Category: Free Trade

Essay on the Advantages and Disadvantages of Free Trade

In recent decades, nations have become more interdependent in term of the economy through the increase of international trade and intercontinental investments. Thanks to globalization, the international transactions in markets for goods, services and some factor of production and much more has increased. The number of exports had exponentially increased to be more than 40 times larger than in 1913. One of the many effects of globalization is trade liberalization or free trade. This term describes the process through which countries encourage trade by lowering or cutting trade barriers.

One of the main benefits of free trade is specialization according to Ricardo’s theorem of comparative advantage. Once trade barriers are cut or reduced, every nation produces more of something that it is skilled in and less of others. Countries try to compensate for the difference in imports and exports. For example, the complex parts of an iPhone are made in Germany, the US or Japan, and the assembly is in China.

Trade liberalization has a positive impact on consumers, notably from lower prices, more product varieties, and higher quality. In February 2018, a paper of the European Commission used evidences from different researches to prove this benefit. For example, Berlingieri et al. in 2017 observed an increase of 7% of products’ quality for the EU thanks to existing trade agreements. In 2016, a study of De Loecker et al. showed a drop in consumer prices by 18% in India thanks to tariff liberalization (a 62% decrease in tariffs).

Trade liberalization, because of reducing tariffs, causes a direct impact of government revenues’ loss. Developing countries, unlike developed ones, rely on import/export taxes and any reduction in them causing pressure on other public areas (education, health, transport, etc.). In 2005, an IMF report showed that tax revenue in middle-income countries declined by about a third, and in low-income countries by about 40% (Clive G., 2010).

One of the aspects of the inequality of trade liberalization is employment. Because of free trade, resources move to more productive industries, causing an increase in exporting industries and a decrease in weak industries that couldn’t compete. Thus, workers are pushed to displace. The maize growers of Mexico have badly suffered from the US competition after the 1994 NAFTA agreement (Clive G., 2010). Australia, on the other side, benefited from freer trade. The number of employers in trade-related industries has risen by 15% to reach in 2014 2.2 million workers representing the fifth of total employers (Australian Department of Foreign Affairs and Trade, 2018).

The environment is one of the key elements of discussions in recently. There is no direct relationship between free trade and environment degradation. It depends primarily on policies. A hypothesis called ‘pollution haven hypothesis’ agrees that developing countries with less strict environmental regulations attract pollution-intensive industries when they adopt a trade liberalization policy. This makes developed countries benefit from international trade by relocating their polluting industries to other developing countries, resulting in a 43% increase in CO2 emissions abroad (Harvard Business Review, 2019). A good illustration of this hypothesis is the spent batteries Americans send for recycling to Mexico by using some crude methods exposing locals to dangerous levels of toxic metal (The New York Times, 2011).

Free trade is indeed concerned as an economic booster, but the advantages are not guaranteed for everyone. It is a double-edged sword.

Is Free Trade Good for the United States of America? Essay

Since 1790 trade has had major benefits to the United States and contributed to economic growth in the country. American workers participate in producing exports while foreign workers produce imports. America’s free trade agreements have facilitated economic growth and resulted in major benefits to the different industries. Despite the benefits associated with free trade, President Donald Trump has increased tariffs on goods worth billions of dollars, imported from the EU, Canada, and Mexico as well as China. These nations form the world’s largest economies and this kind of incremental increase in prices acts as a barrier to trade operations. President Trump has initiated a trade war because he believes the US is losing billions of dollars in trade. According to President Trump, “trade wars are good, and easy to win”. He claims that the dollars acquired from the imposed tariffs will aid in the development of the US’s agricultural sector. Although free trade has caused America to rely upon other nations and led to temporary job loss; ultimately free trade is more favorable to America. Free trade incites technological advances thus creating higher-end jobs, allows consumers to select from a wider variety of goods with lower prices, and promotes lasting peace amongst nations. If President Trump’s trade war continues, Americans could expect to pay higher for goods and access to overseas products.

From 1790 until 1914, tariffs were the first source of revenue for the US federal government. As America’s industries progressed trade became one of the divisive issues in United States politics. The reason behind the divisive trade in America was based on the fact that some of the states supported the slave trade while others did not. The northern manufacturers in the state wanted the protection of high tariffs on competing imports while those in the South involved in cotton production supported an open trade policy that would promote their ability to export. After decades, there was a general trend that was focused on having higher tariffs that would protect the northern states involved in manufacturing which eventually led to the Smoot-Hawley Tariff Act in 1930 (Destler, 2016). During President Franklin Roosevelt’s era, his Secretary of State, Cordell Hull, who was involved in the wool free trading operations was determined to ensure that he could achieve the interests of his state Tennessee. Hull was determined to reverse the high tariffs by proposing the Reciprocal Trade Agreement Act. Congress approved the trade agreement which then set the tone for U.S. future trade agreements.

Like every other nation, America has a focus on protecting the local industries through high tariffs imposed on imports. Free trade is facilitated through trade agreements such as the General Agreement on Tariffs and Trade (GATT), The North American Free Trade Agreement (NAFTA), and the World Trade Organization (WTO). After the Second World War, there was a need to build a post-war economy. The United States was at the forefront of creating (GATT) with the goal of preventing the expansion of communism (GATT); which reduced the trade barriers among nations (Bhagwati, 2017). Based on the benefits acquired from this agreement, America prioritized free trade agreements as it had a positive impact on its economy. In 1994, there was the creation of the World Trade Organization (WTO), which regulates global trade. After this period, America focused on bilateral accords that would encourage trade between nations. The United States created many trade agreements with individual countries with the aim of improving its economic development. America wanted to benefit from other nations through outsourcing and dumping strategies where it was easy to acquire skills from other countries and have a large market for its products. Involvement in the FTAs was one of the strategies that the United States used to strengthen its economy and become one of the superpowers in the world.

