but it is increasingly regulated by multilateral agreements and international bodies, such as the World Trade Organization.
    • Free trade is on the rise, but most countries maintain some level of protectionism in the form of subsidies or tariffs to protect industries considered essential to national security or national economies (e.g., food and steel production ).
    • Arguments against free trade criticize the assumptions of economic theories underlying it and its possible social and political effects, including inequality and cultural homogenization.
    • In the last few decades, fair trade has been proposed as an alternative to free trade.
    • Economic arguments against free trade criticize the assumptions or conclusions of economic theories.
    • Sociopolitical arguments against free trade cite social and political effects that economic arguments do not capture.
    • An alternative concept to free trade in the last decades has been become fair trade.

    Key Terms

    • protectionism: A policy of protecting the domestic producers of a product by imposing tariffs, quotas, or other barriers on imports.
    • World Trade Organization: An international organization designed by its founders to supervise and liberalize international trade.
    • free trade: international trade free from government interference, especially trade free from tariffs or duties on imports

    Global trade is the exchange of money, goods, and services across international borders. As transportation has improved, global trade has increased, and businesses have pressured governments to relax restrictions on trade. In most countries, global trade now accounts for many of the goods and services bought or sold, and many companies earn profits from global trade.

    For centuries, governments restricted international trade based on the principles of mercantilism, which maintained that countries were all competing to maximize their stores of gold. Accordingly, governments imposed high tariffs to limit imports and promoted exports in order to sell their goods in exchange for more gold. But in the nineteenth century, especially in the United Kingdom, mercantilism gradually gave way to a belief in free trade.

    Free Trade: Economist Milton Friedman explains the importance of free trade.

    Following a free trade orientation, governments do not discriminate against imports by imposing tariffs or promoting exports with subsides. Since the mid-twentieth century, nations have increasingly reduced tariff barriers and currency restrictions on international trade. But even though many countries have moved toward free trade, other trade barriers remain in place: import quotas, taxes, and diverse means of subsidizing domestic industries can all hinder trade.

    As global trade has grown, governments have faced the problem of regulating trade that originates or ends outside their jurisdiction. Traditionally, governments regulated international trade through bilateral treaties that were negotiated between two nations. But as trade has become more global and more complex, trade negotiations have expanded to include more countries. Now, trade is regulated in part by worldwide agreements, such as the General Agreement on Tariffs and Trade (GATT), a multilateral agreement that went into effect in 1948. In 1995, GATT was replaced by the World Trade Organization ( WTO ), an international body that supervises global trade.

    Most countries in the world are members of the WTO, which limits in certain ways but does not eliminate tariffs and other trade barriers. Most countries are also members of regional free trade areas that lower trade barriers among participating countries. Trade agreements are negotiated by independent nations with their own interests and values in mind, which often include values and interests other than maximum global output. As a consequence, some level of protectionism is used by almost every nation, in the form of subsidies or tariffs to protect industries a nation considers essential, such as food and steel production.

    Economic arguments against free trade criticize the assumptions or conclusions of economic theories. Critics note that free trade may exacerbate inequality among countries and within them. Free trade may favor developing nations in certain areas, may benefit only the wealthy within countries, may increase offshoring, and may destabilize financial markets. Sociopolitical arguments against free trade cite social and political effects that economic arguments do not capture, such as political stability, national security, human rights, and environmental protection. Critics note that free trade undermines cultural diversity, causes dislocation and pain, and undermines national security. In response, fair trade, or an economic system that emphasizes living wages for the producers of goods, has developed as an alternative to free trade in the last several years.

    Fair Trade: Fair trade products are slightly more expensive but certify that the excess cost is passed along to the workers to ensure better living and working conditions.

    16.2E: Global Trade- Inequalities and Conflict is shared under a CC BY-SA license and was authored, remixed, and/or curated by LibreTexts.

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