Global Free Trade System and Commerce

NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.

NB: All your data is kept safe from the public.

Table of Contents

Introduction
Free trade
Tariffs
Pros and cons of open trade system
Works Cited
Footnotes

Introduction

One of the most enduring features of human life in the world today is trade and commerce. From the ancient barter trade system to the contemporary use of money and credit cards, trade and commerce have shaped almost every aspect of human life. Contrary to one of the core economic beliefs, the world is endowed with resources enough to sustain its population. However, imbalance in the availability of resources has ensured no region on the planet gets enough of everything at the same place^[1].

To survive in the ancient world, human beings were forced to conduct business through barter trading so that they can acquire what they needed while giving out what they had in plenty. This necessitated the development of primitive barter trade business transactions that mainly involved exchange of goods for goods.

Though trade has a long and complicated history, the development of a medium of exchange of goods and services in the form of valuables such as gold and money marked the beginning of the modern trade age (Dunkley 89). Over time, trade has advanced and the current system of business is very complicated with various economic units that closely depend on each other.

In the current system, individual interests dictated by the free market principles have bred bureaucratic trade practices that considerably hinder business and the general growth of economies. The need for ease of doing trade between various nations has necessitated the development free trade where governments formulate policies that do not discriminate against imports and exports within a particular economic region (Kowalski 28).

Free trade

Under free trade, authorities exercise minimum interference to imports and exports by partially or completely removing tariffs, subsidies and quotas. When the principle of comparative advantage is factored in, the sum benefits to both parties that are involved (Trentmann 42).

Free trade is a wide concept that incorporates many principles that stem from complex economic practices (Berdell 66). Despite its complexity, free trade generally has distinct features that at least every such system exhibits. In a free trade system, trading of goods and services take place without trade barriers including subsidies, taxes and quotas (Berdell 66).

Additionally, in such a system, there is no distortion of trade policies whether through legislation or otherwise that give undue advantage to some firms over others. Berdell further says that in a free trade environment, there is a free access to the market and market information (67).

Ideally however, there is nothing as free trade^[2]. Every country is governed by a set of trade laws that apply even in a free trade environment. One of the most important phenomena relating to the free trade philosophy is the tariff (Uhlhaas 108). As mentioned earlier, the absence of tariffs ensures a presence of a free trade area.

Tariffs are a controversial topic that has divided opinion among economists concerning its benefits and mode of application. Many economists have argued for tariffs and while the arguments make sense, there are still a lot of unresolved issues concerning tariffs and their close relationship with free trade.

Tariffs

Bhagwati defines tariffs as trade restrictions such as duty or tax that are imposed by a nation or political territory to inhibit free flow of goods between nations (90). In a way therefore, tariffs are largely a political tool that the leadership of various nations use to skew business balance to their favor. In neoclassical economics, most economists view tariffs as a distortion of the free market principles that require that the market be dictated by forces of demand and supply.

The argument of these economists is that the overall benefits of imposing tariffs within a given territory are minimal especially on the side of the consumer compared to that of government and big businesses (Dunkley 178). In other words, the government and domestic producers are the net gainers. Fig 1.0 below illustrates the benefits of tariffs to an economy^[3].

Benefits of tariffs on the domestic economy Graph.

Fig 1.0 Benefits of tariffs on the domestic economy (click to enlarge)

Source: WTO

From the graph above, it is assumed that country X would like to protect a domestic industry that sells cars at the price P tariff. At the same time, many countries in the world produce and sell similar cars at the price P world.

If the country in the above graph allows the importation of cars to the domestic economy at the price of P world without a tariff, then the domestic industry will face serious competition and possible collapse. Because the supply and demand of cars in the domestic economy are not yet at equilibrium according to the graph, then domestic car manufacturers can easily compete with other manufacturers who want to export to country X above.

At P world, country X cannot compete with foreign car manufacturers. However, at P tariff the country can easily produce domestic cars and comfortably compete with imports because the tariff would have limited imports while having no effect on consumer prices. While there is likely to be no effect on the quantity produced, consumers will be ready to buy cars so long as they fall on the left of QE.

The above situation will allow increased production from domestic manufacturers as well as importations of cars to the domestic economy that will likely push the quantity of cars to QE and the price of cars to PE effectively eliminating the need to have tariffs. The above graph demonstrates the classic argument for imposition of tariffs.

Tariffs are designed purposely by nations to create protectionism by shielding a country’s domestic industries from outside competition (Uhlhaas 108). Tariffs are applied on imported goods in two ways. They can be applied as an ad valorem tax that mainly takes the form of a percentage of an item or as a specific tax that applies on goods based on the weight or the number of items (Uhlhaas 108). Despite tariffs being an important political tool especially in developing nations, their imposition is mainly meant to achieve a number of goals^[4].

The most important reason that proponents of tariffs give is to protect fragile domestic industries that will otherwise collapse on the backdrop of sustained competition by similar foreign products.

Tariffs therefore are used to protect these domestic industries from foreign competition effectively giving them room to grow to a stage where they can compete on the same level playing field. It is important to note that it is not only new industries that are protected. Tariffs also seek to protect inefficient and aging industries within a domestic economy in a move aimed at buying time for necessary reforms.

In the current world order, some economies such as China avail affordable labor and export subsidies that make their products extremely cheap at the expense of quality. Foreign companies operating is such economies can easily make a country a dumping ground for the products, a move that can have detrimental effects to the domestic producers of the same product. Tariffs therefore are used to guard against such as moves.