In the current highly globalized economy, the use of technology has become a requirement for success. Through free trade, America can incite the use of highly advanced technology that facilitates the growth of different sectors, and create high-end jobs (Anderson & Yotov, 2016). Some argue that America loses jobs due to free trade, including President Trump. On December 20, 2012, Trump tweeted, “China is robbing us blind in trade deficits and stealing our jobs, yet our leaders are claiming ‘progress’”. However, much data shows that low-skill jobs are replaced by technology and not foreign workers. According to the research paper from Ball State University titled, ‘The Myth and the Reality of Manufacturing in America’, “trade accounted for 13% of the lost U.S. factory jobs, but 88% of the jobs were taken by robots and other factors at home”. In other words, due to the increase in technology factories are in need of fewer employees. Technology use in various industries has led to improved production, quality, and accuracy in manufacturing products and services. Ball State University reported, “With increasing automation, the manufacturing industry is becoming more productive. From 1998 to 2012, all sectors experienced a productivity growth of 32% when adjusted for inflation – the production of computer and electronic products rose 829% (Hicks & Devaraj 2017)”. Technology has led to the creation of highly ranked positions in organizations that facilitate high-quality production of products and services. Through free trade, America can easily access and adopt advanced technology which then facilitates the creation of high-end jobs in corporations.

Free trade is vital as it improves both efficiency and innovations in different sectors. In the case of technology, people have an opportunity of interacting with advanced technology which enables them to use creativity and innovative skills to create new developments. Job satisfaction is also created among the high-end employees who have to keep on adjusting their skills based on the current and emerging trends in the market. Not only has technology facilitated the creation of high-end jobs but many others that require the utilization of skills by other levels of employees (Dewan & Ronconi, 2018). According to England and Wales census records, “[There has been a] 909% rise in nursing auxiliaries and assistants over the last two decades. Analysis of the UK Labour Force Survey from the Office for National Statistics suggests the number of these workers soared from 29,743 to 300,201 between 1992 and 2014” (Allen, 2015). Additionally, there was a 79% drop in weavers and knitters from 24,009 to 4,961. Ultimately, technology is getting rid of laborious jobs and creating more caring jobs. Despite claims that technology has led to temporary job losses, it has also facilitated the creation of more and high-end jobs in the American economy.

Free trade allows consumers to have access to a wider variety of goods such as overseas produce and clothing for lower prices. America allows the free flow of products and services from other nations. As a result, the United States imports a large variety of products and services into the country which then enables consumers to fulfill their tastes and preference (Baier, Yotov & Zylkin, 2019). This expansion of trade was an effect of the Great Depression. During the Great Depression, a lack of access to products and services led to people suffering from economic pressures. After the Great Depression, America found it necessary to have changes in its trade policies as this was the only way to encourage international cooperation that promotes global trade and economic development (Ludwig & Wang, 2018). For instance, NAFTA changed the way Americans eat by introducing avocados into our diets in 1994. Before NAFTA Americans only had access to avocados and other produce during specific seasons; instead of all year long. Quartz avocado expert David Yanofsky reports, “Avocado consumption in the United States has exploded going from one pound per person to seven, over the course of 20 years (Yi 2017)”. Now that Mexican avocados and products have become a part of our diets, President Trump’s tariffs on Mexico will have a negative impact on consumers. In a Bloomberg article written by Michael Hirtzer, “Avocados crossing from Mexico into Texas were fetching more than $60 per 25 pound-carton, up from about $42 a week ago and $38 a year ago, according to U.S. Department of Agriculture data”. The increase in prices in avocados is due to an increase in tariffs. Furthermore, Larry Kudlow, an economic advisor of the White House calculated that, “American consumers can expect to pay the price as U.S. businesses pass on increased costs. The U.S. imported $346.5 billion worth of goods from Mexico in 2018, according to government data, meaning a 5% tariff will cost over $17 billion (Adamczyk, 2019)”. In other words, the 5% tariffs will make products more expensive for consumers costing them a total of $17 billion. Additionally, shoes manufactured in Mexico were cheaper due to NAFTA and the cheaper labor in Mexico. Prior to this trade agreement shoes were more expensive being that labor was more expensive in the U.S.; the following will apply after the 5% tariffs on Mexican imports. Conclusively, free trade is the reason Americans have access to a large variety of goods.

Furthermore, free trade creates competition that promotes customer satisfaction and sovereignty; every corporation has to ensure that it provides the best quality in the market. Since companies operating in similar industries compete for the same consumers, there is a need to deliver what the customers expect to remain competitive in the market. The wide variety of products has also facilitated their acquisition at lower prices as corporations compete for customers. This concept is evident in the American auto industry, over the past thirty years the U.S. auto industry has had a decrease in sales as a result of struggling to compete with foreign competitors, such as the Japanese auto industry. In 1958, the U.S. imported Japanese Toyota and Datsuns cars which were more affordable and saved gas. According to journalist Marc Davis, “American firms Ford, GM, and Chrysler responded by manufacturing new lines of smaller, more fuel-efficient cars”. The American auto industry responded this way in order to compete with the foreign exports which ultimately benefits the consumers. Free trade benefited consumers because it gave them access to more fuel-efficient and affordable American cars.

