This module is about free trade, and asking if it’s really free, or if it’s freer trade, or if it’s even managed trade across the world today.
The average tariff rate across the world since 1990 has dropped from 25% approximately, to less than 10%.
If it’s true that there are these great gains from trade like Smith and Ricardo showed us, why don’t countries embrace it completely? Why don’t they just put their tariff rates at zero, and the world trades freely according to their comparative or absolute advantage?
Truth is the world operates not in pure free trade, but in some form of freer trade or managed trade.
So we’re going to try to find out what’s going on here with a world where we have declining, but still existing tariff rates.
In the next, part of this module, we’ll talk specifically about regional trade agreements and free trade agreements, a relatively new development in the world over the past 60 or so years.
To what degree is trade free in today’s world? Is it freer trade, managed trade, or pure free trade?
If there is the GATT, and the World Trade Organization, why do regional areas, continents or groupings of countries, or even individual pairings of countries, sign their own trade agreements? If, if the world is agreeing to lower tariffs, why do we see regional groups decide to do the same thing?
The answer is somewhat complex.
To put it simply, the truth is that the GATT and the WTO, even though they have a worldwide coverage, don’t say that every country in the world has to lower their tariffs – it covers certain agreements and certain negotiations, and only go to a certain degree.
These regional trade agreements tend to take trade negotiations to a higher level or a different level within certain trading areas or trading blocks, and regional trade agreements are basically one-on-one negotiations between countries to manage trade on a two-country level in specific industries, on specific products in specific markets.
At other times, for example, in 2008, one of these worldwide negotiations collapsed and there was no further agreement reached. No new levels of tariffs negotiated downward. And so, since it’s very difficult for the entire world, or all the countries in the world to agree, it’s somewhat easier for these regional areas to come to agreement.
An example: countries within the European Union (essentially a regional trade agreement) could take advantage of lower, labor costs, and could do all kinds of competitive and comparative advantage-based decisions; the North American regions decided to try to counteract that by signing a free trade agreement.
Free trade agreements continue to be negotiated: new ones are signed and existing ones renegotiated and/or updated. The World Trade continues to attempt to provide worldwide negotiations but countries are trying to win for some individual products or periods of time (and some of them are receiving domestic pressure for protection too).
The North American Free Trade Agreement is a two-volume, hundreds of pages long agreement.
If it’s supposed to be zero tariffs, why so many hese pages? What’s in it? If it were really a true free trade agreement, it’d be one page saying, these three countries agree that they will not charge tariffs to each other higher than 0%, or there will be no tariffs – this shows it is freer or managed trade.
So today’s world is moving towards freer trade but is still clearly managed.
Tariffs though are not the only way that interests are protected within an individual market or economy or country.
There might be other ways that they can formally, through agreements, or informally prohibit or impede trade from other countries and these have the same effect as tariffs.
import bans i.e. saying the product is, is illegal;
quotas i.e. only certain quantities are allowed;
countries may have complex rules about what percent of the product must be made in a certain country;
standards placed in the products or regulations that make it very difficult for companies to compete;
safety and health regulations placed on imports for certain reasons;
In addition, it is not t just tariff barriers or non-tariff barriers that impact trade flows. As a positive example of increasing trade, it wasn’t until the mid 1960s that countries agreed across the world to adopt a standard size of shipping container, and these standardized containers make it very simple for companies to manage trade across the ocean, thus increasing trade globally.
As the world has evolved, and as we continue to see trade agreements signed and tariff barriers decline, we’ve seen new models that have been embraced by government leaders and others to try to improve their positions in the world, while still allowing for a win win situation.
One model is the Porter’s Diamond of National Advantage by a Harvard professor named Michael Porter it’s one of the most widely utilized models and frameworks today by governments and economic development professionals.
This model/framework tries to explain how countries, economies, or even regions, cities, communities might develop competitive advantages, or comparative advantages upon which they can build their economies, build exports, and buy the best products in the world from other economies in the form of imports.
The model is also used by countries that are trying to attract companies to invest or trade in their economy.
This is module six, part five, in which we continue to ask the question, is today’s world dominated by free trade, freer trade, or managed trade.
When we say managed trade, we’re talking about countries and economics actively trying to create competitive advantages and actively trying to support the development of those competitive advantages on the part of individuals and companies and other entities (many use Porter’s Diamond of National Advantage).
We can use Porter’s Diamond to understand what makes Switzerland great for making watches, France for wine, and Hollywood for movies?
Case study of the Hollywood movie making/creative cluster, focusing on factor conditions.
Continuation of the case study about the Hollywood movie making/creative cluster and what makes it successful – focus on related and supporting industries.
Sometimes we think that seeing several companies together in one location is an example of, a lack of competition, but in fact forces forces companies to do better for the customer.
We also see university programs developed (often in partnership with industry and government) to train the human capital for successful clusters.
Most economic development officials across the world are actively trying to cooperate with the private sector, the governmental sector, to create clusters of success to improve their export position, and to be able to buy better imports from across the world.
We see companies and governments actively managing their positions in competition for more exports, and better imports.