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113-630: The Hoyvík Agreement is a free trade agreement between the Faroe Islands and Iceland . The agreement was signed 31 August 2005 in the town of Hoyvík in the Faroe Islands. The Faroese Løgting ratified the agreement on 2 May 2006 and the Icelandic Alþingi did the same on 3 June. On 21 August 2006, a statement was made by the annual general meeting of the West Nordic Council that

226-730: A customs union between its member states. After expanding its membership, the EEC became the European Union in 1993. The European Union, now the world's largest single market, has concluded free trade agreements with many countries around the world. Most countries in the world are members of the World Trade Organization which limits in certain ways but does not eliminate tariffs and other trade barriers. Most countries are also members of regional free trade areas that lower trade barriers among participating countries. The European Union and

339-580: A neo-classical counter-revolution in Africa through Structural Adjustment Programmes (SAPs) from 1981. The new economic consensus blamed the low growth rates on excessive protectionism in the industrial sector, the neglect of exports, and the low agricultural productivity. For the IMF and the World Bank , the solution to the failure of import substitution was a restructuring of the economy towards strict adherence to

452-424: A neoliberal model of development throughout the 1980s and the 1990s. In 2014, customs duties were applied on imported products in the food sector. Russia has considerably reduced its food imports, and domestic production has increased considerably. The cost of food imports dropped from $ 60 billion in 2014 to $ 20 billion in 2017, and the country enjoys record cereal production. Russia has strengthened its position on

565-639: A "Henry Clay tariff Whig", strongly opposed free trade and implemented a 44% tariff during the Civil War , in part to pay for railroad subsidies and for the war effort and in part to protect favored industries. William McKinley (later to become President of the United States) stated the stance of the Republican Party (which won every election for president from 1868 until 1912, except the two non-consecutive terms of Grover Cleveland ) as thus: Under free trade

678-432: A chronic shortage of skills which pervades not only the small manufacturing sector but the entire economy and the over-loaded government machine." Tanzania, for example, had only two engineers at the beginning of the import-substitution period. The skills shortage was exacerbated by the technological deficiencies facing African states throughout industrialisation. Learning and adopting the technological resources and skills

791-592: A coherent economic model aligned with their political interests. The culmination of the political and economic issues necessitated the adoption of ISI, as it rejected the colonial neo-mercantilist policies that they believed had led to underdevelopment. For leaders of post-colonial African nations, it was imperative for their economic policies to represent an ideological break with the imperialist models of development. To achieve that, some newly independent states pursued African socialism to build indigenous growth and break free from capitalist development patterns. Through

904-459: A country from developing a domestic economic system that ironically mirrors competitive free trade. Many anti-globalization groups oppose free trade based on their assertion that free-trade agreements generally do not increase the economic freedom of the poor or of the working class and frequently make them poorer. Some opponents of free trade favor free-trade theory but oppose free-trade agreements as applied. Some opponents of NAFTA see

1017-479: A country's economy by the local production of industrialized products by national or foreign investment for domestic or foreign consumption. Import substitution does not mean eliminating imports. Indeed, as a country industrializes, it naturally imports new materials that its industries need, often including petroleum, chemicals, and raw materials. In 2006, Michael Shuman proposed local ownership import substituting (LOIS), as an alternative to neoliberalism . It rejects

1130-472: A development path, multinational corporations occupied a dominant role in the economy, primarily in the manufacturing sectors. Economic historians such as Ralph Austen argue that the openness to western enterprise and technical expertise led to a higher GNP in Kenya than comparative socialist countries such as Ghana and Tanzania. However, the 1972 World Bank ILO report on Kenya claimed that direct state intervention

1243-487: A domestic impetus for ISI. Marxist historians such as Walter Rodney contend that the gross underdevelopment in social services were a direct result of colonial economic strategy, which had to be abandoned to generate sustainable development . Rene Dumont supported that observation and argued that African states were administratively overburdened as a result of colonialism. The initial, unchanged conditions created discontent in states such as Ghana and Tanzania during

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1356-475: A high cost producer has a free trade agreement while the low cost producer faces a high tariff. Applying free trade to the high cost producer and not the low cost producer as well can lead to trade diversion and a net economic loss. This reason is why many economists place such high importance on negotiations for global tariff reductions, such as the Doha Round . The literature analyzing the economics of free trade

1469-445: A higher level of education are more likely than those with less education to believe that trade lowers prices. The notion of a free trade system encompassing multiple sovereign states originated in a rudimentary form in 16th century Imperial Spain . American jurist Arthur Nussbaum noted that Spanish theologian Francisco de Vitoria was "the first to set forth the notions (though not the terms) of freedom of commerce and freedom of

1582-431: A level of development in which they were able to compete in the global market. Those countries adopted free market discourses directed at other countries to obtain two objectives: to open their markets to local products and to prevent them from adopting the same development strategies that had led to the industrialization of the developed countries. As a set of development policies, ISI policies are theoretically grounded on