As French philosopher Baron de Montesquieu states, “peace is the natural effect of trade.” In other words, free trade promotes lasting peace among nations as there is a collaboration of effort which requires countries to be interdependent. According to Professor Solomon Polachek’s 1980 research paper, “a doubling of trade on average leads to a 20% diminution of belligerence (Hahn 2016)”. The reason for this is that nations who are united through a trade agreement not only profit from each other but begin to depend on one another for survival. Therefore, the likelihood of either party inciting a war on one another decreases. This is exemplified in the relationship between the U.S. and Germany post World War I and II. At the end of WWI, the U.S. and its allies isolated Germany economically through the Treaty of Versailles. As a result, Germany’s economy failed and there was a rise of a fascist regime, ultimately causing the start of WWII. After the end of WWII America learned from its mistakes and created the Marshall Plan, with the goal of rebuilding Germany and its economy. Today, the U.S. has strong economic ties with Germany and is one of our most trusted allies. Former President Barack Obama celebrated this relationship in his speech at the Messe Trade Show in Hannover, Germany stating, “Germany has long been one of our top trading partners, and during my time in office, we’ve boosted U.S. exports to Germany, and we’ve increased our bilateral trade by nearly 40%”. Free trade enables America to create important relationships that determine the future of its economy. This kind of peace is also experienced by American citizens who feel secure as there exist no threats from foreign nations. As proved free trade creates friendship and other vital relationships between America and other states.

In spite of the numerous benefits free trade has, critics such as President Trump claims that free trade is not beneficial to the U.S. as it causes us to lose money due to unfair trade and threatens domestic jobs. On March 3, 2018, Trump tweeted, “… Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more!”. Trump believes that American jobs are either at risk or are already being outsourced to countries such as India. He concludes that if America does not protect its jobs and industries from foreign competition, our economic power will decline. This idea originates from the lump of labor theory which states that there is a fixed lump of labor within an economy and that once those jobs are distributed, there are no other jobs. Still, many economists have disproved this concept. In the book ‘The World is Flat’ author Thomas Friedman states: “The main reason the lump of labor theory is wrong is that it is based on the assumption that everything that is going to be invented has been invented, and that therefore economic competition is a zero-sum game, a fight over a fixed lump. This assumption misses the fact that although jobs are often lost in bulk… new jobs are also being created…Friedman perfectly explained that if this theory was true, the U.S. unemployment rate will be ‘much higher today than 5%. Additionally, many of the jobs that are being outsourced are jobs that would no longer exist in a few years due to technological advances. Furthermore, the U.S. has earned millions of dollars as a result of NAFTA, despite Trump’s claims. Trump believes NAFTA is an unfair agreement because, according to the United Nations Comtrade database on international trade, America imports $349 billion from Mexico while Mexico only imports $216 billion from the U.S. Our president uses the argument that Mexico is not buying as many goods from the U.S. as we buy from them. Although this is true, President Trump is not taking into account the two countries’ different GDPs. Mexico does not have as much money to spend on imports like America. Even though Mexico only imports $216 billion from the U.S., it accounts for 47% of Mexico’s overall imports. Meaning that the U.S. is Mexico’s main supplier; this would have not been possible without a free trade agreement. While the total U.S. imports from Mexico are significantly larger, it still only accounts for about 14% of all U.S. imports. This is also evident in the trade partnership between the U.S. and Canada, with the U.S. being Canada’s main supplier. Canada imports $235 billion from the U.S. as opposed to the U.S. import of $326 billion from Canada. Again, we see that America’s total imports are greater than Canada’s, but their imports from Canada only represent 13% of America’s overall imports. On the contrary, Canada’s imports from America account for 52% of its overall imports. This proves that America is benefiting more from NAFTA in comparison to Mexico and Canada. Withal, free trade brings in more money to the American economy compared to minor losses.

In conclusion, free trade has more benefits to the American economy when compared to drawbacks. Through globalization, the world has become one and nations have joined hands to grow their economies. Technology has facilitated global trade in a significant way. Free trade allows the United States to have access to advanced technology which when implemented in organizations leads to the creation of high-end jobs. This means that the claim on technology reducing employment opportunities does not always apply. On the other hand, free trade has facilitated an easy flow of goods and services from one nation to the other which enables customers to have access to a wide variety of products and services. With free trade, there is the creation of lasting relationships between America and other nations which creates a suitable environment for economic growth and political stability. Based on the advantages associated with free trade, America should focus on having more agreements that will make it possible to access products from various parts of the world that will then lead to customer satisfaction. Free trade has more benefits to America when compared to drawbacks a reason why the government should focus on supporting global trade while protecting the local industries.

Free Trade Vs Protectionism: An Essay

With the increase in the interconnectedness of the world trade between countries has been increasing as well since a long time of history. There are two trade strategies adopted by countries, and they are trade liberalism and trade protectionism. Trade liberalism is defined as the movement of goods and services internationally by removing or reducing tariff and non-tariff barrier. Trade liberalism became drastically proficient after the World War II and most of the developing countries adopted the trade liberalism strategy in the 1980s and grew intensely by 1990s. Trade liberalism limits the government’s interference in free trade such as minimizing the decision-making of the government on the resource allocation (Shafaeddin, 2005). On the other hand, trade protectionism is just the opposite of trade liberalism and it is the restriction on international free trade by implementing policies to focus on the local markets rather than dependency on imports.

