What are the benefits and pitfalls of free trade?

[Willser]

In relation to the global market.

[pauly51_2001]

The main benefit of free trade is that through specialization a group of countries can obtain a higher production output than by producing every thing themselves. Some countries have natural comparative advantage in producing certain products over others.

For example, Scotland has a cold and damp climate that makes it nearly impossible to grow oranges. But, it is a tremendous place to make wool for sweaters. Conversely, Andalucía region of Spain has warm, temperate climate, which is perfect place for oranges. But, the fleece on sheep does not grow very fast. Since the Scottish people love orange marmalade, it would make little sense for Scots to build a multitude of greenhouses for the orange trees to satisfy the demand for marmalade. Rather, it would prudent to buy oranges on the cheap from Spain, and sell them wool in return. In this case, the Scots will have cheaper oranges for marmalade and the Andalucía’s will have cheaper wool for sweaters. At the end of the day, each group will have more in their pockets through free trade.

This comparative advantage can be seen in many products and commodities throughout the world like Japan and cameras, United States and aircraft, Brazil and sugar, as well as China and cell phones.

The main drawback to free trade is the dislocation of labor. When a textile plant in say South Carolina closes, it is difficult for the low skill individuals to retrain themselves and transfer to more efficient industries. As a result, these dislocated workers can become permanently unemployed.

As whole the benefits of greater efficiency and wealth created through free trade outweigh the social costs of dislocated labor.

Best regards,

Pauly