1695-402: A net gain for society. An almost identical analysis of this tariff from the perspective of a net producing country yields parallel results. From that country's perspective, the tariff leaves producers worse off and consumers better off, but the net loss to producers is larger than the benefit to consumers (there is no tax revenue in this case because the country being analyzed is not collecting

1808-506: A priority. ISI gained a theoretical foundation only in the 1950s, when the Argentine economist and UNECLAC leader Raúl Prebisch was a visible proponent of the idea, as well as the Brazilian economist Celso Furtado . Prebisch had experience running his country's central bank and started to question the model of export-led growth. Prebisch came to the conclusion that the participants in

1921-572: A stage of ISI in which much investment in industry was directed to replace imports. Going further, in his book Kicking Away the Ladder , the South Korean economist Ha-Joon Chang also argues based on economic history that all major developed countries, including the United Kingdom, used interventionist economic policies to promote industrialization and protected national companies until they had reached

2034-457: Is a broad consensus among economists that protectionism has a negative effect on economic growth and economic welfare while free trade and the reduction of trade barriers has a positive effect on economic growth and economic stability. However, in the short run, liberalization of trade can cause significant and unequally distributed losses and the economic dislocation of workers in import-competing sectors. Two simple ways to understand

2147-401: Is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products. The term primarily refers to 20th-century development economics policies, but it has been advocated since the 18th century by economists such as Friedrich List and Alexander Hamilton . ISI policies have been enacted by developing countries with

2260-589: Is believed that ISI will allow that. In many cases, however, the assertions did not apply. On several occasions, the Brazilian ISI process, which occurred from 1930 to the late 1980s, involved currency devaluations to boost exports and discouraging imports, thus promoting the consumption of locally manufactured products, as well as the adoption of different exchange rates for importing capital goods and for importing consumer goods. Moreover, government policies toward investment were not always opposed to foreign capital:

2373-486: Is defined as "the dominance of agricultural and mineral activities – in the low-income countries, and in their inability, because of their structure, to profit from international trade." Mercantilist economic theory and practices of the 16th, 17th, and 18th centuries frequently advocated building up domestic manufacturing and import substitution. In the early United States , the Hamiltonian economic program , specifically

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2486-411: Is highest among respondents with the lowest levels of education. Hainmueller and Hiscox find: that the impact of education on how voters think about trade and globalization has more to do with exposure to economic ideas and information about the aggregate and varied effects of these economic phenomena, than it does with individual calculations about how trade affects personal income or job security. This

2599-575: Is largely considered ineffective for currently developing nations. The chart at the right analyzes the effect of the imposition of an import tariff on some imaginary good. Prior to the tariff, the price of the good in the world market and hence in the domestic market is P world . The tariff increases the domestic price to P tariff . The higher price causes domestic production to increase from Q S1 to Q S2 and causes domestic consumption to decline from Q C1 to Q C2 . This has three effects on societal welfare. Consumers are made worse off because

2712-500: Is nevertheless the norm throughout the world. From 1820 to 1980, the average tariffs on manufactures in twelve industrial countries ranged from 11 to 32%. In the developing world, average tariffs on manufactured goods are approximately 34%. The American economist C. Fred Bergsten devised the bicycle theory to describe trade policy . According to this model, trade policy is dynamically unstable in that it constantly tends towards either liberalization or protectionism. To prevent falling off

2825-431: Is not to say that the latter types of calculations are not important in shaping individuals' views of trade – just that they are not being manifest in the simple association between education and support for trade openness Import substitution industrialization Import substitution industrialization ( ISI ) is a trade and economic policy that advocates replacing foreign imports with domestic production. It

2938-404: Is rich. Economists have done extensive work on the theoretical and empirical effects of free trade. Although it creates winners and losers, the broad consensus among economists is that free trade provides a net gain for society. In a 2006 survey of American economists (83 responders), "87.5% agree that the U.S. should eliminate remaining tariffs and other barriers to trade" and "90.1% disagree with

3051-726: Is that trade increases wages, with 31 percent of people believing it does, compared to 27 percent who believe it does not. In emerging economies, 47 percent of people believe trade increases wages, compared to 20 percent who says it lowers wages. There is a positive relationship of 0.66 between the average GDP growth rate for the years 2014 to 2017 and the percentage of people in a given country that say trade increases wages. Most people, in both advanced and emerging economies, believe that trade increases prices. 35 percent of people in advanced economies and 56 percent in emerging economies believe trade increases prices, and 29 percent and 18 percent, respectively, believe that trade lowers prices. Those with

3164-673: The Dominican Republic , could implement ISI only to a limited extent. Peru implemented ISI in 1961, and the policy lasted until the end of the decade in some form. To overcome the difficulties of implementing ISI in small-scale economies, proponents of the economic policy, some within UNECLAC , suggested two alternatives to enlarge consumer markets: income redistribution within each country by agrarian reform and other initiatives aimed at bringing Latin America's enormous marginalized population into