Economies in the today’s world are facing one of the serious options that is to choose a trade strategy. Whether to adopt trade liberalism or trade protectionism. Whether foreign goods should be allowed into the country with low tariffs and freedom of relocation of industries around the world or should it be better to impose huge tariff on foreign goods and services and stop or reduce exports of goods in the country and allow the domestic producers to grow. It is a dilemma in today’s huge interlinked world but the debates between supporters of trade Liberalism and supporters of protectionism includes so many perspectives. So, the approach I take in this research paper is to analyze the effect of the two trade strategies: trade protectionism and free trade (in other words, trade liberalism) on the economic development of a country and how efficient it is in the business environment.

Trade Protectionism and Trade Liberalism on the Economic Development of a Country

The argument between trade protectionism and trade liberalism started with the statement of a theory known as mercantilism which is the predecessor trade strategy of protectionism in the fifteenth century intensely in Europe. Until the 9th of March 1776, the philosophy of mercantilism prevailed leading as the strongest theory of economies. The main perception of Mercantilism was that in order to increase the economic strength of a country, a country has to try to avoid depending on export items and rather produce as many things as possible within the country. Moreover, in order to shoulder local industries, huge tariffs should be imposed on the imported goods and services by the government. High tariffs on imported goods and services stop or reduce competition between local markets and foreign investors. According to merchandise, a strong country are the ones that achieve total independence in the trade by producing their own goods and services.

The Scottish philosopher Adam Smith in respond to the perception of nature of the wealth of nations by merchandise argued the underlying meaning of mercantilism in his book: the history of the modern world. Smith argued that the best way for a country’s economy to grow was not through trade protectionism where the country avoids international trade and produce all the goods and services on their own. This is because according to him countries have different strengths in different productions may it be depending on the human force or the landscape or natural resource of a country. And countries cannot do well in every sector of an economy. Countries should focus on the strengths that they possess. Some countries possess more dexterity at manufacturing furniture while others might have the ability to manufacturing clothes or some might be good at producing advanced technologies. This theory at the level of nations can be explained with an example related to an individual level. If someone has an inborn ability to be a scientist, they should focus on becoming a scientist and not waste a huge amount of time on doing something that they are not good at or lack the ability to achieve. Likewise, even countries should focus on producing goods and services according to their ability and which they are not good at producing can be attained by trading with other countries.

An example of such cases can be: if China could produce wooden goods more cheaply than India and if India could produce tea more cheaply than China, then it would be beneficial to both the countries to exchange the product. They can gain the benefit of lower price, low effort and less time consuming. Both countries will have economic development as the job opportunities for capital and labor would be increased and will be focused on those fields where they have the dexterity in achieving. Smith’s theory convinced most of the economic and political classes of north Western Europe very quickly. For example: in Britain, his theory was first put to a practical test in relation to the production of grain in the country. Protectionism was provided by the government on grain for many years. Import of grain was cut down to support local production of grain and increase the country’s economy. Today, David Ricardo put up the perspective that the protectionism on grain production hindered economic development of the country rather than developing it. After much of the argument on two trade strategies the protectionism was removed which led to the reasonable price of corn and many people could save money from the cheaper price. This trade liberalism helped the economy of British grow drastically making it the leading economy in Europe. However, the trade liberalism made life difficult for people in local farm due to the huge import of goods and services from the USA and Canada.

The moral worthiness and stability of a country are affected by trade liberalism. This argument was because the benefits of trade liberalism can be obtained only through several processes. The government has to spend on educating the people in the economy field capable in what they possess dexterity in. Not only that but also the government need to enhance the social mobility which would cost huge expenditure. That is why for example, when a Malaysian worker can manufacture a car for 7 dollars per hour whereas Singapore can cost 38 dollars per hour it is clearly wise to allow Malaysia to do it. This is the same for other goods and services in the free market. However, defenders of free trade have ignored implementing political programs required to help the productivity of free trade. They have not considered the price that comes along with the protection of domestic markets and cutting down imports and export activities with other countries. Furthermore, any nation who adopts trade liberalism has to ensure that economy sector pays taxes which is an advantage to the economic development of a country but eventually the money is used to give training to people in sectors of the economy which is due to the competition in the global market.

Trade Liberalism and Its Efficiency in Today’s Business Environment

Business means the process of selling and buying and the term environment refers to anything which surrounds a system. Thus, the business environment is defined at the surrounding including all people in which business takes place. Some define it as all the internal and external factors which affect business. In the twenty-first century, with the increase in interconnectedness, economic globalization is like a buzz word. It is broadly defined as the increased interconnectedness of national economies into a single global economy to a larger or lesser extent (Heywood, 2011). Compared with previous periods of 1946-1979, economic integration increased in the 1980s and the early 1990s. Economic globalization promoted the betterment of free trade by the nineteenth century. From the second half of the twentieth century on after the World War II, economic globalization was vibrant and institutional systems were dependent on market economies and rich countries. Trade is no more domestic and it is more on the global level by which it means trade liberalism is practiced more than trade protectionism. Research shows almost all the countries have changed their policy towards free trade by lessening the tariff and non-tariff barriers. This is mainly done in the expectation of economic development through global trade. Also, the economic benefit depends on the stages of economic development and it differs from countries to countries. For an instance, if a country who started having trade liberalism strategies when its economic status was lower-middle income, they are most likely to benefit by 3% on average which is more compared to other developing countries that started practicing trade liberalism when they were low income or upper-middle income. Countries especially South East Asia has achieved economic development due to their policies towards trade liberalism. For example, countries such as India and China have shown great economic development and poverty decline due to free trade policies. However, trade liberalism has not benefited all the countries. For example, most of the African countries like Ghana despite the encouragement of export business and lowering tariff, they are not on the side of benefits from trade liberalism. So, trade liberalism leads to both winners and losers. On the other hand, trade liberalism in most developing countries have led to the economic decline. This is because after the adoption of trade liberalism the imports in the countries seem to increase drastically while the exports are very limited. Reduction in exports and dependency on foreign goods have reduced economic development in most of the countries. For instance; right after following the trade liberalism strategy the import rate grew much higher than the export rates in countries such as Latin America, Kenya, and some African countries. This showed a significant decrease or stagnant economic growth in the country.

