As the term is used in economic and political discourse these days, what do you perceive "free trade" to mean and entail?
Okay, I will give my explanation of free trade. Today
most media refers to free trade as uninhibited trade between nations. In other words,
people can buy things made anywhere and usually for near the same local price as where manufactured. And
businesses can sell their products to anyone anywhere for the same price plus shipping. Shipping across nation borders adds no additional cost to products.
But there is another element to free trade which is not discussed much. And that is
the element of competition between manufacturers.
One of the assumptions of capitalism combined with free trade is that consumers will buy the best product at the least expensive price. But that is an ideal seldom seen in the real world. As highly successful companies grow very large, they always clobber their competition even if the competition produces a better product. When profits give then sufficient power, they undercut the small competitors prices (often at below cost) to kill the small business. And the large corporation usually tries to buy the small one (if they have a better product) as the small one fails. When corporations get very large, mega-mergers begin happening.
Without healthy small businesses and their innovations, free trade is lost as far as the consumer is concerned. We end up getting cheaper low-quality products as a result.
And I have not even touched on the unemployment problem created by large corporations with too much power.
This is the main reason for a dying economy. People have less money to buy stuff.
TY for explaining how you understand the term free trade.
I apologize for this post being so long, but there is so much that you've written that doesn't at all jibe with the principles of economics. At best, they are statements bourne of "common sense;" however, economics -- the behavior buyers and sellers exhibit in the face of scarcity and choice -- does not lend itself to being discerned by common sense. That it doesn't is, IMO, why there is so much haranguing about what economic policy the nation should follow: too many people who have no training in economics exercising their 1st Amendment right to nonetheless discuss and opine about economic matters.
It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a "dismal science." But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.
― Murray N. Rothbard
Red:
And they would be correct in doing so.
Free trade is the unrestricted purchase and sale of goods and services between countries without the imposition of constraints such as tariffs, duties and quotas. Free trade is a win-win proposition because it enables nations to focus on their core competitive advantage(s), thereby maximizing economic output and fostering income growth for their citizens.
Blue:
That is an outcome of free trade existing. It is not an element of free trade.
Pink:
I can assure you that consumers buying a good in the area where it's produced will pay prices far lower than will consumers buying the very same good in a distant locale, regardless of whether free trade happens or not.
For example:
- In 1977 I went globe hopping for the summer and the first port of call was Mexico. My friends and I bought a full sandwich bag of "basic" weed for 75¢, a sum we haggled down from $1.00, when back home in D.C., we had to pay about $10 for it. The last time I bought weed it was $25 for the same quantity in D.C., but I have no idea what the price was in Mexico at the time.
- A couple years ago, I bought a bunch of clothes -- a couple pairs of jeans, a sweater, several shirts and a pair of shoes -- at the Versace boutique in Florence. They were on sale and I paid ~$2200 for all of it...that even though I'd seen the sweater and shoes selling in NYC for $1200 and $600, respectively. Admittedly the boutique was having a sale, but still. The Versace store in NY never has a sale that good.
- In the PRC, I routinely see high end domestically made "designer" (i.e., the designer is a "big deal" among the wealthy folks in China, but nobody outside of the PRC has heard of them) garments selling for half or less of the price the very same garments, made in the same factory, sell for in the West under a different designer's/store's brand name.
- In the PRC the parts that used to be used to make iPhones were the very same parts used to make the Chinese knock-offs of iPhones. And guess what, they worked equally well. In fact, the Chinese version I bought was a dual sim "iPhone," which for me is better because it allows me to install my China Mobile and my U.S. AT&T sims in the phone, and use either, at my choosing, to make calls, send texts, read/send email, etc., and when I travel to the Europe or Japan, or wherever, I take out the China Mobile sim and install the Vodaphone (now Softbank in Japan) sim as needed. As a frequent traveler, being able to carry one less device is a good thing for me. I've been using the phone without issue since 2011. I paid $200 for the phone and purchased it from an independent phone seller at a little booth in Hua Jiang Bei, Shenzhen, PRC. I don't think such a thing can be bought in the U.S., and I know one could not then or now buy an iPhone of any sort for $200.