3277-452: The Economist of Irwin's 2017 book Clashing over Commerce: A History of US Trade Policy notes: Political dynamics would lead people to see a link between tariffs and the economic cycle that was not there. A boom would generate enough revenue for tariffs to fall, and when the bust came pressure would build to raise them again. By the time that happened, the economy would be recovering, giving

3390-769: The European Economic Area and the Mercosur open markets , establish a free trade zone among members while creating a protectionist barrier between that free trade area and the rest of the world. Most governments still impose some protectionist policies that are intended to support local employment, such as applying tariffs to imports or subsidies to exports. Governments may also restrict free trade to limit exports of natural resources. Other barriers that may hinder trade include import quotas , taxes and non-tariff barriers , such as regulatory legislation . Historically, openness to free trade substantially increased from 1815 to

3503-626: The Four Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan) have been characterized as government intervention to facilitate " export-oriented industrialization ". ISI policies generally had distributional consequences , as the incomes of export-oriented sectors (such as agriculture) declined while the incomes of import-competing sectors (such as manufacturing) increased. Governments that adopted ISI policies ran persistent budget deficits as state-owned enterprises never became profitable. They also ran current accounts deficits , as

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3616-705: The North American Free Trade Agreement in the 1990s, and the Dominican Republic–Central America Free Trade Agreement in 2006. In Europe, six countries formed the European Coal and Steel Community in 1951 which became the European Economic Community (EEC) in 1958. Two core objectives of the EEC were the development of a common market, subsequently renamed the single market , and establishing

3729-609: The Prebisch–Singer thesis , on the infant industry argument, and on Keynesian economics. The associated practices are commonly: By placing high tariffs on imports and other protectionist, inward-looking trade policies, the citizens of any given country by using a simple supply-and-demand rationale substitute the less expensive good for a more expensive one. The primary industry of importance would gather its resources, such as labor from other industries in this situation. The industrial sector would use resources, capital, and labor from

3842-458: The nationalization of industry to create jobs and to produce a domestic market for goods while it maintained an adherence to African socialist principles exemplified through the ujamaa program of villagization. The unaffordability of industrial products and increased tensions between managers and settlers of the villages contributed to a "colossal failure" of ISI in Tanzania, leading it to abandon

3955-563: The 1940s. That economic model rendered the postcolonial states vulnerable to unstable export prices and failed to promote the diversification of the economy. Postcolonial governments were also sceptical of the reliance on multinational corporations for economic development, as they were less likely to pay taxes and exported capital abroad. Thus, ISI policies were adopted to redirect African economies towards indigenous growth and industrialisation . The underdeveloped political and economic structures inherited across post-colonial Africa created

4068-651: The 1950s to the 1980s. The theories behind Latin American structuralism and ISI were organized in the works of economists such as Raúl Prebisch , Hans Singer , and Celso Furtado , and gained prominence with the creation of the United Nations Economic Commission for Latin America and the Caribbean ( UNECLAC or CEPAL ). They were influenced by a wide range of Keynesian , communitarian , and socialist economic thought, as well as dependency theory . By

4181-489: The 1950s, augmented by the natural protectionism of high transportation costs in the 19th century. The most consistent practitioners of free trade have been Switzerland, the Netherlands and to a lesser degree Belgium. Chang describes the export-oriented industrialization policies of the Four Asian Tigers as "far more sophisticated and fine-tuned than their historical equivalents". The Global Enabling Trade Report measures

4294-639: The Americans, like it or not". In March 1801, the Pope Pius VII ordered some liberalization of trade to face the economic crisis in the Papal States with the motu proprio Le più colte . Despite this, the export of national corn was forbidden to ensure the food for the Papal States . In Britain, free trade became a central principle practiced by the repeal of the Corn Laws in 1846 . Large-scale agitation

4407-615: The Brazilian industrialization process was based on a tripod that involved governmental, private, and foreign capital, the first being directed to infrastructure and heavy industry, the second to manufacturing consumer goods, and the third to the production of durable goods such as automobiles. Volkswagen, Ford, GM, and Mercedes all established production facilities in Brazil in the 1950s and the 1960s. The principal concept underlying ISI can thus be described as an attempt to reduce foreign dependency of

4520-617: The Ottoman Empire as "an instance of the injury done by unrestrained competition" in the 1846 Corn Laws debate, arguing that it destroyed what had been "some of the finest manufactures of the world" in 1812. Trade in colonial America was regulated by the British mercantile system through the Acts of Trade and Navigation . Until the 1760s, few colonists openly advocated for free trade, in part because regulations were not strictly enforced (New England

4633-529: The US, and in China less than 1/20), increased trade with those countries will put downward pressure on unskilled labor rates in the US. An overwhelming number of people internationally – both in developed and developing countries – support trade with other countries, but are more split when it comes to whether or not they believe trade creates jobs, increases wages, and decreases prices. The median belief in advanced economies

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4746-743: The United States are negotiating a Transatlantic Trade and Investment Partnership . in 2018, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership came into force, which includes eleven countries that have borders on the Pacific Ocean . Free trade may apply to trade in goods and services . Non-economic considerations may inhibit free trade as a country may espouse free trade in principle but ban certain drugs, such as ethanol , or certain practices, such as prostitution , and limiting international free trade. Some degree of protectionism