Other benefits of practicing trade liberalism in the economic development of a country are supported by many scholars such as Ricardo, for example, due to the competition that exists between countries in the market the price will be reduced and at the same time efficiency is enhanced as well (Ricardo, 1971). This will thus contribute towards the economic development of a country. According to the world bank, compared to trade restriction, trade liberalism is seen to be more economic strengthening. This can be supported by research done by world bank on the trade policy and economic performance. 41 developing countries from the 1960s to 1980s were taken into account and the economic development of countries who adopted trade protectionism is seen to be lower than the countries who adopted trade liberalism (The World Bank, 1987).

However, in trade liberalism, foreign investments occur hugely among world’s richest states and it is always the stronger states that gets vast foreign investments. Developed capitalist countries are still the most dominants and are acting as international rule makers. For example, states like the United States have autonomy for most of their existence that most of the other weaker states from developing countries don’t. USA has an uneven impact over the IMF and the World Bank. USA’s power to change the General Agreement on Tariffs and Trade (GATT) into stronger open market World Trade Organization (WTO) shows how economic globalization favors the needs of the USA. So, it is hard to say if the theory of Smith can be applicable to all the countries and all also not all the countries experience the same economic benefits from free trade.

Trade Protectionism and Its Efficiency in Today’s Business Environment

Trade protectionism as I mentioned earlier it is mainly to support the domestic market and reduce foreign investments by putting limitations to free trade. A case study to support the efficiency of trade protectionism in today’s market can be the studies of trade policies of the US and why trade protectionism was adopted. According to Tullock and Krueger countries emphasize on trade protectionism policy when interested groups seek protection from the nation which is referred to as rent seekers. The public loses trust in the equality of market and seeks the intervention of government thinking it will be beneficial. For example, US farm lobby sought the intervention of the government which is to increase the national income of farm households more than the national average. This can be proved by the facts collected in 2006 and 2008. In 2006, the average farm household income was $77,654 which was higher than the national average income by seventeen percent. According to research, in 2008 the farm household’s income is expected to rise to $90000. This was followed by huge economy rise in the farm households, and they constituted about 2 percent of America’s wealthy population (Gordon and Cho, 2008). Due to this result, most people started to follow the trade protectionism strategy. For example, United Fresh Produce association sought for nation’s interference after the success of rent-seeking method adopted by the farm households. They received benefits such as monetary gain. However, the main argument of trade protectionism lies in the employment, national defense and infant industries. In the trade protectionism strategy, due to the decrease in the imports and exports industries, it drastically decreases the job opportunities or even job lost in these fields. Therefore, the main intention of trade protectionism; to protect and increase the productivity of the local market is equalized by the job losses in export and import sector industries. Moreover, due to the lack of competition globally, the price of the goods and services can be very high while the quality may be deficient. This will only bring pressure to the people in that country. When business firms ask for protection from the government it becomes very costly for them and also these days, we can hardly find any industries which do not have relation with foreign investors. Not only that but most of the national defense companies are now foreign owned. For example, US security review notwithstanding, this defense company is now vulnerable to foreign dominance. The infant industries, i.e. newly established firms, face difficulty to compete in the international market where most of the firms have already developed much more efficient and innovative technologies. So, the infant industries seek protection from the government by restricting the imports. They stay under protection and also increases the duration to stay under protectionism through political supports and often successfully raise their levels (Pincus, 1977).

Conclusion

The two trade strategies that countries adopt for the trade of goods and services are trade liberalism and trade protectionism. With globalization, in the current era, there is hardly any countries who do not practice trade with other countries. Trade protectionism was much prominent before the World War II two while trade liberalism became quite prominent after the World War II with the establishment of the new world organization. The argument that is often made is which one of the two trade strategies is more beneficial to adopt in order for economic development of a country. Trade liberalism is definitely a strategy which helps countries to increase their national wealth. This is because as the tariff or non-tariff barriers are removed the exports and import activities increases which leads to rising in the market leading to more job opportunities, more cost-efficient of goods and services to people with better quality due to the competition that exists in the global market. However, the downside of trade liberalism such as inequity between strong countries and poor countries should now be neglected. Not all the countries gain the same economic benefit from trade liberalism and it is often seen to be in favor of rich countries. Moreover, for new firms, it is difficult to directly compete in the global market with firms who have already reached far ahead in innovative technologies and production of goods and services thus they need to rely on trade protectionism to grow. On the other hand, trade protectionism is mainly adopted so to support local markets and local people. When the imports are reduced or stopped the opportunities will be given to the local market. However, it should be considered that as a country cut down imports eventually the exports also decrease. With this, there is no job opportunity in the export and import industries and some even lose their jobs. Therefore, the growth in the employment rate remains stagnant. Also, due to lack of competition with the global market the goods and services might not be efficient and the price might also be higher. Therefore, I believe trade liberalism should be adopted by countries in order for the economy to grow at the same time the country should provide trade protectionism to firms which are new to the global market so that they can develop and compete in the international market. Another policy that could be changed for trade liberalism to be more efficient is by giving all the countries equal power in the field of international market and should not be entirely placed on rich countries like USA and China. This trade strategies I believe would help the economic development of countries to grow in an efficient manner rather than considering only the advantage or only the disadvantage in any of the strategy.

