WHAT IS FREE TRADE?


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With the level playing field of open markets companies in one country are forced to companies in other countries to sell their goods and services. When every country in the world is allowed to do what it does best-letting the French excel in fashion, for example, or the Japanese in consumer electronics, or the Americans in aircraft and movies-the world economy prospers.

 The downside is that free trade exposes local producers to foreign competition, which can be hard on inefficient or poorly managed companies. This can lead to short term layoffs and idle factories, a disaster for small towns that rely on a local industry for jobs and tax revenue.

 But nothing in the fast-changing global economy stays the same for long. Confronted with foreign competition, many local companies take the necessary steps to become more efficient, thus enabling them in the end to compete and prosper at home as well as abroad. Others, however, call for “managed trade”, a return to some restrictions on foreign products. Other simply prefer an outright ban on imports

 If a government wants to encourage trade with another country, the first step is to remove restrictions to its internal markets. This courtesy, previously called “most favoured nation status” in the United States, is now referred to as Permanent Normal Trade Relation (PNTR). The idea is that barriers to trade are eventually eliminated in both countries. The decision to grant China PNTR in the year 2000, for example, not only removed U.S restrictions on Chinese-made goods, but called for the Chinese to abolish import quotas and licenses on U.S goods and services. Immediately reducing average tariffs from 24 percent to 9 percent.

When a country wants to encourage exports, it tries to find incentives that will make its products more competitive on world markets. Some countries provide loans or grants to foreign buyers of a country’s goods and services through export and import banks. These state-supported “ex-im” banks often provide low cost loans, called export subsidies, to stimulate sales of good and services abroad.

Countries may also encourage trade by allowing barter between local companies and companies from economies that experiencing currency problems. For example, in some Eastern European countries, bartering may involve trading a shipment of Pepsi-Cola for a shipment of vodka, or a truckload of computers for a tanker full oil. Bartering often allows countries to overcome a temporary shortage of “hard” foreign currencies, such as dollars or euros.

 Sometimes, a country might want to encourage imports of foreign goods and services in order to decrease international tensions resulting from large trade imbalances. For example, when Japan was criticized for running large trade surpluses, particularly by the United States, it decided to stimulate the purchase of foreign goods.

 One of the most effective tools for stimulating imports is to increase the value of a country’s currency. This can be done, in the short term at least, through government intervention on the international foreign exchange markets. The goal is to make foreign goods and services less expensive than locally made products. Thereby stimulating imports. This process is sometimes referred to as external adjustment.

A country may also encourage imports by stimulating its economy through lower interest rates, thus increasing overall spending on foreign goods such as Germany and France, where many consumer goods are imported, lowering interest rates can encourage imports of everything from Brazilian shoes to Canadian snow boards.

 Another way to encourage imports is to reduce cultural barriers to trade. The Japanese government, for example, has tried in the past to encourage consumers to overcome their reluctance to buy anything foreign. In some cases, the government has to encouraged purchases of everything from German automobiles to U.S beef. The goal, of course is not to hurt local producers, but to forestall threats of retaliatory sanctions from uneasy trading partners.


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