4859-662: The United States as a result of the American Revolution . After the British Parliament issued the Prohibitory Act in 1775, blockading colonial ports, the Continental Congress responded by effectively declaring economic independence, opening American ports to foreign trade on 6 April 1776 – three months before declaring sovereign independence. According to historian John W. Tyler, "[f]ree trade had been forced on

4972-438: The United States for much of the 20th century (e.g. Henry Ford and Secretary of State Cordell Hull ), believed that free trade promoted peace. Woodrow Wilson included free-trade rhetoric in his " Fourteen Points " speech of 1918: The program of the world's peace, therefore, is our program; and that program, the only possible program, all we see it, is this: [...] 3. The removal, so far as possible, of all economic barriers and

5085-702: The Whigs favored higher protective tariffs to protect favored industries. The economist Henry Charles Carey became a leading proponent of the American System of economics. This mercantilist American System was opposed by the Democratic Party of Andrew Jackson , Martin Van Buren , John Tyler , James K. Polk , Franklin Pierce and James Buchanan . The fledgling Republican Party led by Abraham Lincoln , who called himself

5198-495: The adoption of African socialism, leaders such as Kwame Nkrumah , Julius Nyerere , and Leopold Senghor hoped to establish a model of development based around consciencism , an intellectual and cultural revolution; and, most importantly, a big push in industrialization towards rapid development for the continent. One of the main aspects of the big push towards development was the growth of parastatals from 1960 to 1980. The state-owned trading corporations were given control over

5311-470: The agreement as materially harming the common people, but some of the arguments are actually against the particulars of government-managed trade, rather than against free trade per se . For example, it is argued that it would be wrong to let subsidized corn from the United States into Mexico freely under NAFTA at prices well below production cost ( dumping ) because of its ruinous effects to Mexican farmers. Research shows that support for trade restrictions

5424-548: The agricultural sector. In time, a developing country would look and behave similar to a developed country, and with a new accumulation of capital and an increase of total factor productivity , the nation's industry would in principle be capable of trading internationally and of competing in the world market. Bishwanath Goldar, in his paper Import Substitution, Industrial Concentration and Productivity Growth in Indian Manufacturing , wrote: "Earlier studies on productivity for

5537-419: The backlash against globalization and the motives for trades unions and politicians to call for protection of trade. In Kicking Away the Ladder , development economist Ha-Joon Chang reviews the history of free trade policies and economic growth and notes that many of the now-industrialized countries had significant barriers to trade throughout their history. The United States and Britain, sometimes considered

5650-460: The bike (the disadvantages of protectionism), trade policy and multilateral trade negotiations must constantly pedal towards greater liberalization. To achieve greater liberalization, decision makers must appeal to the greater welfare for consumers and the wider national economy over narrower parochial interests. However, Bergsten also posits that it is also necessary to compensate the losers in trade and help them find new work as this will both reduce

5763-662: The centuries. The Ottoman Empire had liberal free trade policies by the 18th century, with origins in capitulations of the Ottoman Empire , dating back to the first commercial treaties signed with France in 1536 and taken further with capitulations in 1673, in 1740 which lowered duties to only 3% for imports and exports and in 1790. Ottoman free trade policies were praised by British economists advocating free trade such as J. R. McCulloch in his Dictionary of Commerce (1834), but criticized by British politicians opposing free trade such as Prime Minister Benjamin Disraeli , who cited

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5876-491: The colonial economic system. The metropolitan governments aimed to offset colonial expenditures and attain primary commercial products from Africa at a significantly reduced rate. That was successful for British commercial interests in Ghana and Nigeria , which increased 20 times the value of foreign trade between 1897 and 1960 because of the promotion of export crops such as cocoa and palm oil . Such economic growth occurred at

5989-729: The consumer market and regional integration by initiatives such as the Latin American Free Trade Association (ALALC), which would allow for the products of one country to be sold in another. In Latin American countries in which ISI was most successful, it was accompanied by structural changes to the government. Old neocolonial governments were replaced by more-or-less democratic governments . Banks, utilities, and certain other foreign-owned companies were nationalized or had their ownership transferred to locals. Many economists contend that ISI failed in Latin America and

6102-413: The consumer surplus (green region) becomes smaller. Producers are better off because the producer surplus (yellow region) is made larger. The government also has additional tax revenue (blue region). However, the loss to consumers is greater than the gains by producers and the government. The magnitude of this societal loss is shown by the two pink triangles. Removing the tariff and having free trade would be

6215-506: The developing countries are able to adopt technologies from abroad whereas developed nations had to create new technologies themselves and that developing countries can sell to export markets far richer than any that existed in the 19th century. If the chief justification for a tariff is to stimulate infant industries , it must be high enough to allow domestic manufactured goods to compete with imported goods in order to be successful. This theory, known as import substitution industrialization ,

