Free Trade Debate - Definitional Issues

Definitional Issues

The World Trade Organization (WTO) was created to open up markets and promote international trade based on the 'Free Trade' paradigm. The WTO creates and monitors agreements to reduce trade barriers, and arbitrates in disputes over foreign market access, and violations of these agreements. Its definition of 'Free Trade' is trade on a level playing field, so that the unlimited exchange of goods between countries is not necessarily 'Free'. If a country with aircraft producers, say, subsidizes corporate research and development (R&D) or enacts regulations requiring the industry to procure its aircraft part suppliers be domestic producers, then the WTO considers this a violation of Free Trade, even when the barriers to trade are not imposed at the national borders in an import-export transaction step (like a tariff).

Some economists criticize the WTO's definition of "free trade" as too narrow. They argue that a foreign governmental producer-subsidy is another form of "comparative advantage"' and should not be used as a reason to impose domestic barriers on the purchase of overseas goods.

These economists argue that (since the surplus benefit to domestic consumers outweighs the surplus loss of domestic producers) the lower price of foreign subsidized goods is a net positive (as in the standard Ricardian argument) and the source of the "comparative advantage" is irrelevant. Therefore, any import restriction (even on "dumped goods") makes the domestic society as a whole worse off than it would be with unlimited imports.

This "abolitionist" position has had little governmental support in the developed world, due to the following considerations:

• Producer lobbyists and job-protectionists are more organized than consumer advocates.
• The "artificial" handicap of a foreign subsidy seems much less "just" to local production than advantages deriving from geography, natural resources, or native skill. Electorates often prefer "fairplay" to Utilitarian considerations.
• Despite accepting that a country would be better off without tariffs than with them, some game theory models consider that a long-term strategy superior to immediately dropping all tariffs is to negotiate progressively lower barriers bilaterally so as to pry open foreign markets to domestic producers of goods, benefiting both domestic consumers and domestic producers. (The justification for tariffs is not important; tariffs only exist to be relinquished.)
• If trade barriers are already low, the threat of a "trade war" of tit-for-tat tariff increases may reduce the temptation for either partner in bilateral trade to raise import barriers.
• It would tend to decrease the political power and revenue flowing to government bureaucrats.