Effects of the Free Trade Regime on the U.S Term Paper

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¶ … free trade regime on the U.S.

The Effects of the Free Trade Regime on the United States

By the term "free trade" economists refer to an idealized market model, where countries trade their goods or services without being limited and inhibited by tariffs and taxes imposed by governments and non-tariff barriers (Wikipedia, 2007). Some say that in order to have real free trade, perfect competition is required, while others say that the absence of inhibitory taxes is enough for the free trade to take place.

Although free trade is considered by some economists to have important advantages, that surpass the eventual disadvantages, free trade has its share of opponents, like some of the nationalists, communists, agricultural and manufacturing interests, and anti-globalization and some labor campaigners.

Free trade requires certain criteria to be encompassed: in the international trade the goods must not have any tariffs, like taxes on imports, or other trade barriers; the same must apply for services in the international trade; domestic firms, households or factors of production must not be favored over foreign ones through trade-distorting policies, like taxes, subsidies, regulations and laws; there must be free access to markets; also, free access to market information is necessary; monopoly or oligopoly power should not exist so that certain companies cannot distort markets with such power.

The evolution of Free Trade

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Free trade's evolution started with that of the international trade in general. Since countries all over the world have been engaged in trade activities since Ancient times, it was time for developing a theoretical rationalization related to the free trade policy's beneficial effects on any nation involved.

Term Paper on Effects of the Free Trade Regime on the U.S. Assignment

The world's greatest economists, like Adam Smith and David Ricardo, have emphasized in their theories the positive effects that free trade has on the involved countries' economies. Therefore, they considered free trade to be responsible for economic development and prosperity of certain countries. For example, the Mediterranean area (especially Egypt, Greece and Rome) and also Bengal and China, owe their flourishing economies to the increased trading. Also, after declaring Free Trade and Freedom of Thought, the Netherlands started their economic prosperity period.

However, free trade had its battles against other policies, like: mercantilism, protectionism, isolationism, communism, and others. Protectionism policies have been used by all developed countries at some point, but reduced it due to gaining more wealth.

After the World War II, the United States have become one of the most fervent proponents of reduced tariff barriers and free trade in general (Wikipedia, 2007). The United States played an important role in establishing the General Agreement on Tariffs and Trade (GATT), the World Trade Organization (WTO), numerous free trade agreements, like: the North American Free Trade Agreement (NAFTA), the Dominican Republic-Central America Free Trade Agreement (CAFTA), and several bilateral agreements.

The General Agreement on Tariffs and Trade

The General Agreement on Tariffs and Trade (GATT) was created after World War II as part of a plan for economic recovery from the disastrous effects the war had left behind (Wikipedia, 2007). GATT was created mainly for reducing barriers in the international trade in order to facilitate the goods and services exchange between nations. Aside with the reduction of tariff barriers, quantitative restrictions and subsidies on trade have been reduced.

Although the intention was to create a full international organization called the International Trade Organization (ITO), the project was not ratified, leaving GATT as just an international agreement, very much similar to a treaty. Further more, the United States law classifies it as a congressional-executive agreement. Because the agreement was based on the "unconditional most favored nation principle" the International Trade Organization has faced strong opposition in the United States, and it was not even submitted to the Congress by the president.

The North American Free Trade Agreement and its effects

The North American Free Trade Agreement (NAFTA) was signed between the United States (represented by President George H.W. Bush), Canada (represented by the Canadian Prime Minister Brian Mulroney), and Mexico (represented by the Mexican President Carlos Salinas de Gortari) on 17 December 1992 (Wikipedia, 2007).

However, the agreement had to face strong opposition from all three countries, but in the United States President Bill Clinton managed to influence its ratification, making its passage an important legislative initiative in 1993, although he considered the agreement to be inadequate. On 1 January 1994 the North American Free Trade Area that was created by NAFTA as a trade bloc between the United States, Canada and Mexico, came into effect.

NAFTA's effects started immediately. Duties on most of tariffs between products that were traded among the three countries forming the agreement have been eliminated, while other tariffs have been gradually phased out during the past 14 years. These tariff eliminations were applied to the most important categories of goods, like motor vehicles, automotive parts, computers, textiles, and agriculture. The agreement was extended to protect intellectual property right also, especially patents, copyrights, and trademarks. Also, investment restrictions between the United States, Canada and Mexico have been removed.

NAFTA's impact on the United States is definitely considered to be a positive one, and is set as an example for other countries to follow. However, some economists state that it failed to reduce poverty rates in a significant manner. The trade between the three countries involved in NAFTA has significantly increased. Between 1993-2004 the total trade between the United States and the other two countries in NAFTA increased up to 129.3%, 110.1% with Canada and 100.9% with Mexico (Wikipedia, 2007). Another effect was integrated the Mexican auto industries into the existing market between the United States and Canada. As a consequence, the auto and auto parts trade between NAFTA members became the most important sector within it, covering 20% of intra-NAFTA trade. Another effect on the United States caused by NAFTA is the significant increase in the bilingual and trilingual (in English, French and Spanish) labeling on products so that they can be distributed through retailers in the United States, Canada and Mexico.

Regarding the agriculture sector, the effects of the Mexico-United States agricultural agreement divides economists into two opposite sides. Some of them consider this agreement's effects to be extremely negative for peasants Others state that the effects were positive for Mexico mostly, while for the United States it did not seem to have any significant effects.

NAFTA did not have a very significant impact on the United States, but it managed to exceed some of its opponents' negative expectations. For example, some expected that the U.S. manufacturing sector would suffer from some devastating effects, caused by the possible movement of U.S. companies to Mexico, in search of cheaper labor. Their negative expectations did not come true, since the U.S. employment has increased since NAFTA came into effect, the unemployment rates have slightly diminished, and the domestic manufacturing output has significantly increased. In addition to this, the investment in the U.S. manufacturing sector was 100 times bigger than the investment in the Mexican manufacturing sector.

Another NAFTA effect was caused by the limited restrictions at the borders of the three member countries of NAFTA for their citizens. This measure is responsible for the increase in tourism and cross-border shopping. The freedom of mobility has been significantly increased due to NAFTA. However, after the September 11, 2001 events, the security on the United States borders was significantly increased. These events also put an end to negotiations between the U.S. President George W. Bush and Mexican President Vicente Fox regarding the idea of free flow of people between the United States and Mexico.

However, the Office of the United States Trade Representative considers NAFTA to be "a strong record of success" (2006). It is a fact that for the past 12 years the trade among the NAFTA nations increased up to 173%, from $297 billion to $810 billion. For the United States, Canada and Mexico represent their first and second largest markets, covering about 36% of the United States' export growth to the world in 2005.

United States' increasing agricultural sector exports is due to Canada and Mexico exports that cover 55% of the increase in the U.S. since 1993. Since 1993 to 2005 the United States GDP increased by 48% due to NAFTA's effects. NAFTA also determined the growth in real compensation for manufacturing workers that significantly increased. Also during that period of time, the United States business sector productivity rose by 2.6% each year, reaching 36.2% over the full period. The investments increased by 104% during that period.

The free trade advantages on the United States

According to the Office of the United States Trade Representative, "the United States is the world's largest economy and largest exporter and importer" (2006). The United States' economic and social prosperity relies mostly on trade. Trade, especially free trade, is responsible for the economic growth, the support of good jobs, the continuously raising living standards, and the great supply of affordable goods and services. In addition to this, the Office of the United States Trade Representative stated that free… [END OF PREVIEW] . . . READ MORE

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