6328-412: The domestic sugar producers would lose a lot while each of a great number of consumers would gain only a little, domestic producers are more likely to mobilize against the reduction in tariffs. More generally, producers often favor domestic subsidies and tariffs on imports in their home countries while objecting to subsidies and tariffs in their export markets. Socialists frequently oppose free trade on

6441-414: The early 1960s over the fall in wages and employment opportunities. The unrest culminated in a series of mass strikes and tensions between governments and trade unions. Dissatisfaction with the poor economic progress upon decolonisation made it clear to African leaders that they could no longer rely on rhetoric and tradition to maintain power and could retain the support of their political base only through

6554-481: The economic category (trade hurts the economy or groups in the economy) or into the moral category (the effects of trade might help the economy but have ill effects in other areas). A general argument against free trade is that it represents neocolonialism in disguise. The moral category is wide, including concerns about: Economic arguments against free trade criticize the assumptions or conclusions of economic theories. Domestic industries often oppose free trade on

6667-460: The economist Ha-Joon Chang , a proponent of industrial policy, believes higher levels may be justified in developing nations because the productivity gap between them and developed nations today is much higher than what developed nations faced when they were at a similar level of technological development. Underdeveloped nations today, Chang believes, are weak players in a much more competitive system. Counterarguments to Chang's point of view are that

6780-434: The establishment of equality of trade conditions among all the nations consenting to the peace and associating themselves for its maintenance. According to economic historian Douglas Irwin, a common myth about United States trade policy is that low tariffs harmed American manufacturers in the early 19th century and then that high tariffs made the United States into a great industrial power in the late 19th century. A review by

6893-413: The expense of indigenous communities, which had no say over the crops that were produced and retained marginal profits from their agricultural output. That model also expanded monocultures , whose economies were centered on a single crop or natural resource for exports. Monoculturing was prevalent in countries such as Senegal and Gambia , where groundnuts accounted for 85% to 90% of earnings throughout

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7006-457: The expense of the agricultural sector, which accounted for 70% of the region's workforce throughout the 1970s. The neglect was detrimental to producers as well as the urban population, as agricultural output could not meet the increasing demands for foodstuffs and raw materials in the growing urban areas. ISI efforts also suffered from a comparative disadvantage in skilled labor for industrial growth. A 1982 World Bank report stated, "There exists

7119-482: The factors, policies and services that facilitate the trade in goods across borders and to destinations. The index summarizes four sub-indexes, namely market access; border administration; transport and communications infrastructure; and business environment. As of 2016, the top 30 countries and areas were the following: Academics, governments and interest groups debate the relative costs , benefits and beneficiaries of free trade. Arguments for protectionism fall into

7232-487: The financial and political means to unify the state apparatus behind an industrialization process. Sub-Saharan Africa's experiment with ISI created largely pessimistic results across the continent by the early 1980s. Manufacturing, which formed the core of the big push towards industrialisation, accounted for only 7% of GDP across the continent by 1983. The failures of the model stemmed from various external and domestic factors. Internally, efforts to industrialise came at

7345-409: The first time in almost 100 years. Import substitution policies might create jobs in the short run, but as domestic producers replace foreign producers, both output and growth are lower than would otherwise have been in the long run. Import substitution denies the country the benefits to be gained from specialisation and foreign imports. The theory of comparative advantage shows how countries within

7458-454: The free-trade regime had unequal power and that the central economies (particularly, Britain and the United States) that manufactured industrial goods could control the price of their exports. The unequal powers were taking the wealth from developing countries, leaving them with no way to prosper. He believed that developing countries needed to create local vertical linkages and that they could not succeed except by creating industries that used

7571-724: The gains from free trade are larger than the losses. A 2021 study found that across 151 countries over the period 1963–2014, "tariff increases are associated with persistent, economically and statistically significant declines in domestic output and productivity, as well as higher unemployment and inequality, real exchange rate appreciation, and insignificant changes to the trade balance." Economic models indicate that free trade leads to greater technology adoption and innovation. A 2023 study in Journal of Political Economy found that reductions in trade costs since 1980 caused increases in agricultural productivity, food consumption and welfare across

7684-517: The ground that it allows maximum exploitation of workers by capital . For example, Karl Marx wrote in The Communist Manifesto (1848): "The bourgeoisie [...] has set up that single, unconscionable freedom – free trade. In one word, for exploitation, veiled by religious and political illusions, it has substituted naked, shameless, direct, brutal exploitation". Marx supported free trade, however, solely because he felt that it would hasten

7797-453: The grounds that lower prices for imported goods would reduce their profits and market share. For example, if the United States reduced tariffs on imported sugar, sugar producers would receive lower prices and profits, and sugar consumers would spend less for the same amount of sugar because of those same lower prices. The economic theory of David Ricardo holds that consumers would necessarily gain more than producers would lose. Since each of

7910-549: The homes of free trade policy, employed protectionism to varying degrees at all times. Britain abolished the Corn Laws which restricted import of grain in 1846 in response to domestic pressures and reduced protectionism for manufactures only in the mid 19th century when its technological advantage was at its height, but tariffs on manufactured products had returned to 23% by 1950. The United States maintained weighted average tariffs on manufactured products of approximately 40–50% up until