Benefits of Free Trade for Developing Countries

A free trade policy is one in which imports and exports are not limited. It can also be described as the application of the free market concept to foreign trade. Government will not discriminate against imports or interfere with exports by imposing tariffs or subsidies on import. Countries, especially those in the developing stage, profit from free trade in a variety of ways. A developing world is one country with limited economic resources and/or a low standard of living. Strategic free trade agreements would also aid the development of developing countries’ economies.

Free trade can help developing countries increase the amount of or gain access to economic capital. Economic resources are normally scarce in most countries. Land, labor and capital are all economic tools. In the economic marketplace, small developed countries often have the smallest quantities of natural resources. Small countries may receive the economic tools they need to manufacture manufactured products or services thanks to free trade agreements. Below are some of the benefits of free trade towards developing countries.

Free trade will increase a country’s citizens’ quality of life. Imported goods are those that are not readily available within a country’s borders. For a developing world, importing products may be less costly than manufacturing consumer goods or services within its borders. Many developing countries lack the manufacturing processes needed to transform raw materials into valuable consumer products. In addition, developing countries with friendly neighbors will be able to import products more frequently. Importing items from neighboring countries ensures a reliable supply of ready-to-eat goods. Making the process work for citizens, on the other hand, necessitates a well-regulated and functioning government, which is uncommon in developing countries.

If trade expands, domestic businesses will face increased competition from abroad. As a result, there would be more motivation to reduce costs and improve performance. It has the potential to discourage domestic monopolies from charging excessively high prices.

Unintended implications of free trade include stronger foreign relations. International threats also target developing countries. Developing strategic free trade relations with more influential countries would assist a developing nation in becoming more stable in the face of external threats. International trade and economic ties often result in cross-national exchanges of information, ideas and culture. This also leads to a better understanding and amity among certain countries, and theory reduces the risk of commercial conflict and war.

In summary, developing countries can boost their production by taking advantage of free trade. Almost every country is capable of producing some kind of product or service. Lack of expertise or resources, on the other hand, may render output inefficient or ineffective. Free trade may be used by developing countries to fill in the gaps in their production processes. Local businesses also profit from their multinational partners’ access to cutting-edge technology. Employment prospects expand in tandem with the growth of local economies. Local workers receive work training from multinational corporations.

Is Free Frade Passe: Analytical Essay

Assignment title: ‘Free Trade is not free in its present form’, discuss, with reference to the international trading system.

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‘Free Trade is not free in its present form

Free trade and free markets are essentially made to make trade easier by allowing the market to balance needs, supply, and demand. Free trade is the agreement to regulate the tariffs Taxes and duties that countries impose on their imports and exports (Amadeo, 2019). Trade is the oldest and most important economic nexus among nations and is central to the evolution of international nations (Gilpin, 1987). The cost of trade goes back to the nineteenth century with the ideas of Adam Smith which was to raise revenue and tariffs to protect domestic producers from foreign competition (Renata, 2019). Smith asserted that trade should be free and nations should specialize in what they could do best so they could become wealthy and powerful but unfortunately, this idea was unrealistic, and the nature of nations possesses attributes of parsimoniousness (Ravenhill, 2005). The countries of the developing world welcome the idea of globalization through free trade but unfortunately, it allows the economic and politically powerful countries of the south to dominate and submerge countries of the weaker and peripheral region of the north (Shah, 2006). The global trade regime is a rule-based political system organized by an international agreement that seeks to promote and stabilize economic exchanges between counties within regulations. Unfortunately, as we see in today’s world, countries often restrict these regulations and exchanges as they impose rules and reduce the protectionism of national regulation to promote the stability of their own country (Ravenhill, 2005). In the twentieth century, economic growth allowed domestic sources of revenue to displace the tariff revenue which has diminished the revenue effects of trade while taxation is still a major source of revenue for the political elites and the official bureaucracy of many less developed countries (Gilpin, 1987). Now, in the twenty-first century trade is based on national regulations and international agreement which is regulated by the World Trade Organisation (WTO) (Ravenhill, 2005). This essay will underline the reasons why free trade is not free in its present form by looking at trade theories of the past, free trade in the global market, and free trade versus economic protectionism in today’s world.

To understand this essay, free trade needs to be understood. Free trade is the trade of services and goods between two or more countries without tariffs on imports. The reason why free trade is not free in today’s society is that countries that have a lower cost of living have exports that cost less (Amadeo, 2019). Many co-operations steal ideas and sell them at a lower price. This is evident with many goods and services one major example today is the makeup industry. China will produce counterfeit makeup stolen from the ideas of major American brands like ‘Urban Decay’ and ‘Too Faced’ and sell them at a lower price. The result of this is that small family firms cannot compete with subsidized agribusiness in developed countries and poorer countries gain aggravated unemployment, crime, and poverty. Free trade also leads to the depletion of timber and deforestation which results in the destruction of natural resources which can be seen in the Amazon Rainforest in Brazil (Amadeo, 2019). Reduced tax revenue in smaller countries leads to a struggle to replace revenue lost from import tariffs and fees. This essay will go through the process of how free trade which is not free results in developed countries getting richer while developing countries stay poorer.

