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The Free Trade Debat..

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The Free Trade/
Fair Trade Debates
Conflict over Theory & Practice
Theory of Free Trade
в–є What?
 In a system with open and free markets, the
economy will operate more efficiently with a
higher level of overall prosperity.
в–є How?
 The principle of comparative advantage will
operate with each place, each firm, each person
performing the economic activity in which that
place, firm or person has a comparative
advantage
Free Trade Theory (cont)
в–є Employing
the principle of comparative
advantage will allow economic specialization
and therefore greater economic efficiency.
в–є Not only will producers be experts at which
they do, but they will also accrue economies
of scale.
в–є Open markets will assure competition
among efficiency producers, assuring the
lowest possible prices at the highest quality.
Circular & Cumulative Causation
в–є With
people paying less for higher quality
goods, they have money to buy more things
в–є With more money in circulation, more firms
will succeed
в–є With more firms succeeding, more taxes will
be available to infrastructure, helping firms
reduce costs, have better workers, & obtain
more materials
Forward & Backward Linkages
в–є Circular
& cumulative growth will provide
two kinds of advantages
 “backward linkages” to the community so that
production can be more efficient
 “forward linkages” to the market so the firm can
be more competitive
Fair Trade Reality
в–є Free
trade generates winners & losers.
в–є Whether it leads to greater general
prosperity depends at least to some degree
on interpretation of data.
в–є Disparities in income increase.
в–є The powerful may gain inordinately at the
expense of the powerless.
в–є Assumptions of the theory are bogus.
USA Development History
в–є The
USA succeeded as a free trade area
after failing as a series of independent,
protectionist states.
в–є Yes, but the USA had other advantages, too





Distance from the competition when young
Incredible natural resource endowment
In the North, a free, motivated work force
Development of human resources
Propitious public sector economic participation
Tariffs through History
в–є In
the 19th and 20th centuries, when tariff
barriers went up, the global economy
suffered.
в–є When barriers went down, the global
economy benefited.
в–є After World War I, protectionist policies led
to the Great Depression.
в–є After World War II, open trade policies led
to global economic expansion.
European Union As a Model
в–є The
European Union, as we have seen,
evolved through several steps to become a
very successful, coordinated economy with
internal trade barriers dismantled &
movement of both capital & labor.
в–є With so much success, how can anybody
question the wisdom of free trade?
The Rest of the Story
в–є Practice
does not match theory.
 Some places may have no current comparative
advantages
в–є Disparity
arising within a country between
those succeeding and those failing may be
too acute.
в–є Some economic activities need protection
for a while until they get established.
Current Practice
в–є The
current global economy is so skewed
that calls for free trade without ameliorating
protections are tantamount to turning the
world over to rich countries and powerful
companies.
в–є Promises of debt alleviation need to be kept
before rather than after the implementation
of free trade agreements.
Fair Trade Alternatives
в–є The
Fair Trade movement asks that trade be
fair rather than free
 Poor countries and poor people should be given
reasonable opportunities
 Inherited debt should be “forgiven”
 Annan’s Millennium Fund should be
implemented
 No one should prosper through the misery of
others
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