8023-469: The import-export business as well as the retail-wholesale distribution. That allowed post-colonial states to nationalise industries and retain the profits from their output, rather than allow capital flight to the west through multinational corporations. The growth of African socialism in the pursuit of ISI can be seen in the 1967 Arusha Declaration (Tanzania) in which Nyerere argued that "we cannot get enough money and borrow enough technicians to start all

8136-407: The importance of common trading tariffs in specific parts of the continent and aimed to protect domestic manufacturing from external competitors. Early attempts at ISI were stifled by colonial neomercantilist policies of the 1940s and the 1950s that aimed to generate growth by exporting primary products to the detriment of imports. The promotion of exports to metropoles was the primary goal of

8249-436: The impression that tariff cuts caused the crash and the reverse generated the recovery. Mr Irwin also methodically debunks the idea that protectionism made America a great industrial power, a notion believed by some to offer lessons for developing countries today. As its share of global manufacturing powered from 23% in 1870 to 36% in 1913, the admittedly high tariffs of the time came with a cost, estimated at around 0.5% of GDP in

8362-465: The industrial sector of developing countries have indicated that increases in total factor productivity, (TFP) are an important source of industrial growth". He continued that "a higher growth rate in output, other things remaining the same, would enable the industry to attain a higher rate of technological progress (since more investment would be made) and create a situation in which the constituent firms could take greater advantage of scale economies." It

8475-505: The industrialized goods that they consumed, were prevented from importing because of a sharp decline in their foreign sales, which served as an incentive for the domestic production of the goods that they needed. The first steps in import substitution were less theoretical and more pragmatic choices on how to face the limitations imposed by recession even though the governments in Argentina ( Juan Domingo Perón ) and Brazil ( Getúlio Vargas ) had

8588-486: The industries we need and even if we could get the necessary assistance, dependence on it would interfere with our policy on socialism." The need for indigenous development formed the core of the African socialist vision whereby the state would manage a planned economy to prevent it from being controlled by the free market, which was regarded as a form of neo-imperialism . In line with that economic vision, Tanzania engaged in

8701-432: The intention of producing development and self-sufficiency by the creation of an internal market. The state leads economic development by nationalization, subsidization of manufacturing, increased taxation, and highly protectionist trade policies. In the context of Latin American development, the term "Latin American structuralism" refers to the era of import substitution industrialization in many Latin American countries from

8814-416: The interests of political elites may be self-serving, rather than for the good of the nation. That correlates with the theory of neo-patrimonialism , which claims that post-colonial elites used the coercive powers of the state to maintain their political positions and to increase their personal wealth. Ola Olson opposes that view by arguing that in a developing economy, the government is the only actor with

8927-609: The interwar period, economic protectionism took hold in the United States, most famously in the form of the Smoot–Hawley Tariff Act which is credited by economists with the prolonging and worldwide propagation of the Great Depression . From 1934, trade liberalization began to take place through the Reciprocal Trade Agreements Act . Since the end of World War II , in part due to industrial size and

9040-518: The long run these gains are much larger than any effects on employment". Paul Krugman stated that free trade is greatly beneficial to the world as a whole, and especially beneficial to people in poorer nations, since it allows them to increase their standards of living. He also stated in 2007 that, as the US trades more with less-industrialized countries whose workers are paid less than equivalent US workers (2007 wages in Mexico were 1/10 what they were in

9153-541: The manufactured goods produced by ISI countries were not competitive in international markets, and as the agricultural sector (the sector which was competitive in international markets) was weakened; as a result, ISI countries ended up importing more. ISI policies were also plagued by rent-seeking . ISI is a development theory, but its political implementation and theoretical rationale are rooted in trade theory . It has been argued that all or virtually all nations that have industrialized have followed ISI. Import substitution

9266-430: The mid-1870s. In some industries, they might have sped up development by a few years. But American growth during its protectionist period was more to do with its abundant resources and openness to people and ideas. According to Paul Bairoch , since the end of the 18th century, the United States has been "the homeland and bastion of modern protectionism". In fact, the United States never adhered to free trade until 1945. For

9379-501: The mid-1950s, Latin America's economies were growing faster than those of the industrialized West." ISI policies were implemented in various forms across Africa from the early 1960s to the mid-1970s to promote indigenous economic growth within newly independent states. The national impetus for ISI can be seen from 1927, with the creation of the East African and Central African common markets in British and French colonies that recognized

9492-471: The mid-1960s, many of the economists who had previously advocated for ISI in developing countries grew disenchanted with the policy and its outcomes. Many of the countries that adopted ISI policies in the post-WWII years had abandoned ISI by the late 1980s, reducing government intervention in the economy and becoming active participants in the World Trade Organization. In contrast to ISI policies,

9605-487: The model gain from trade, however, this concept has received criticism for its misguided underlying assumptions and inapplicability to modern production. Moreover, protectionism leads to dynamic inefficiency, as domestic producers have no incentive from foreign competitors to reduce costs or improve products. Import substitution can impede growth through poor allocation of resources, and its effect on exchange rates harms exports. Despite some apparent gains, import substitution

