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Theory and practical facts do not confirm this assumption made by free trade economists that all BOP deficits are self-correcting. For example, the US has been suffering continuously BOP deficits for the last 40 years. Under this trade theory made by free trade economist that BOP deficits are self-correcting, the US should now be enjoying a huge surplus BOP bonanza because of the many trillions of US dollars owned by foreigners as the result of this continuing BOP deficit suffered by the US in the last 40 years. However, after 40 years of continuing BOP deficits, it does not seem that US dollars stashed in the coffers of foreign banks would re-circulate back into the US economy.

The Americans are still suffering from huge BOP deficits — the largest among industrial nations — regardless of how much trillions of dollars are held in foreign banks; and there seems to be no let up in the American BOP deficits.

What would induce a person to buy something from another is his need for a product or service that a seller is offering him — not the amount of money he has in the bank. If the seller is offering something that the buyer does not need, he would not buy — even though he has got oceans of money in his bank. However, if the seller is offering the buyer something that he needs, the buyer would buy even if he has to borrow money just to buy what he needs. So the quantity of money a purchaser has in his bank has nothing to do with his decision to buy or not to buy.

The main reason why US dollars held by foreigners is not circulating back to the US is because there is nothing that the US economy could offer that foreigners with US dollars would want to buy. What need has a Korean or German for an American car when Korean and German cars are as good as American cars?

The main reason why the US devalued her currency in the 1970s is because of the complaint of European bankers that useless dollars are accumulated in their coffers which they could not make use of because there is nothing that the US economy could offer that would make Europeans want to buy American goods. This led Pres. Nixon to devalue the US dollar in the early 70s so as to wipe out the American deficit with European nations.

However, the Japanese took a different approach. While Japanese banks were facing the same problem of the accumulation of useless dollars in her coffers, she decided to keep quiet in order to protect the jobs of Japanese workers. The elimination of the American deficit with Japan would mean that more Japanese workers would loose their jobs.

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The basic economic principle that underlies the emergence of international trade as a global economic force is using limited resources in the most efficient way possible. International trade allows countries to specialize in producing goods and services that have the greatest comparative advantage for them. As countries begin to specialize, they trade with other countries that have different comparative costs on the products being traded, so that each country minimizes its domestic opportunity costs and both countries benefit. Trading also raises a country's GDP, increases domestic economic growth, and raises the standard of living.

Who are the winners and losers of trade between the US and China as explained above?

Everybody is a winner in the US/China trade scenario as described above. US markets get cheaper shirts, China gets US dollars that it can spend in the US economy when importing goods from the US. The factory workers in Elon, NC may not feel like winners since they were outsourced, but on a macroeconomic level trade between the US and China benefits both countries.

Why do you think free trade is such a controversial topic among certain groups of Americans and other Western nations’ people?

Free trade is such a controversial topic among certain groups of Americans and other Western nations' people because they sympathize with the domestic workers whose jobs were outsourced. They automatically associate international trade with unemployment. People who discourage free trade fail to consider the long term benefits; the countries that the US trades with will import US products and increase demand of certain products, thus the money that leaves the US through trade will eventually return.

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It is fundamental knowledge to know that competition is a great thing for the consumers. Competition pushes the manufacturers and sellers to strive for better quality products at the lowest cost in order to stay in contention with their competition and stay in business. As long as it is ensured that China will end up putting that money back into our economic system, then essentially, even when we buy from China, we are still buying American.

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Increse in competition provides an incentive for firms to improve their products in order to stay in the market and to pursue the least cost method of production. However, no all countries gain from free trade and in that case they can use some type of protection by placing barriers to trade in order to protect their domestic economy. For example a country could place a tariff, but it can only be effective if placed on elastic goods and something that the country is able to produce on its own. Some people here mentioned how Switzerland subsidizes the farmers, they are also protecting their domestic economy in this way, thus there is no need to import as many goods. Elisabeth gave the example of the US subsidizind their corn production and then giving the extra corn as aid to philippines, however after this philippines became dependent on the US corn due to the cheap price.

As said, countries who specialize in a production of a spesific good will increse their output, but as we learnt last year, the terms of trade will determine whether or not the country will gain from free trade. This including absolute and comparative advantages.

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(I am aware of the ambiguoity of the morality of this argument, for it goes against trade and labour unions. Yet it makes for good debate).

