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Free trade refers to the government’s abolition of trade barriers, tariffs, taxes, and quotas, as well as all other limitations on foreign trade that make it difficult to exchange such goods. Many countries consider free trade to be a noble concept because it removes obstacles, making exporting easier and less costly. Free trade along with product differentiation is very beneficial for a country and creates more winners than a loser in an economy.
Product differentiation is a marketing strategy for identifying product variations. Differentiation helps to increase the attractiveness of a commodity by comparing its distinctive characteristics with those of rivals. Product differentiation aims to gain a competitive advantage or to distinguish your product from competitors on the market. Product differentiation is very important in doing international trade as we should be able to provide something new than our competitors otherwise, it’s not very useful, for example, Japanese cars and US cars in the 80s were competing as Japanese car was more economical and that time there was the rise in fuel prices and US car ate a lot of fuel so, people were looking for something economical and, due to international trade they were able to get access to it and if the Japanese car was the same as the US than it wouldn’t be very viable for the customer to pay more and get the same product they already produce in their own country. Product differentiation provides a different option for the consumer in a country, it provides them with an alternative to choose from the same industry. It is from the point of view of demand-side this also benefits the supplier as they have a bigger market. There may be very minor variations between the goods, and the decision to purchase a foreign brand may not be based solely on price, but rather on other factors like product quality, performance, reliability, location, and services. (What is Product Differentiation? | Definition and Examples, 2021)
When we differentiate our product from the market it provides us with a competitive advantage talking about why there are more winners than losers when the country shift from no trade to free trade there is the various reason why there is likely more winners than a loser in a country. The trade barriers are also lifted so it is easier to trade with other countries. Consumers (buyers) and domestic businesses that export products are also winners of foreign trade (sellers). Consumers understand trade’s advantages in terms of choice and cost. Consumers benefit from international trade because they have access to a wider range of goods and services. Consider the products and brands we buy daily. If imports were restricted, our options would be extremely limited. For example, Nepal cannot manufacture cars, and if there was no free trade, people in Nepal would be unable to access them furthermore, by providing a wider range of options, the attractiveness of imported goods allows domestic producers to increase product quality while keeping prices down Trade benefits domestic vendors as well. The world, not only the domestic economy, is the market for domestic companies that export. Producing for a wider market allows them to expand and expand their production. They can take advantage of efficiencies and deliver goods at a lower average cost because of these economies of scale. Lower manufacturing costs help businesses compete more effectively, which can lead to lower prices for customers. And also international trade helps in the free movement of labor manufacturers can benefit from it they can get cheap labor which in turn will reduce the cost of production. Other benefits of free trade could be static gains as the differentiation increases the chances of export, stable employment, and higher wages, increase in factor of production, consumer saving, and catch-up benefits as developing countries could take advantage of it.
The advantages of trade are not limited to the immediate producers and consumers. Economic growth and an increasing standard of living support countries that participate in foreign trade. This can happen in two ways. To begin with, trade provides countries with physical resources (technology, machinery, and equipment) that they would not be able to manufacture on their own. China, for example, has developed into a manufacturing powerhouse and India has become a pioneer in service exports. Both countries have seen growth and development that would not have occurred if they had not had access to foreign markets. Economists believe that trade offers the poorest countries a way out of poverty. Foreign trade means exchanging goods and services the other party finds beneficial. Third parties, on the other hand, must be recognized that certain people are worse off as a result of foreign trade. Companies that offer goods that can’t compete in a global marketplace are the most visible third-party losers. So to be able to survive when a country goes from no trade to free trade product differentiation is important. So that in the long run economies don’t suffer.
We can support this with different theories like Intra industry trade theory. This theory says that two countries with similar resources will still trade goods of the same industry with each other because they have similar resources which is a different concept from other trade theories which focus on selling goods that they specialize in or have a comparative advantage. Other theories like an absolute advantage, comparative advantage theory, and the HO model can explain the trade pattern between countries which have different resources but, our main focus with this statement is product differentiation as a basis for international trade and how there are more winners than losers when a country converts from no trade to free trade. Standard trade theory assumes trade in similar goods; hence, with perfect competition, only inter-industry trade occurs. When two countries trade developed and developing other theories like absolute advantage theory can be related as a basis that they both have different resources if a country specializes in labor abundant product then they should produce only that kind of product and if a country specializes in the capital intensive product they should produce only that kind of product. This theory tells us how trade occurs in homogeneous products.
Another standard trade theory of comparative advantage propounded by David Ricardo says that nation will gain from trade even if it has no absolute advantage in making any product. He also emphasized a major aspect of the theory: products are more mobile across foreign borders than resources (land, labor, and capital). The theory of intra-industry trade is still based on this premise. This theory of trade is intended to demonstrate that any nation can efficiently exploit any differences between countries. Whether a country has increased wages or lower productivity, the competitive wage rates in place ensure that each country focuses on the product in which it has a competitive advantage.
These standard trade theories are only relatable to some extent as they only take homogeneous goods as the main trade statement talks about product differentiation but in the case of these, they mostly deal with homogenous goods in a perfect market.
The previous explanation of the underlying causes of inter-industry trade focuses on country differences. However, a lot of foreign trade can happen between similar countries. This is where the Intra-industry concept is important. Trade does not have to be the consequence of differences in technology between countries or factor proportions between countries; it can simply be a means of expanding the market and fully exploiting scale economies. Intra-industry trade occurs when countries sell products with virtually equal factor intensities and is often between countries with similar factor endowments. Intra-industry trade happens whenever countries trade goods that are essentially the same. Let’s take an example of a watch to assume that it is differentiated which means there will be specialization within the watch group, with one country making more athletic watches and the other manufacturing more expensive watches. Larger markets have more opportunities to produce a greater variety of products from the same industry. The market is monopolistic in It benefits both consumers and sellers. In this type of market, many sellers are competing against each other but the product they sell is differentiated. Firms in a monopolistically competitive market distinguish their goods to ensure that they are imperfect replacements for one another. As a result, a company that strengthens its branding will boost prices without jeopardizing its customer base. Suppliers have more command in the market, unlike a perfect competition market. Product differentiation is critical since it enables different brands or businesses to achieve a competitive advantage in the marketplace. If the distinction were impossible, the market would still be dominated by larger companies with economies of scale because they can beat small companies on price. In this intra-industry trade growing more countries are getting into intra-industry trade one of the main reason for growing intra-industry trade is product differentiation.
In conclusion, we can say that product differentiation is the basis of international trade. Countries that have dabbled in free trade have been invited to join more FTAs or organizations, including the most populated, oldest, smallest, and weakest economies. This is because they claim that lowering trade barriers and increasing product differentiation would help them expand trade with other countries. Though some people might think that International trade benefits those with advanced technologies and the opportunity to manufacture high-quality, low-cost goods; free trade, in particular, has significant implications for those employed in import-competing sectors this means they will lose market for their product. That’s also mainly because of a lack of awareness of the strengths of free trade and product differentiation; but, once they realize that most of the international trade is based on product differentiation, the countries would have more winners than losers as a result of free trade benefits. There would be no foreign trade if there was no product differentiation and everyone would be pleased with what they make. People buy from other countries only if there is a differentiation between what they get in their own country whether it be price, quality, or service. Like people in china will not spend on buying iPhones if the features and design were not different from Huawei’s products. (Impact of the Product Differentiation on Free Trade
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