9718-405: The model of development. Tom Mboya , the first minister for economic development and planning, aimed to create a growth-oriented path of industrialization, even at the expense of traditional socialist morals. Kenya's Sessional Paper No. 10 of 1965 reinforced the view by claiming, "If Africanization is undertaken at the expense of growth, our reward will be a falling standard of living." Under such

9831-582: The most part, the Jeffersonians strongly opposed protectionism. In the 19th century, statesmen such as Senator Henry Clay continued Alexander Hamilton 's themes within the Whig Party under the name American System . The opposition Democratic Party contested several elections throughout the 1830s, 1840s and 1850s in part over the issue of the tariff and protection of industry. The Democratic Party favored moderate tariffs used for government revenue only while

9944-613: The onset of the Cold War , the United States has often been a proponent of reduced tariff-barriers and free trade. The United States helped establish the General Agreement on Tariffs and Trade and later the World Trade Organization , although it had rejected an earlier version in the 1950s, the International Trade Organization . Since the 1970s, United States governments have negotiated managed-trade agreements, such as

10057-519: The outbreak of World War I. Trade openness increased again during the 1920s, but collapsed (in particular in Europe and North America) during the Great Depression . Trade openness increased substantially again from the 1950s onwards (albeit with a slowdown during the 1973 oil crisis ). Economists and economic historians contend that current levels of trade openness are the highest they have ever been. Economists are generally supportive of free trade. There

10170-560: The possibility of extending the agreement to include Greenland (thus creating a West Nordic free trade zone) should be seriously studied. It was noted at Løgting that the agreement could be extended to Norway and Canada in the future. Free trade Most nations are today members of the World Trade Organization multilateral trade agreements. States can unilaterally reduce regulations and duties on imports and exports, as well as form bilateral and multilateral free trade agreements. Free trade areas between groups of countries, such as

10283-522: The precedent of Fascist Italy (and, to some extent, the Soviet Union ) as inspirations of state-induced industrialization. Positivist thinking, which sought a strong government to modernize society, played a major influence on Latin American military thinking in the 20th century. The officials, many of whom rose to power, like Perón and Vargas, considered industrialization (especially steel production) to be synonymous with "progress" and naturally placed as

10396-407: The primary products already being produced domestically. Tariffs were designed to allow domestic infant industries to prosper. In doing so, Prebisch predicted many benefits: dependence on imports would lower, and the country would not be forced to sell agricultural goods for low prices to pay for industrial goods, the income rate would go up, and the country itself would have a strong growth. ISI

10509-436: The proposed benefits of free trade are through David Ricardo 's theory of comparative advantage and by analyzing the impact of a tariff or import quota. An economic analysis using the law of supply and demand and the economic effects of a tax can be used to show the theoretical benefits and disadvantages of free trade. Most economists would recommend that even developing nations should set their tariff rates quite low, but

10622-504: The reason for the flourishing of not just Mediterranean cultures such as Egypt , Greece and Rome , but also of Bengal ( East India ) and China . Netherlands prospered greatly after throwing off Spanish Imperial rule and pursuing a policy of free trade. This made the free trade/mercantilist dispute the most important question in economics for centuries. Free trade policies have battled with mercantilist , protectionist , isolationist , socialist , populist and other policies over

10735-406: The seas". Vitoria made the case under principles of jus gentium . However, it was two early British economists Adam Smith and David Ricardo who later developed the idea of free trade into its modern and recognizable form. Economists who advocated free trade believed trade was the reason why certain civilizations prospered economically. For example, Smith pointed to increased trading as being

10848-403: The social revolution. He also viewed the tendency to support protectionism out of spite for free trade to be unsound. That is because Marx viewed protectionism as a means for domestic firms to establish "large-scale" industry within its borders, which would inevitably make it dependent on the world market so that it could make more revenue for example. He also argues that protectionism does not stop

10961-474: The suggestion that the U.S. should restrict employers from outsourcing work to foreign countries". Quoting Harvard economics professor N. Gregory Mankiw , "Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards". In a survey of leading economists, none disagreed with the notion that "freer trade improves productive efficiency and offers consumers better choices, and in

11074-497: The tariff). Under similar analysis, export tariffs, import quotas and export quotas all yield nearly identical results. Sometimes consumers are better off and producers worse off and sometimes consumers are worse off and producers are better off, but the imposition of trade restrictions causes a net loss to society because the losses from trade restrictions are larger than the gains from trade restrictions. Free trade creates winners and losers, but theory and empirical evidence show that

11187-591: The third report and the magnum opus of Alexander Hamilton , the Report on Manufactures , advocated for the U.S. to become self-sufficient in manufactured goods. That formed the basis of the American School in economics , which was an influential force in the country during its 19th-century industrialization. Werner Baer contends that all countries that have industrialized after the United Kingdom have gone through