Just for perspective, Hua Jiang Bei is a 2 mile long by 4/5ths mile or so wide district within Shenzhen that has little other than electronics dealers (most are "mom and pop" type), although there are restaurants and two department stores there too.
To get a sense of just how extensive is the electronics market right there alone -- and note that one can there buy everything electronic and computer related, from the smallest "visible to the naked eye" raw materials to finished goods like phones, televisions, etc. -- image an eight story building covering the area of a "big city" office building and having nothing but electronics vendors in small "shops" that are about 20ft x 15 feet or so. Now imagine that there are well over a dozen such places along with literally hundreds of small one or two story buildings having more of the same. That's Hua Jiang Bei. I don't know of any place in the U.S. that is even remotely similar. The closest thing that readily comes to mind is the jewelry district in NYC.
Schematic representation
Actual aerial view -- Hua Jiang Bei is a district named for its central street which is the big one seen about in the middle of photo below.
Without going into too much detail about the vagaries of pricing strategies, which are critical to the practical aspects of a free trade discussion such as the one to which you opened the door, I'll just say that what one pays in the locality where a good is produced is unlikely to usually be near what one pays in a distant and wealthy locale. At the highest level, one can boil pricing down to being a matter of what the market will bear and individual seller's minimum profit requirements.
FWIW, here are some entry level discussions of pricing strategies:
Green:
They can do that if and only if they sell everywhere at the minimum price at which they'd be willing to sell in the single highest cost market in which they do sell.
Purple:
That's something that occurs in free trade and un-free trade.
Fluorescent Green:
That's not an assumption of capitalism. Capitalism is nothing more than an economic model/system wherein the forces of supply and demand, as described by microeconomics and macroeconomics, determine what is and is not produced and bought. Period. Economic systems become less and less capitalist as governments exert greater and greater degrees of control over what it and is not produced. The most extreme limitation is found in what is referred to as a command economy. Pure capitalism can coexist within a communist or socialist political system, but a purely command economy cannot exist within a democratic political system.
That out of the way, let's look at what that statement is. What it is is a poor approximation of one of the principles underpinning all of microeconomics. That principle is called "rational choice." Specifically, rational choice is an economic principle that assumes that individuals always make prudent and logical decisions that provide them with the greatest benefit or satisfaction and that are in their highest self-interest.
Economics addresses the idea of what constitutes what a given consumer deems as being in their best interest, that is, what provides them the greatest benefit, using the ideas of elasticity and substitution with regard to price.
- Elasticity -- Elasticity is the economists term for what everyone has in mind when they say "worth it." A consumer may be well aware that, say, copper cookware provides distinct advantages over aluminum or ceramic cookware; however, given their cooking needs and abilities, they decide copper cookware isn't "worth it" because it costs too much more than either of those alternatives.
I made exactly such a decision when I bought a sports coupe a few years back. I test drove coupes offered by Porsche and BMW. I could tell the Porsche performed much better and was equally comfortable and convenient to use. Price wasn't a limiting factor, but I was nonetheless very aware of the price difference between the two. I bought the BMW because (1) my driving skills aren't good enough for me to benefit from the Porsche's greater abilities, and (2) the customization options Porsche offered, though appealing, weren't central to why I sought a car in the first place. Though I could tell it was a more capable and more luxurious car, it still wasn't worth it, even though having the money to buy it was not the issue.
On another occasion, I found myself in Dallas and it was far cooler than I'd expected it would be. I needed buy a garment that would be warmer than the thin shirts I had with me and I didn't want to wear a sport jacket to that evening's event. There was a Walmart close by and I went in to see what it had. I found a $5 orange fleece pullover that would do just fine, so that's what I bought. Why? Because for what I needed, there was no need to seek something "nicer" or "better," be either of those terms taken subjectively or objectively. Would I typically go to a Walmart to buy garments? No, but I knew they sell them, Walmart was closer than the Macy's or an outdoor clothing store like REI, and I was sure Walmart would have something good enough to get me through that evening. Lo and behold, I was right. I still wear that pullover; I like it just fine.