Today we see the ingenuity of government regulators and the establishment of new forms of protection called Non-Tariff measures (NTMs). NTM’s have become more important than tariffs as tariffs have been reduced to promote ‘free trade’. NTMs are replaced instead by mainly developed countries, and in return developing countries are left without tariffs or NTMs making trade much more expensive for them. The implementation of NTM instead of Tariffs are allowed by trade agreement under the General Agreement on Tariffs and Trade (GATT). NTMs have restricted trade in recent decades imputed by the national government (Renata, 2019). To make matters more difficult for developing countries, some governments have international agreements with specific countries which restricts the free flow of international trade anyway. This specific international agreement usually stems from a historical agreement, for example, commercial treaties between kings of ancient Egypt and Babylonia which gave parties the right to exact duties on the merchandise of traders and travelers, and this agreement still exists today in 2019 (Ravenhill, 2005). This shows that developed countries already have a high ground when it comes to international trade which makes tariffs and exchange rates perhaps ‘free’ between certain long-term relationships that countries have developed throughout history and this presents the idea of trade as a diplomatic practice between countries today leaving out less developed countries (Ravenhill, 2019). The first trade tolls were made to regulate the entry of country borders and it has been translated since the eighteenth century to modern-day customs duties. Customs duty is a tax on imported goods and is the main source of revenue for European countries which are developed regions of the world. For the rest of the world, customs duties are used to protect domestic producers from foreign production but this has led to failure in eastern countries such as China and India. This then leads to controversial and cultural effects of trade which impacts the values, ideas, and behavior of a society. This idea arises from the overlapping in bureaucracy in societies that have an inadequate domestic tax base because it is easier for western countries to place direct taxation on outsiders which results in high tariff rates and an increase in the cost of imported goods which ultimately discourages economic advantages from developing countries (Gilpin, 1987).

Free trade intertwines with regionalism which is most important in trade today. Regionalism is the formal process of intergovernmental collaboration between two or more states but the problem arises with the idea of what is a ‘natural’ region as a region is just a social construction. The use of regionalism has increased in the last two years means that there is a reduction in global welfare by distracting the allocation of resources. Regional economic integration has become the integration of association of arrangements between three or more geographically contiguous states. All countries that tend to lie on each other’s borders have a better opportunity for free trade (Ravenhill, 2005). The European Union have free trade agreements with twenty-seven countries because they are all close to one another and share a similar history, this is the same for China and Hong Kong trade agreements and also Korea and Chile. This all results in the scrutiny of WTO committees on RTA’a because they labeled these free trade agreements ‘regional’ which they are not and thus neglecting the third world countries due to economic reasons and not regional. In order to prevent this, the WTO created transregional relations to link countries in different parts of the world. Minitel relationships include the North American Free trade agreement (NAFTA) and ASEAN Free Trade Agreement (AFTA). The most important example of a transregional relationship is the Asia- Pacific Economic Cooperation (APEC) which links the United States to twenty-one countries outside of America but still is connected to wealthy countries such as Singapore and Jordan (Ravenhill, 2005). It is more obvious that regionalism is being used in trade for economic means with the result of political ends. There are multiple examples of this as the failure of the regional trade agreement is seen among less developed countries as it happens more slowly. A major example of this is the breakup of the Soviet Union which led to six new Republican states which meant they were a new trade area. The EU saw this as an opportunity to make a trade agreement with these less developed states so that they could be compatible with the WTO’s regulations. Hence the EU offered these new states duty-free access to the European market in return to make these new states in industrialized countries for their own use in the future (Ravenhill, 2005). Countries that enter free trade agreements are concerned that non-members of the agreement will exploit the benefits that they provide to their parties. The fear of regionalism is that no common tariffs mean that non-members will send goods into the free trade arena through a country with the lowest tariffs and use the free trade provision for groups to access other members’ markets. As a result of this countries are scared that this will lead to trade deflection and loss of tariff revenue for the economies of higher tariff payers which inevitably causes greater competition for domestic produces (Ravenhill, 2005). Hence Free trade is not free in terms of regional agreements as they enable industries to become internationally competitive and therefore RTAs will ease a path towards non-discriminatory liberalization which leads to competition at a regional and global level, which will increase tariffs (Ravenhill, 2005).

