Free Trade Policies:
Most famous theory of comparative advantage arose with the hypothesis by Heckscher-Ohlin (HO), based on resource abundance. Labor-abundant countries would have comparative advantage in, and would export, labor intensive goods. From the above widely accepted theorem there emerged three important corollaries. As a country shifts from protection to free trade, prices of factors (land, labor, and capital) adjust without the factors having to migrate to other countries, so that trade is a substitute for migration.
- Trading will move factor prices towards international convergence, on equalization
- Free trade will increase the relative price (and income) of a country's abundant factor. (increased trade normally raises product and factor prices in industries which enjoy comparative advantage and which are intensive in that abundant factors.
While tariffs and quotas diminish production without any benefit to the American workers, the principle of free trade does not in any way prohibit the restriction of imported products that are harmful to consumers, the environment or the workers who produced them. A tariff is a tax on imported products, and a quota is a limit on the number of a specific product that comes from another country. People who advocate tariffs and quotas contend that these restrictions on foreign trade will insure a larger number of jobs at higher wages than would result if international trade were unrestricted. While trade agreements like NAFTA (North American Free Trade Agreement) include hundreds of pages of provisions that are not free trade, the tendency continues in the spirit of freer trade. Today, many of the corporations that were in the past advocates of protection, have established facilities in other countries and are now sending goods to the United States. Others are importing component parts which are incorporated into American products. In both cases, tariffs diminish their profits, so, many of them have reversed their positions, and now favor free trade.