Nations like free trade as long as it favors their goods, services, and citizens. When they begin to feel like they have the short end of the deal, free trade agreements can collapse quickly.
Tariffs are the import taxes placed on goods entering a country. Most of the time, tariffs are intended to protect the companies and people who produce a similar product within the nation. For example, if American car manufacturers can produce a car that sells for $20,000 and the Koreans can build and sell that same type of car for $12,000, U. S. manufacturers will cry foul. The government will then place a tariff on Korean cars that is high enough to make the American companies competitive. By doing this, it protects the companies and the earnings power of its employees.
The problem with tariffs is that it encourages the other country to take similar action against an import from our nation that is profitable for our businesses and individuals. Thus, their ability to do business in the other nation is damaged. A second problem is that it also reduces the benefits of a competitive market in our country by protecting what might be excessively high prices by our own companies. A third problem is that tariffs can discourage innovation. This is true for our people and for the people that we may want to buy from oversees.
Specific taxes levied by the federal and state governments can also be problematic. Many taxes are item specific. These taxes are often aimed at achieving some goal. Taxes on petroleum products are hoped to reduce the use of these products and cut pollution and the need for foreign imports. Taxes on tobacco products are intended to improve the health of the nation by reducing the number of smokers.
When products from foreign nations are targeted for these types of taxes, it can have the same effect as a tariff. If the tax it too high, retaliation by the offended nation is likely. Unlike tariffs, these types of taxes are sometimes harder to find and can be even harder to rescind. Free trade agreements do not alway address this area because the tax is not intended as a protectionist effort, but is expected to serve some other perceived purpose.
Trade restrictions are another barrier to free trade. Like tariffs, restrictions are definitely targeted in free trade agreements. Restrictions limit the quantity, quality, and type of products that can be imported. For example, opium is a restricted product. It derivatives like heroin are also restricted. Obviously, not too many nations are going to openly complain about these restrictions. However, many complaints come when technology items are put on the list of restricted exports from our nation.
Free trade agreements seek to limit the number of restrictions and eliminate as many tariffs and taxes as possible. An absolute free trade agreement would remove all of these. The United States' agreements with most of the North American nations is about as close to this as it gets. The major benefit of free trade agreements is that we are free to sell our most profitable items in greater quantities to our trading partners. Unfortunately, they get the same benefit.
Free trade encourages and open international market system. Competition and innovation should be increased and overall, prices on desired goods whether domestic or imported should fall. Because of a larger sales market, profits for efficient corporation should rise with expansion. Everyone should smile all of the time. However, because of variations in the price of raw materials and labor, these agreements often favor the nation with the lowest labor cost and the most raw materials.
