Suppose Germany Signs A Free Trade Agreement With Russia

Suppose the U.S. exports airplanes to Japan and imports TVs, and an airplane can buy 1,000 TVs. If an airplane can now buy 2,000 TVs, the United States will be better off; Otherwise, his well-being will be reduced if he can only buy 500 TVs with a single plane. Not surprisingly, economic theory, as it applies to trade in services, is still under development. In general, economists now believe that the fundamental theory of comparative advantage, as it applies to goods, also applies to cross-border trade in services. As Geza Feketekuty says, “The theory of comparative advantage as a theoretical statement on economic relations should be valid in the same way, whether the products covered by the theory are negotiable physical goods, such as shoes and oranges, or negotiable services such as insurance and engineering.” [24] Another extremely important reservation is the so-called factor price compensation system, which states that international trade will have the effect of offsetting the relative returns of factors of production, such as unqualified labour between countries, under conditions of free trade. This would mean that for a high-wage country like the United States, the wages of unskilled workers would fall, while wages would rise in labor-intensive countries. However, factor prices will not align in sectors where production costs are falling. Access to other markets plays an important role in this economic model, where comparative advantages can be created. Without free trade, it will be extremely costly for a government to subsidize a new entrant, because the subsidy must be large enough to overcome both foreign trade barriers and stimulate the domestic producer. The WTO and U.S.

free trade agreements also play an important role in establishing rules that govern the steps a country can take in many areas to produce comparative advantages. For example, the subsidy code limits the nature of the subsidies that governments can provide. [2] William Bernstein notes that Smith was not the first to support the benefits of free trade. He says, “The most notable of the early dealers was Henry Martyn, whose reflection on east Indian trade was preceded by seventy-five years by Adam Smith`s wealth of nations.” William J. Bernstein, A Splendid Exchange: How Trade Shaped the World (New York: Grove Press, 2008), 258. [20] Viner notes a restriction on the rule that global welfare is reduced when trade diversion is greater than trade creation, i.e. when unit costs decrease in a sector with increased production. . . .