Now imagine similar sorts of consumer choices -- pick whatever product you want -- wherein price and functionality are both critical to a consumer and you will, as you likely already do, have a clear grasp of what price elasticity of demand is and how it's manifested by consumers in the marketplace.
- Substitutes -- These are really easy to understand. They are whatever a given consumer views as the possible alternatives s/he may demand (buy) in order to satisfy the need/desire they have. In the examples above, aluminum, steel, copper, and glass ceramic pots/pans are substitutes. So are the BMW and Porsche cars I considered. However, a person who needs transportation may see a BMW, Porsche, public transportation, motorcycle and bicycle as substitutes. Similarly, a hungry person may see hamburgers and carrots as substitute goods, but his also hungry friend may or may not.
What is and is not a substitute is determined by the consumer, not by economists or producers; however, economists and producers can identify what goods/services one can reasonably assume will be seen as substitutes. Also, it's important to keep in mind that money need not be in play; if you need to put out a fire in your skillet, the lid or your glass of water may be substitutes. I note that only so that you'll consider substitutes correctly and not get yourself confused by thinking money necessarily has something to do with it.
Whether consumers utilize the ideas of elasticity and substitutes to make choices they feel are in their best interest is not something that occurs only in an ideal world. It happens every time there resources are scarce and the consumer must use them to obtain satisfaction, however great or small.
Brown:
Those things can and do happen, both on the company level and the individual services/goods level. For example, years ago the Betamax and VHS were competing formats in the video recording industry. Betamax was widely viewed as the objectively better product, but VHS was less expensive and "good enough" for what most consumers needed; thus VHS won out.
As for companies becoming monopoly providers, well, that results from the interplay of a number of factors, but free trade is not among them. Monopolists certainly have vast degrees and extents of control in the marketplace, but a company doesn't come to exist because of free trade, they come to exist as a result of their being able, before other competitors, to overcome one or several
barriers to market entry, one of which can be tariffs and other restrictions on free trade. In other words, limitations on free trade can allow a domestic producer to obtain a monopoly in their country. In the U.S. we have laws that prevent that from happening and persisting, except where the good/service produced/delivered lends itself to being offered within the construct of a natural monopoly.
Generally speaking, only undifferentiable goods/services are provided by monopolists. Utilities are the main things that fit that description, and they are because the investment in infrastructure needed to deliver utility goods and services is so large that it's economically inefficient and unprofitable for multiple producers to compete in such arenas. Over time, however, the
natural monopoly elements of a monopoly supplier have their monopoly status carved away as it becomes profitable for multiple suppliers to compete. We've seen this played out in the electricity market with the advent of competition in the production segment of the energy industry.
Electricity is produced and delivered to users via three main processes: generation/production, transmission and distribution. Over the past 30 years or so, it's become cost effective for multiple producers to generate electricity, but it's not for multiple providers to deploy transmission and distribution equipment. And frankly, consumers won't want them to...nobody wants three electric utility poles on the corner, yet that's exactly what would have to be there if three companies distributed electricity. Now that electricity generation is efficient to produce by multiple providers, you and I can choose from whom we buy our electricity, but we can't choose who delivers it to us.
The companies I suspect you have in mind are large
monopolistic competitors. They are not at all the same as monopolists. They are just big companies that are able to use one or more marketing principles, in concert with economic realities/principles such as barriers to entry, elasticity, substitutes, and others, to obtain and sustain market dominance. Make no mistake, however. Being big doesn't mean one can or will maintain dominance in the market of a given class of goods. The
story of Microsoft and its Windows OS obtaining superiority over IBM's OS/2 is a fine example of that. It was by no means easy for Microsoft to achieve that, particularly seeing as OS/2 was widely viewed as being objectively better, but they did it and now are a larger and more profitable company than IBM. Moreover, IBM's loss in the desktop PC operating system market was so great that it exited that market.
