A fundamental conviction of economics is that international trade increases the material prosperity of people. There are numerous reasons for this. At the same time, however, it should be pointed out that a number of conditions must be met, since the international division of labor and the trade associated with it actually improve people’s living conditions. Three aspects play a central role here.
1 Eliminating discriminatory trade barriers without race to the bottom
The central element of international trade is the dismantling of import restrictions that serve exclusively to protect domestic companies (so-called discriminatory trade barriers). On the other hand, restrictions designed to protect domestic consumers must be maintained. This means that if a society classifies the consumption of chlorine-treated meat as a health risk, the ban on the import of chlorinated chickens is not a discriminatory trade barrier.
Furthermore, in order to prevent “race to the bottom” competition, it is imperative that labor, social and other protection standards (e.g. working time regulations, the prohibition of forced labor, protection against dismissal, health at work and environmental protection requirements) are not abandoned as part of an intensification of global free trade.
2 Market transparency and equal state of information of all market players
Market transparency is a mandatory prerequisite for a functioning free trade system. Only if consumers have all the information about the products available can they choose the offer that best suits their preferences. The removal of trade barriers in international trade must not, therefore, lead to a renunciation of product information, which is necessary for optimal consumer choices.
A functioning free trade system also requires the elimination of information differences between consumers and suppliers of products. Otherwise, there is a risk that information advantages will be exploited to the detriment of market participants who lack information.
3 Increasing welfare requires internaliuzation of externalities
Free trade only leads to an improvement in the welfare of society as a whole if consumers and producers bear all the costs associated with international trade. This applies, for example, to pricing the costs related to the use of the environment (e.g. the costs of CO2 emissions for society as a whole) into market prices. Insofar as the enforcement of the liability principle requires state intervention, these must not be regarded as discriminatory barriers to trade.
This also applies if the private benefit of an economic decision is less than its benefit for society as a whole. This form of market failure also requires public intervention, which is expressed above all in the participation of the state in the financing of the corresponding activities. Subsidies that serve to internalize positive external effects should therefore not be regarded as a distorting preference for domestic producers.
- Suggested reading: A more detailed version on the necessary conditions for a welfare-enhancing international trade can be found here.