Keith Schuman Economics 4999 February 20, 2006 Free Trade and India This paper will look at free trade from the viewpoint of an economist, analyze whether its benefits are greater than its costs and determine if in fact, unrestricted international trade helps to achieve the ethics of economists. I will present a traditional economic argument for free trade using India as an example while providing empirical evidence. Free trade does not come without costs. You, the reader should understand the costs of free trade and think critically about the issue while reading this paper. In order to get your mind racing, there will be arguments presented against free trade and the negative affects that it has. My intention for this paper is to insight the reader to learn more about free trade and the issues surrounding it. Globalization is the increasing interconnectedness of the world. The integration of societies consists of three primary areas: economic integration, cultural integration and political integration. Trade is the primary engine of economic integration. It is the unrestricted flow of goods and services across international boundaries. The trade benefits that are sought after by Multinational Corporations and state actors are accomplished through means of comparative advantage. A country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries. Exchange rates play a role, however, assuming that preferences are equal across countries, the trade pattern of goods incorporates floating exchange rates (meaning that exchange rates of countries arenot fixed, and are determined by international market supply and demand for a currency). Trade can benefit both countries involved if each country exports the goods in which it has a comparative advantage. Free trade has many supporters and critics, each with their own agenda. Economists believe in achieving market efficiency through free markets. Restrictions on markets create inefficiencies which eventually lead to non-market failures. Trade between states acts as a catalyst for labor specialization which allows wealthy countries to use their resources, whether labor, capital or technology more efficiently. Because countries are endowed with different assets and natural resources, some countries may produce the same good more efficiently and therefore sell it more cheaply than other countries. If a country cannot efficiently produce an item, it will be able trade for that item with a country that does produce it efficiently. This specialization is the primary component in determining the comparative advantage of a particular country. In turn, specialization is the primary determinant of which goods and services will be produced at “home” and which will be imported from abroad. Specialization of goods and services allow countries to maximize their production and growth by producing goods which they specialize in. Cost-minimizing efforts by companies have led to an increasing number jobs being outsourced out from the United States and into countries that have a comparative advantage in manufacturing a particular good. It is more affordable to purchase a good from companies with comparative advantages than it is to produce the good internally.This aspect of free trade has been heavily criticized by labor rights organizations and other political entities. However, from an economics perspective, imports do not cause a net loss of jobs in a nation’s economy. It redistributes resources to more productive areas of the economy, creating an even more efficient economy in the long-run. For most domestic workers, imports raise real compensation by keeping prices down and stimulating domestic competition. Jobs are outsourced to the United States. These jobs are not in sectors such as textiles and manufacturing, which are thought of to be traditional jobs that are outsourced. Many finance jobs including banking are outsourced to the US. HSBC, on of England’s largest banks generates over half of its revenue through its US offices. I am not referring to retail banking, but corporate finance, such as investment banking, capital structuring advisory and other similar products. Imports benefit American producers, providing capital equipment to make workers more productive and lower-cost inputs, such as steel, electronic components, and raw materials, that make their products more price-competitive in world markets. The economic principles behind this correlation has partially to do with the “floating exchange rates.” As imports increase, the demand for the US dollar decreases. This devalues the dollar (empirically, we can see this through the devaluation of the dollar over that last couple years as our trade deficit continues to increase). As the US dollar becomes less valuable, its goods become cheaper and in turn more competitive on the open market. Outsourcing, even though in the short run may seem to make some people significantly worse of and the majority marginally better off, is better to be thought of as the redistribution of domestic resources to create an overall more efficient economy in the long run. This should be thought of a Pareto improvement for the world, but notdomestically. The people who lose their jobs in the short-run do not gain. Over the long-run, they would gain from reentering the workforce in a more efficient industry. At this point, free trade could be thought of as a Pareto improvement for the consumers and workers. The costs of outsourcing: transportation costs + foreign wages + loss of domestic jobs, are far less than the gains from outsourcing, which is the difference between operating costs at home versus operating abroad. It is common knowledge that many of the high technology firms in the United States have been slowly outsourcing jobs abroad. The goods that are produced abroad by “home” countries are then exported from abroad back “home”. Free trade allows for firms to use the specialized labor of a foreign market to reduce its production costs while still selling its goods to “home” consumers at “home” prices. The decision to do so is very logical and intelligent from a firm’s perspective. The firm is concerned with the cutting of costs to maximize profit. An outstanding liability on the firm’s balance sheet is the cost of labor. If labor abroad is cheap, than a