Additionally, application of tariffs is seen by many economists as a source of revenue especially in developing nations (Kowalski 48). Companies setting shop in such domestic economies and deal in commodities that are not available in the domestic economy such as oil may pay more tax due to tariffs imposed by authorities. Though the cost is passed to the consumer, revenue to government is used to offset the costs through other subsidies.

Pros and cons of open trade system

According to Kowalski, the free trade system argument is mainly theoretical and is based on the proposition by Adam Smith that specialization, more efficiency and higher aggregate production among nations is possible but only through effective division of labor (50).

Kowalski says that the above proposition is only theoretical because there is no one country that is the sole buyer and seller of a particular commodity and that protection of domestic industries may prove detrimental in the long run for the entire population (51). Despite the differences however, there is consensus that open trade is has led to increased international trade in the recent past. So important is open trade that nations had to form the World Trade Organization to advance the cause of free trade among nations^[5].

While there may never be a complete open trading system, the WTO cause is based on multilaterally agreed rules that will lessen trade hindrances such as import quotas, taxes, and diverse means of subsidizing domestic industries (Bhagwati 92).

According to the WTO, tariffs and other trade barriers to open trade have fallen since the World War II with tremendous economic results among nations. According to the organization, world economic growth averaged above 5% during the first 25 years after the war. At the same time, world trade grew at a faster rate of 8% after the war thanks to reduced trade tariffs (Trentmann 39). The figure below illustrates.

World economic growth after WWII Graph.

Fig 2.0 World economic growth after WWII (Click to enlarge)

Source: WTO

The figures highlighted above thrust to the fore the link between free trade and economic growth. Most experts contend that the key to unlocking economic potential in developing countries and hauling their populations out of poverty is through sustainable economic growth that is evenly distributed in order to have positive ripple effect (Dunkley 188).

Proponents of free trade therefore cite economic growth as the main reason why nations of the world should move towards free trade devoid of barriers. They cite territories such as Hong Kong that have achieved economic prosperity through free trade policies (Carbaugh 111).

The basic argument behind this reasoning is that every nation has resources i.e. human, industrial and financial that they can easily tap to produce goods and services for both domestic use as well as exports. Exports bring economic benefits to the country of origin.

However, comparative advantage theory dictates that countries concentrate on their strong points, produce the goods they can best and then trade them off with the rest of the world. Concisely, this can only be possible under a liberal trade policies regime where there are policies that allow for minimal restriction on the flow of goods and services. That way, countries can perfect their production potential through unhindered market access while doing the same for other countries whose strengths lie elsewhere (Dunkley 188).

Proponents of open trade emphasize that protectionism is done mainly for political gain. More often than not, protectionism breeds complicated red tape, inefficient and complacent producers and unattractive goods devoid of creativity due to minimal research and development. According to Berdell, if many governments adopt such protectionist measures at the expense of free trade, there is likelihood that economic activity will contract leading to closure of factories and loss of jobs (67).

It is important to acknowledge however that despite the documented advantages of open trade, there are many disadvantages that come with free trade. As highlighted in some of the sections above, free trade brings to domestic industries unnecessary competition especially from more superior and established foreign competitors. In such a scenario, domestic manufacturers are likely to play catch up and be forced to increase spending for services such as research and marketing effectively exposing them to possibility of total collapse.

Trentmann says that such outcomes are as a result of free trading and are likely to start a chain reaction that that will engulf domestic industries with adverse effects such unemployment, corporate restructuring and economic underdevelopment (143). He cites the case of the North American Free Trade Association (NAFTA) that many observers say is skewed to the US’s advantage because of the technological and economic superiority of the United States.

Perhaps, the most adverse effect of free trade is economic underdevelopment of weaker economies because of the possible collapse of the domestic industries on the face of competition. In open trade system, domestic industries are left exposed to competition and are gradually pushed out of business. In such a situation, it is possible for the country to slowly become a net importer of goods that otherwise can be manufactured locally.

Works Cited

Berdell, John. International Trade and Economic Growth in Open Economies, Cambridge: Cambridge University Press, 2002. Print.

Bhagwati, Jagdish. Termites in the Trading System: How Preferential Agreements Impact the Economy, New York: Thomson’s Learning, 2008. Print.

Carbaugh, Robert. International Economics, New York: Cengage Learning, 2011. Print.

Dunkley, Graham. Free Trade: Myths, Realities and Alternatives, New York: Routledge, 2004. Print.

Kowalski, Kathiann. Free Trade, New York: Sage Publications, 2007. Print.

Trentmann, Frank. Free Trade Nation, Oxford: Oxford University Press, 2008. Print.

Uhlhaas, Anne. What are the main advantages and disadvantages of global free trade systems, New York: Routledge, 2003. Print.

Footnotes

This point is just one of the many that have been advanced by various economists but none is yet to provide a comprehensive answer on the effective exploitation of resources.
It is important to note that free trade is a general term that just connotes reduces trade restructions. There cannot be a situation where trade within a country is not regulated at all.
This is just one of situations that illustrate the benefit of imposing tariffs. In this case nobody can justify that it is done because of political reasons.
Goals that tariffs can achieve vary from country to country and depend on the goods and services being targeted.
World Trade Organization has a wealth of information concerning free trade among nations and the progress of various free trade initiatives in place.

Click Here To Order Now!