11300-399: The trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man. [It is said] that protection is immoral [...]. Why, if protection builds up and elevates 63,000,000 [the U.S. population] of people, the influence of those 63,000,000 of people elevates the rest of

11413-544: The view that there is no alternative . Shuman claims that LOIS businesses are long-term wealth generators, are less likely to exit destructively, and have higher economic multipliers . Import substitution policies were adopted by most nations in Latin America from the 1930s to the late 1980s. The initial date is largely attributed to the impact of the Great Depression of the 1930s, when Latin American countries, which exported primary products and imported almost all of

11526-463: The villagization project and to focus on agricultural development. While ISI under African socialism was purported to be an anti-Western development model, scholars such as Anthony Smith argued that its ideological roots came from Rostow's modernization theory , which maintains that commitment to economic growth and free-market capitalism is the most efficient means of state development. Kenya 's implementation of ISI under state capitalism exemplifies

11639-409: The world food market and has become food self-sufficient. In the fisheries, fruit, and vegetables sectors, domestic production has increased sharply, imports have declined significantly, and the trade balance (the difference between exports and imports) has improved. In the second quarter of 2017, agricultural exports were expected to exceed imports, which would make Russia a net agricultural exporter for

11752-429: The world. The welfare gains were particularly large in some developing countries. According to mainstream economics theory, the selective application of free trade agreements to some countries and tariffs on others can lead to economic inefficiency through the process of trade diversion . It is efficient for a good to be produced by the country which is the lowest cost producer, but this does not always take place if

11865-419: The world. We cannot take a step in the pathway of progress without benefitting mankind everywhere. Well, they say, 'Buy where you can buy the cheapest'…. Of course, that applies to labor as to everything else. Let me give you a maxim that is a thousand times better than that, and it is the protection maxim: 'Buy where you can pay the easiest.' And that spot of earth is where labor wins its highest rewards. During

11978-492: Was "both unsustainable over time and produced high economic and social costs". Given import substitution's dependence upon its developed and isolated markets within Latin America, it relied upon the growth of a market that was limited in size. In most cases, the lack of experience in manufacturing and the lack of competition reduced innovation and efficiency, which restrained the quality of Latin American produced goods, and protectionist policies kept prices high. In addition, power

12091-515: Was a protracted and costly process, something that African states were unable to capitalise on because of the lack of domestic savings and poor literacy rates across the continent. The failure of ISI to generate sufficient growth in industrialisation and overall development led to its abandonment by the early 1980s. In response to the underdeveloped economies in the region, the IMF and the World Bank imposed

12204-501: Was famous for smuggling), but also because colonial merchants did not want to compete with foreign goods and shipping. According to historian Oliver Dickerson, a desire for free trade was not one of the causes of the American Revolution . "The idea that the basic mercantile practices of the eighteenth century were wrong", wrote Dickerson, "was not a part of the thinking of the Revolutionary leaders". Free trade came to what would become

12317-480: Was heavily practiced during the mid-20th century as a form of developmental theory that advocated increased productivity and economic gains within a country. It was an inward-looking economic theory practiced by developing nations after World War II . Many economists then considered the ISI approach as a remedy to mass poverty by bringing a developing country to a developed status through national industrialization. Mass poverty

12430-603: Was most successful in countries with large populations and income levels, which allowed for the consumption of locally produced products. Latin American countries such as Argentina, Brazil, and Mexico (and to a lesser extent Chile , Uruguay and Venezuela ) had the most success with ISI. While the investment to produce cheap consumer products may be profitable in small markets, the same cannot be said for capital-intensive industries, such as automobiles and heavy machinery, which depend on larger markets to survive. Thus, smaller and poorer countries, such as Ecuador , Honduras , and

12543-611: Was necessary to reduce the growing economic inequalities that had occurred as a result of state capitalism. In all of the countries that adopted ISI, the state oversaw and managed its implementation, designing economic policies that directed development towards the indigenous population, with the aim of creating an industrialised economy. The 1972 Nigerian Enterprises Promotion Decree exemplified such control, as it required foreign companies to offer at least 40% of their equity shares to local people. A state-controlled economy has been criticized by scholars such as Douglas North who claim that

12656-652: Was one of many factors leading to the so-called lost decade of Latin American economics . Against most opinions, one historian argued that ISI was successful in fostering a great deal of social and economic development in Latin America: "By the early 1960s, domestic industry supplied 95% of Mexico's and 98% of Brazil's consumer goods. Between 1950 and 1980, Latin America's industrial output went up six times, keeping well ahead of population growth. Infant mortality fell from 107 per 1,000 live births in 1960 to 69 per 1,000 in 1980, [and] life expectancy rose from 52 to 64 years. In

12769-605: Was sponsored by the Anti–Corn Law League . Under the Treaty of Nanking , China opened five treaty ports to world trade in 1843. The first free trade agreement, the Cobden-Chevalier Treaty , was put in place in 1860 between Britain and France which led to successive agreements between other countries in Europe. Many classical liberals , especially in 19th and early 20th century Britain (e.g. John Stuart Mill ) and in

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