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Economists have had an enormous impact on trade policy, and they provide a strong rationale for free trade and for removal of trade barriers. Although the objective of a trade agreement is to liberalize trade, the actual provisions are heavily shaped by domestic and international political realities. The world has changed enormously from the time when David Ricardo proposed the law of comparative advantage, and in recent decades economists have modified their theories to account for trade in factors of production, such as capital and labor, the growth of supply chains that today dominate much of world trade, and the success of neomercantilist countries in achieving rapid growth.
Almost all Western economists today believe in the desirability of free trade, and this is the philosophy advocated by international institutions such as the World Bank, the International Monetary Fund, and the World Trade Organization (WTO). And this was the view after World War II, when Western leaders launched the General Agreement on Tariffs and Trade (GATT) in 1947.
However, economic theory has evolved substantially since the time of Adam Smith, and it has evolved rapidly since the GATT was founded. To understand U.S. trade agreements and how they should proceed in the future, it is important to review economic theory and see how it has evolved and where it is today.
In the seventeenth and eighteenth centuries, the predominant thinking was that a successful nation should export more than it imports and that the trade surplus should be used to expand the nation’s treasure, primarily gold and silver. This would allow the country to have a bigger and more powerful army and navy and more colonies.
One of the better-known advocates of this philosophy, known as mercantilism, was Thomas Mun, a director of the British East India Company. In a letter written in the 1630s to his son, he said: “The ordinary means therefore to increase our wealth and treasure is by Foreign Trade, wherein wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value. . . . By this order duly kept in our trading, . . . that part of our stock which is not returned to us in wares must necessarily be brought home in treasure.”[1]
Mercantilists believed that governments should promote exports and that governments should control economic activity and place restrictions on imports if needed to ensure an export surplus. Obviously, not all nations could have an export surplus, but mercantilists believed this was the goal and that successful nations would gain at the expense of those less successful. Ideally, a nation would export finished goods and import raw materials, under mercantilist theory, thereby maximizing domestic employment.
Then Adam Smith challenged this prevailing thinking in The Wealth of Nations published in 1776.[2] Smith argued that when one nation is more efficient than another country in producing a product, while the other nation is more efficient at producing another product, then both nations could benefit through trade. This would enable each nation to specialize in producing the product where it had an absolute advantage, and thereby increase total production over what it would be without trade. This insight implied very different policies than mercantilism. It implied less government involvement in the economy and a reduction of barriers to trade.
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Name of trade agreement United States-Colombia Trade Promotion Agreement (TPA) United States-Australia Free Trade Agreement (FTA)
Countries involved United States, Colombia United States, Australia
Goal of agreement remove trade barriers, create jobs, and enforce labor rights lower or phase out tariffs on goods
Date implemented May 15, 2012 January 1, 2005
Additional source 1 "US-Colombia Trade Promotion Agreement Now in Force!" "Australia-United States FTA: Doing Business under AUSFTA"
Additional source 2 "Why Support the US-Colombia Trade Promotion Agreement?" "The Costs of Australia's 'Free Trade' Agreement with America"
"How the US Trade Deal Undermined Australia's PBS"
Interesting fact 1 Even before this TPA, 90% of imports from Colombia entered the United States with no tariffs. The FTA sparked concerns that it would disturb the Pharmaceutical Benefits Scheme (PBS), which provides medicine at affordable prices to Australian citizens. Australians feared the FTA would give more weight to profitability than affordability.
Interesting fact 2 The cities of Houston and Miami are major exporters to Colombia. Under the FTA, Australia eliminated all tariffs for US products imported into Australia.
Interesting fact 3 Before the TPA, Colombia imposed tariffs on American corn and wheat. The FTA gives preferential treatment to US goods in the Australian market. US goods face fewer restrictions than goods from other countries.
Industries you think will benefit US agriculture will benefit because the United States can export more products than before. Australian agriculture, including meat and dairy, will benefit from access to the US market.
The pharmaceutical industry may benefit if it is allowed to increase product prices.
Industries you think will be harmed Colombian agriculture will have to compete with the highly subsidized US agricultural industry. Colombian farmers will become poorer. The Australian manufacturing sector may be harmed because lower labor and environmental standards in the United States may put Australian manufacturers at a disadvantage. Their jobs may be outsourced to the United States.
Why you think the agreement will benefit or harm the economy overall The TPA will be harmful to the Colombian economy if it puts thousands of farmers out of work. The FTA may have a moderate and unevenly beneficial impact on the Australian economy.
Explanation:
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