A second extremely important caveat is the so-called factor price equalization theorem, which states that international trade will lead to the equilibrium of the relative returns of factors of production such as unskilled labor under conditions of free trade between countries. This would mean that for a high-wage country like the United States, the wages of unskilled workers would fall, while wages would rise in countries with abundant labor. However, factor prices do not tend to be offset in industries where production costs are falling. Geza Feketukuty, the main US negotiator for services in the Uruguay Round, gives a wonderful anecdote about the first efforts to start negotiations on trade in services: “The Swiss delegate. rejected trade in services, stressing how impossible it was for him to have his hair cut by a hairdresser in another country. The Chair of the Committee.. replied that all women in Germany had benefited enormously from French exports of hairdressing services, and she was confident that the delegate`s wife would confirm that this was also the case in Switzerland. [23] One of the great strengths of these models is that they can show how the impact on industries affects the economy as a whole. One of their drawbacks is that the assumptions behind their projections are not always transparent due to their complexity.

Business models are useful for giving an idea of what might happen as a result of a trade agreement. They sound authoritative, but users should be aware that business models do not predict what will actually happen and that they have significant weaknesses. In early 2018, President Trump stepped up his efforts, particularly against China, and threatened a hefty fine for alleged theft of intellectual property (IP) and significant tariffs on $500 billion of Chinese products, such as steel and soybean products. The Chinese retaliated with a 25% tax on more than 100 American products. Proponents of free trade argue that imposing import barriers, even if other countries do, is like shooting yourself in the foot. The wisdom of turning the other cheek on the trade barriers of other countries is based on an economic argument attributed to Adam Smith in the eighteenth century: consumption being the only end of production, the interests of consumers take precedence over the interests of producers, especially those of relatively inefficient producers. Pushed to its logical conclusion, this strategy recommends that the U.S. government take no action to offset the de facto subsidies granted to domestic consumers when imports are sold at prices below fair value. [28] The objective of removing barriers to trade is, of course, to increase the level of trade, which should improve economic well-being. Economists often measure economic well-being in terms of the share of total production of goods and services (i.e., gross domestic product, GDP), which the country produces on average per person. GDP is the best available measure of economic well-being, but it presents significant conceptual challenges.

As Joseph Stiglitz notes, measuring GDP “does not take into account some of the factors that change people`s lives and contribute to their happiness, such as security, leisure, income distribution and a clean environment – including the factors that growth itself needs to be sustainable.” [10] Moreover, GDP does not distinguish between “good growth” and “bad growth”; For example, if a company disposes of waste in a river as a by-product of its production, the production and subsequent cleaning of the river contributes to the measurement of GDP. [18] The GATT authors probably focused on the potential benefits of a European customs union that would promote integration. Some historians argue that U.S. negotiators also considered a possible U.S.-Canada free trade agreement that would remove barriers to trade in North America. A company established in an industry that required considerable investment and knowledge had a huge advantage over its potential competitors. Its production series were large, which allowed it to produce products at a low marginal cost. And the capital investment for a new competitor would be significant. However, they also recognized a role for regional integration that would allow members of a trading bloc to remove barriers to trade among themselves while maintaining a discriminatory duty on imports from third countries. [18] Accordingly, Article XXIV of the GATT provides an important exception to the most-favoured-nation principle, allowing countries to form customs unions or free trade areas (FTAs) that may discriminate against non-bloc members. [19] In a customs union, members remove barriers to trade between themselves, but establish a Common Customs Tariff for imports from third countries. Members of a free trade area also remove barriers to trade with each other, but each maintain their own tariff plan for imports from third countries. Of course, to succeed in a neo-mercantilist strategy, a country needs access to other markets, which has allowed the gradual liberalization of trade barriers within the framework of the GATT/WTO.

Neo-memerarchtilists typically focus on key industries chosen by the government, a strategy known as industrial policy. A successful industrial policy requires a far-sighted government. Japan had an extremely competent group of officials in the Ministry of Industry and Trade (MITI), which oversaw its industrial policy and was basically immune to political pressure. While the MITI has had many successes, it has also made some missteps. For example, in planning to develop a world-class auto industry in the 1950s, MITI officials initially believed they had too many automakers and urged Honda to merge with another company. Instead, Honda decided to invest in the United States and became a leading automaker. In addition to trade diversion and trade creation, which are essentially static effects, participants in free trade areas and customs unions are also striving for dynamic advantages, such as.B. expansion of production, as firms take advantage of the growing size of the market to increase production, and increased efficiency as firms adapt to increasing competition. Access to a larger market is particularly important for small countries whose economies are too small to justify large-scale production. The creation of trade benefits the exporters of the trading bloc member, which has a comparative advantage in the production of a product, and it benefits the consumers of the importing member, who can now buy the product at a lower price. Domestic manufacturers competing with cheaper imports from their partner countries lose out, but their loss is less than the profit for exporters and consumers.

Business creation increases global well-being through greater efficiency. However, in the case of trade diversion, a member makes its sales at the expense of a more competitive producer in a country that is not a member of the bloc, simply because its products enter its partner`s market duty-free, while the more competitive non-member producer is subject to a discriminatory duty. [20] Exporters from third countries who would have a comparative advantage under a level playing field lose out due to trade diversion. In May 2019, tariffs on Chinese imports impacted nearly $200 billion in imports. As with all trade wars, China retaliated and imposed high tariffs on U.S. imports. A study by the International Monetary Fund (IMF) shows that U.S. importers of these products have mainly borne the cost of tariffs imposed on Chinese products. It is expected that these costs will eventually be passed on to the U.S. consumer in the form of higher product prices. This seems to be the exact opposite of what the trade war was supposed to achieve. Critics argue that protectionism often harms the people it is supposed to protect in the long run by deterring markets and slowing economic growth and cultural exchanges.

Consumers may have less choice in the marketplace. They may even face bottlenecks if there is no ready-made domestic replacement for imported goods that have been affected or eliminated by tariffs. Having to pay more for raw materials hurts manufacturers` profit margins. As a result, trade wars can lead to price increases – industrial goods in particular becoming more expensive – leading to inflation in the local economy as a whole. .