Trade, Free

Much of contemporary economic policy is based on the notion that free trade raises the standard of living of all countries. This is the position espoused by advocates of neoliberal economic policies such as those of the World Trade Organization (WTO), its precursor, the General Agreement on Treaties and Tariffs (GATT), and the North American Free Trade Agreement (NAFTA). Yet, many environmentalists and antiglobalization activists remain critical of that assertion that free trade benefits the environment, suggesting that free trade actually leads to a race to the bottom in which polluting industries migrate to countries with the lowest standards.

The argument about free trade begins with the assumption that tariffs, taxes, subsidies, and regulations across international boundaries distort the terms of trade. The purported consequences of this leads to economic inefficiencies and imposes artificial costs on the movement of goods. One of the central tenets of free trade is the principle of comparative advantage, a theoretical explanation for why two countries can both benefit from international exchange. The first mention of comparative advantage is in economist Robert Torrens's Essay on the External Corn Trade. But the idea is often attributed to the English economic philosopher David Ricardo who sought to explain why both Portugal and England benefitted from their exchange of wine and cloth. Ricardo argued that Portugal could produce wine more cheaply than England. Even though England and Portugal could both produce cloth at similar costs, it was still beneficial for Portugal to produce more wine for trade with England because of benefits from economies of scale.

Since the time of Ricardo, the theory of comparative advantage has come under fire for some of its primary assumptions. For example, Ricardo assumes that transportation costs are negligible. This assumption may hold true in today's economy of subsidized oil, but it certainly does not account for externalities. Ricardo also assumed negligible labor costs because he assumes that there would also be a free market in labor, something that does not hold up in today's economic and political circumstances.

Perhaps the biggest pitfall to following the comparative advantage policy prescription is the narrow, even risky, set of economic enterprises that a country relies on. A good example of this can be found in the Yucatan, Mexico, as told by historian Sterling Evans. In the early 1900s, the Yucatan exported extensive quantities of sisal fiber, derived from an agave plant (spp. Agave sisalana) similar to that used to produce tequila, to the United States where it was used to bind wheat. Successive years of bumper wheat crops and a free trade zone in New Orleans made sisal production so profitable that by the 1920s and 30s the Yucatan was the wealthiest Mexican state and the first with electricity. But soon after extensive sisal monoculture plantations were established throughout the region, the combine harvester, which could bind the wheat at harvest, was invented, rendering the fiber useless to the U.S. wheat industry. The sisal plantations were subsequently abandoned and soon the Yucatan was one of the poorest states in Mexico. The low diversity of economic engagements and the dependency on a single industry were to blame.

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