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In reply to Ross’ comment: Yes, the corn industry in Indonesia will definitely face a reality check, but how do you expect them to “a) Shape up, and damned fast or b) Switch into something they can do better” when they have no starting ground? Because of the US supplying corn, Indonesian corn industry is completely out of business, so where do they get the money to “produce something better”? In theory, they ARE the better country at producing corn, but they face competition because of a foreign country’s subsidy – without this subsidy the US corn industry wouldn’t stand a chance. Where they are now, Indonesia is perhaps better equipped to produce corn, while the US should channel their resources on something Indonesia can’t produce – then everyone should be happy, apart from the US farmers, who can retrain to produce something efficiently without a subsidy. Like Ross says, “The biggest hindrance to aforementioned growth is government intervention.”, yet when talking about Elisabeth’s example, he seems to be all for said government intervention, even if it is from another country. Say what?

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As in almost any situation, there is a compromise; it is difficult for one to be the clear 'winner'. In this case I do find that it is the smaller firms that lose out to bigger corporations who are the 'losers', even though this movement creates more competition, it can of course push firms who do not have the resources to fund themselves out of the market.

Overall I do find that questions 1, 2, and 3 on this controversial issue have all been fully answered by everyone.

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As our civilization continues to develop we will be forced to rely more and more upon long chains of production, with each step of the chain tending to be organized in areas that can do it the most efficiently and cost effectively. As the chain of production grows in complexity, the areas that are prone to failure become more numerous as well.

For example let us assume that a major pandemic strikes and people remain at home instead of going to work for fear of catching the illness or to look after family members who have become sick. With many pilots, boat captains and truck unwilling to work, the transportation of goods would grind to near halt; unable to receive fresh supplies supermarkets would run out of food, petrol pumps would run dry, hospitals stocks of important drugs and surgical materials would diminish. Cities typically carry only three days worth of food, and stocks would disappear very quickly. If people failed to come to work at places such as oil refineries during a pandemic the repercussions could be felt worldwide, with not enough petrol to go around transport vehicles would be stuck in place and power stations that rely on burning oil, coal, etc. to generate energy would run out of steam, plunging cities into darkness and severely limiting communication as well as preventing the pumping of water to households. If this scenario was to happen many supply chains would be broken across the world – leading to worldwide shortages – the worlds economy could fall sharply, perhaps causing a major recession. In the months following it could prove very difficult to build up again, as the infrastructure would be damaged significantly, farmers may not be able to plant for fear of a lack in supplies or the struggling marketplace.

The tendency is to create ever longer supply chains to take advantage of economies of scale, but this causes a substantial increase in the fragility of those systems. Trade is important but we should encourage decentralized production and alternatives to oil, as well as focusing on renewable alternative energy sources in case a disaster does result in a major disruption of the supply chains. Although a nation may be able to find out exactly how to make a certain good they may lack the infrastructure to actually produce it, which will be difficult and costly to create – especially under time pressure and the shortage of supplies during a crisis. We should prepare for the worst, because if a major disaster does occur trade may be cut down or even halted, leaving nations without essential supplies, which they are unable to produce internally.

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However, I completely agree with Joel on the point that examples scuh as the one of China and the US "both benefitting from each other's specialist advantages in different market areas" is idealistic. I also feel that every country producing only the type of products at which it is best at producing is idealistic. This is patrially due to political factors, as Nic said, but also because of greed. It is part of human nature to always want more/be the best; therefore, it is my personal opinion that if the world relied on this system, all hell would eventually break loose. As Joel said, yes, it may theoretically promote world peace. This peace would, however, only be temporary because in the system everybody has to rely on the others and eventually some "powerhouse" country would seek to produce more types of products, breaking down the strong dependence on eachother.

I think that more or less shows my personal response to the question Palmi posed about whether or not it would be realistic for such free trade to work in the real world. (no).

One final note is to Joel's comment about the iPods. The way I have percieved free trade is that every country produces the type of good that they are best at etc. However, though they may focus on the production of their specialty, they will also have smaller industries within their nation. So maybe whoever wants to invade Japan make iPods too (in much smaller quantities, naturally) and will not have that holding them back.

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if I can remember correctly from last year… I think this would be an example of argentina having comparative advantage in Alpaca Wool.

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