by Disinvestment Supporter

Created on: April 19, 2008

Free trade theory is the center of globalization. It is an ideological term referring to a state of trade relations in which governments are not allowed to act in ways that might distort the market-determined cost of an item. Corporations have a legal obligation to pursue short-term profits by pushing environmental and societal costs on to the public. Traditionally governments have protected the people from these costs by regulating business. Free trade is essentially the government rejecting this role in favor of increased freedom for investors.

In practice free trade has never occurred, nor is it likely to, although free trade agreements, including the World Trade Organization, do lead to the lowering of trade barriers, privatization of nationally-owned infrastructure, increasing mobility of capital and labor, and less protections for labor and the environment. Before consider the practice of free trade, we should understand why it exists by looking to history.

From the 16th to 18th centuries, the most powerful European economies used a system of bilateral trade agreements commonly called mercantilism (short for merchant capitalism). Nations like Britain and the Netherlands protected their young industries by imposing high tariffs on competing imports, meanwhile encouraging those industries to export by use of government subsidies. The idea behind mercantilism was to grow the nation's gold and silver supply by effecting a positive balance of trade. A modern comparison is China's protectionist economy which has helped that country grow at the expense of large negative trade balances for other countries, like the US.

By the time British colonies in America had gained independence, Britain began pushing for other nations to lower trade barriers under the new idea of free trade. Our first Secretary of the Treasury, Alexander Hamilton, knew his history and rejected British free trade in favor of moderate trade barriers and government subsidies for American industries not yet ready to compete with the world. Though many politicians and parties fought to open America up to free trade between then and the 1970's, the policies of the Tariff Act of 1789 would remain more or less in place.

The American era of free trade began in the 1970s with Nixon's removal of the gold standard which meant currency would no longer be limited by the amount of actual wealth in the country. Since then a single-minded focus on the cheapest goods has become dominant across the world.

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