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  • Essay / When free trade is good for growth

    From growing concern over tariff hikes imposed by Donald Trump on Chinese goods and by British ministers negotiating trade deals with the EU, reflects a resurgence of old arguments about the benefits of free trade. This debate has lasted for centuries because the benefits of free trade are often diffuse and indistinct, while the benefits of protecting specific countries from foreign competition are often immediate and visible. Although this illusion fuels the common perception that free trade is detrimental to a country's economic growth, numerous researches and studies have shown that reducing barriers to international trade results in greater wealth and great economic well-being, which will stimulate the economic growth of the country. According to John Stuart Mill, we can classify the gains from trade according to three main principles: The direct economic benefits of trade, the indirect effects of trade and the promotion of intellectual and moral values, or otherwise can be referred to Sweet Commerce. Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get an original essay “Direct economic benefits” are the standard gains that arise from a country's specialization from mutually beneficial trade. They are able to use their limited productive resources (land, labor and capital) more efficiently by exporting some of their locally produced goods in exchange for imports, earning them a higher real national income than without trade. Improvements in allocative and productive efficiency result in a static gain for the country with greater accumulation of capital that it is able to invest in infrastructure, human development and improved quality of life resulting in economic growth. A classic illustration of static gains from trade comes from China's opening to the global economy. Although foreign trade existed before economic reform, it was generally limited to obtaining goods that could not be manufactured or accessed in China. However, after 1979, China decided to completely open its economy in an effort to increase foreign trade and investment. Gains from trade can be estimated by looking at commodity prices in China before and after trade was opened. For example, the price of grain and cotton on the world market was much higher than in China before trade was opened. Once trade is introduced, China is able to export these crops at a higher price, thereby increasing their profit margins. As a result, this development significantly boosted its economy, giving it a real GDP growth rate of 9% from 1979 to 1997, compared to 4.4% from 1953 to 1978, according to research by economist Angus Maddison . Free trade allows a country to specialize in a range of goods and services with comparative advantage – a concept from Alan Deardorff's "The General Validity of the Law of Comparative Advantage". This concept basically means that trade encourages a country to specialize in goods and services that it can produce more effectively and efficiently and at the lowest opportunity cost than others. A country's comparative advantages are ultimately determined by national factor endowments based on its initial conditions in terms of resources, population and geographic location. For example, New Zealand has a comparative advantage in the production of butter and cheese due to its.