Today protectionism is the main reason for tariffs because it is the main source of revenue in some developing countries. Economic protectionism is the main thing that restraints free trade and the meaning behind it. Protectionism entails the expanded government discretionary powers that influence trade patterns and the global location of economic activities. The foremost manifestation of the new protectionism has been the governmental use of voluntary export restraints and orderly market arrangements to create the idea of ‘organized free trade’ (Gilpin, 1987). Protectionism also entails the spread of trade to service sectors and to high technology industries which are believed to be both a strategic plan of countries and provide future growth in industries of the advanced countries. In Asia, the majority of their exports are construction services, electronics, and information industries especially now in India with an increase of call centers located there to provide information to developed countries like Europe and America. This might sound good but the estimates differ greatly and the actual extent of non-barriers is a completely different gauge as they are hidden from view by their nature (Renata, 2019). In many cases, a non-tariff barrier to one nation is a legitimate activity to another. The important message in this statement is that trade restrictions and government interventions are relatively small but growing in a number of sectors that are actually more than one-fourth of the world trade in manufactured goods (Shah, 2013). These goods include textiles, steel, automobiles, and electronics which all have high tariffs and non-tariff barriers which results in distorting subsidization (Gilpin, 1987). Protectionism is necessary but is only a temporary expedient and a stepping stone toward a system of free trade. This is why the General Agreement on Tariffs and Trade (GATT) was established in 1948 to achieve ‘freer and fairer trade’ through the reduction of tariffs and elimination of other trade barriers (Gilpin, 1987). The downside of this agreement was that less developed countries never signed it and did not accept its principles of it and even developed countries did not fulfill the obligations of the agreement. Instead, the World Trade Organisation (WTO) was set up to replace the GATT, with the same idea to promote trade between member countries and to provide non-discrimination in trading relations. The WTO still manages the struggle between liberalization and protectionist forces and all agreements are slow and neglectful. Today the WTO has created the Uruguay Round Negotiation of 1993 which is a contract between its members to establish trade rules with a powerful dispute settlement system (Gilpin, 1987). This only benefits developed countries and again forgets about the less fortunate regions. From this evidence, protectionism suits the needs of the rich countries while only opening the markets for the poor. Developed countries have the luxury of being protectionist but in return expect developing countries to completely remove barriers and free trade which causes an imbalance in the favour of already industrialized countries (Gilpin, 1987).

Evidence of trade protectionism can be seen between countries in Europe and North America. Which North America is subsidizing their farmers for billions of dollars and making it harder for poorer countries to export these materials (Abbas, 2019). The rapid advance of the Asian industry especially in Japan and China has threatened sectors of the American electronics industry, so the I.T. industry of the U.S. and Europe is growing so that they can outsource the developments of these countries (Gilpin, 1987). Richer countries want their products to be prioritized when being exported and for them to have power over multinational cooperation companies (MNCs) (Abbas, 2019) A major example of this is Bolivia. In 2003, the town of El Alto, Bolivia was overruled by Spanish MNCs to dig out the resources of gold, silver, and rubber. Today El Alto is still being monopolized by MNCs by their gas reserves being privatized by Spanish MNCs and as a result, the taxes are slashed to attract corporate investment (Shah, 2006). These MNCs make an enormous profit while the nation of Bolivia sees the very little benefit and this is the case in many other developing world countries (Shah, 2006). This shows that free-market economics result in poorer countries being monopolized by MNCs as a result of economic protectionism.

The liberal trade theory is significant when it comes to trade. Liberal economists believe that the international division of labor is based on the comparative cost which in fact results in countries specializing in commodities whose costs are comparatively lower (Abbas, 2019). Liberal trade theory means that one nation in the developed part of the world has an absolute advantage over other countries in production. For example, in the EU, England and Portugal can have free trade by means of swapping. England would give Portugal cloth in return for Portugal’s wine. The main disadvantage of this swap system is that it only benefits countries that have resources to give and is only successful on a two-country model (Gilpin, 1987). The neoclassical reformulation or otherwise known as Heckscher-Onlin-Samuelson (H-O) Theory is the standard liberal position of international trade since the 1980s. This is the idea that nations with competitive advantage are determined by the relative abundance and most profitable combination of several factors of production like labor, resources, and technology (Gilpin, 1987). The H-O model suggests the exchange of manufactured goods for commodities. It can be seen in practice by importing models of automobiles while exporting different models. For example, a Japanese ‘Mazda automobile would be exported to Europe while a German ‘Mercedes-Benz automobile would be exported to Asia. This kind of trade is successful in North and South countries but it is still less successful among non-industrialized countries (Abbas, 2019). However, liberals still consider free trade to be the best policy due to specialization and the international division of labor, the increase of individual productivity, and hence the accumulation of both national and global wealth while also increasing consumption possibilities. Liberals support the superiority of a policy of free trade over protectionism as they believe protectionism will end itself which will result in state building and industrial power (Gilpin, 1987).

On the other side of this free trade debate is the economic nationalist trade ideas. Economic nationalists share contemporary Marxist ideas and believe free international trade is destructive to traditional values. The idea is that free trade is a form of cultural imperialism that must be strictly controlled by tariffs. Nationalists believe that trade makes interdependence insecure and vulnerable to external developments, especially in poorer regions. The emphasis on the cost of trade and the favor of economic protectionism and trade and central for international trade and ‘free trade’ does not work (Abbas, 2019). This was seen in the twentieth century with Britain. Britain was seeking to advance their own national economic interests by gaining unimpeded access to foreign markets through free trade and this allowed Britain to now be an interdependent world economy by using the free trade market to their own advantage and not giving back into it (Gilpin, 1987).

From the contents of this essay, it is reasonable to accept free trade is not free in today’s world. The agreement of free trade lies at the heart of the conflict between economic liberals and economic nationalists (Gilpin, 1987). The fact that integration of global markets and international production is taking place in a world divided among nation-states. Over sixty percent of this trade is among the developed countries and this results in many distributional and conflictual aspects of the trade (Shah, 2013). Globalization has created ‘social Darwinism’ which is the idea of the survival of the fittest and in a trading sense: countries have their own interest and financial gains in mind. It is true to say that the increase of globalization risks a financial crisis in the developing world as products being exported from poorer countries are facing high barriers in rich nations while their labor is paid less to enable them to pay these tariffs. Overall, this trade agreement is leaving the poorer countries poorer and the richer countries still accumulated wealth from taxes (Shah, 2006).

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