ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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A. Did you follow the still ongoing discussion about free trade in the recent election cycle? Do you think
that the USA is tending toward a mercantilist approach and likely to impose restrictions on foreign trade
over the next few years?
B. Do you agree or disagree with Adam Smith that we are better off with some form of free trade, than
would be the case if each country raised or lowered tariffs based on its own economic needs and political
philosophy? Provide a logical reason for your answer.
Not at all Somewhat Completely
1 2 3 4 5 6 7 8 9 10
C. Thomas Freedman made the following statement in the “World is Flat”. He maintains that technology
makes it possible to compete with, or collaborate with anyone, anywhere in the world. Globalization, he
argued is both inevitable and desirable. The winners says Freedman, will be the countries and
companies that can respond quickly to change and that the loser will be those who are slow to do so.
“Whatever our political and philosophical points of view we may have little option but to adapt to the
global economy.” Do you agree or disagree?
What is the reason for your answer?
Transcribed Image Text:3. THE HISTORICAL BACKGROUND OF FREE TRADE
Adam Smith and Free Trade
The World is not just flat, says Thomas Friedman but, according to his more recent book, Flat, Hot and
Crowded. Toward the end of chapter fifteen we are offered a glimpse of the more important trading blocs on
the planet. It is useful, to research the origins and functions of the World Trade Organization as well as to
understand tariffs, dumping embargos and other barriers to international trade. The controversy of free trade
versus protectionism, ongoing in this election cycle, is not new. There was considerable discussion in the
period leading up to the 2008 presidential election of "opting out" of NAFTA and indeed during this time the
Senate failed to endorse a free trade agreement with Colombia even though all parties agreed it would be a
win-win situation. In fact the free trade v. mercantilism debate goes all the way back to Adam Smith, whose
publication in 1776 of The Wealth of Nations was, not coincidentally, the same year that the Declaration of
Independence was endorsed by the Continental Congress. Smith proposed that in the future, each country
or region should do what it could do best and most economically, so that all countries would benefit from free
trade. Look up the Smoot-Hawley Act of 1930 and examine the consequences that raising trade barriers
caused at that time. Among other measures, this act that raised tariffs to protect jobs in the US, was passed
by Congress in retaliation to other countries doing the same thing, Rather than improving the situation
however it exacerbated an already disastrous slide of the world economy into the great depression. Another
key factor was the increasingly grave situation in Europe.
Germany in 1920's and 30's
The cause of the immense acceleration of prices that occurred during the German hyperinflation of 1922-23
seemed unclear and unpredictable to those who lived through it, but in retrospect was relatively simple. The
Treaty of Versailles imposed a huge debt on Germany that could be paid only in gold or foreign currency.
With its gold depleted, the German government attempted to buy foreign currency with German currency, but
this caused the German Mark to fall rapidly in value, which greatly increased the number of Marks needed to
buy more foreign currency. This caused German prices of goods to rise rapidly which increased the cost of
operating the German government which could not be financed by raising taxes. The resulting budget deficit
increased rapidly and was financed by the central bank creating more money. At the same time Germany
raised tariffs and imposed quotas in an effort to stem rising unemployment
Transcribed Image Text:When the German people realized that their money was rapidly losing value, they tried to spend it quickly.
This increase in monetary velocity caused still more rapid increase in prices which created a vicious cycle.
This placed the government and banks between two unacceptable alternatives: if they stopped the inflation
this would cause immediate bankruptcies, unemployment, strikes, hunger, violence, collapse of civil order,
insurrection, and revolution. If they continued the inflation, they would default on their foreign debt. The
attempts to avoid both unemployment and insolvency ultimately failed when Germany had both." Eventually
the situation was brought under control by a new government headed by Gustav Stressmann. But the
measures taken were seen by the German people a defeat, ultimately this setting the stage for the rise of the
National Socialist (Nazi) party, World War II and all that it implies.
The GATT and the WTO
Preparing to rebuild the international economic system while World War II was still raging, 730 delegates
from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire,
United States, for the United Nations Monetary and Financial Conference, also known as the Bretton
Woods Conference. The delegates deliberated during 1-22 July 1944, and signed the Bretton Woods
agreement on its final day. Setting up a system of rules, institutions, and procedures to regulate the
international monetary system, these accords established the International Monetary Fund (IMF) and
the International Bank for Reconstruction and Development (IBRD), which today is part of the World
Bank Group. The United States, which controlled two thirds of the world's gold, insisted that the Bretton
Woods system rest on both gold and the US dollar. Soviet representatives attended the conference but
later declined to ratify the final agreements, charging that the institutions they had created were "branches
of Wall Street."[¹These organizations became operational in 1945 after a sufficient number of countries had
ratified the agreement. Today this has developed into the General Agreement on Trade and Tariffs (GATT),
administered by the World Trade Organization (WTO). In turn in past 50 years we have seen the creation of
multiple "free trade" agreements such as NAFTA and what has now become the European Union (EU).
While the system is an admittedly flawed instrument, now showing some strains, such as the disagreement
over refugee policies in the EU, it is arguably far superior to the conditions that prevailed in the nineteenth
and first half of the twentieth century, when trade war led inevitably to hot war.
4. USE THESE THREE QUESTIONS TO FRAME YOUR DISCUSSION BOARD COMMENTS
A. Did you follow the still ongoing discussion about free trade in the recent election cycle? Do you think
that the USA is tending toward a mercantilist approach and likely to impose restrictions on foreign trade
over the next few years?
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