Benefits and Challenges of Free Trade - Coursework Example

Running Head: INTERNATIONAL BUSINESS International Business Name Institution Date Introduction Free trade has elicited every kind of debate owing to the mixture of effects that result from it. More glaringly, it has been pointed out that free trade favors developed countries while ignoring the developing countries. Owing to the fact that free trade encourages open competition, critics of it explains that countries with advanced economy will possess an unfair advantage of the nations that are struggling to get into the business world. According to Deardorff (2004), supporters of free trade say that it helps the developing nations to get a foot hold in the world trade markets. To be able to understand the truth in these counterarguments it is important to look at the act of the developing country removing barriers to trade in a critical manner commencing with its meaning. Free trade can be a double-edged sword. Superficially it appears as an equal opportunity for everyone in the pact. It has both advantages and disadvantages. Fuller and Geide-Stevenson (2003) note that the degree of disadvantages in any given country in the free trade is directly related to the level of attainment of technology for that country. Consequently members of a free trade region who are less industrialized may be at the receiving end until such countries remove technological obstacles that they possess. According to Fukase and Martin (2002), if the barriers to trade of developing countries are removed, such countries will automatically become free trade zones. Free trade regions or zones are regions without trade boundaries and limitations. The countries that make up free trade region permit trade, free flow between them and apply no trade barrier and tariffs or very little against services and goods delivered from any of the countries within the region. If barriers to trade are removed a developing country can have both negative and positive effects of this decision. There are some benefits that come with free trade and there as discussed as below: Benefits or advantages of free trade Comparative advantage In view of the theory of competitive advantage, countries that specialize in goods having lower opportunity cost translates to increasing economic welfare of all the countries. In this case the developing country has to specialize in what is best at and this will lead to increased productivity as only activities with low lost and high economical value will be ventured into. The market becomes a true representative of the real demand and supply (Deardorff, 2004). Economy of scale According to Andriamananjara and Schiff (2001), if a given country specialize in particular goods that it can produce, it can seize the advantage of economy of scale and produce the same goods at an average lower cost. This is widely utilized in industries where the production fixed cost is very high. By narrowing down to these products, the industry will take advantage of lower production costs and economy of scale. This will make the goods to be available to the consumers at the lowest prices. Increased healthy competition Owing to increased demand from abroad, industries will consequently react by increasing efficiency and reducing costs. This will result in the prevention of monopolies from cropping up in the domestic market which usually results into increase in prices. Free trade makes the domestic industry realize healthier competition by eliminating the chances of monopolies coming up (Fuller & Geide-Stevenson, 2003). Increase in economic growth Trade is the greatest determinant of economic growth. If trade happens due to true supply and demand, economic growth that is realized shows the true picture in economic welfare increase. Hence free trade is a direct push for economic growth and this translate into standards of living that have improved. Effective utilization of raw materials Apart from being a push for economic growth, free trade is also responsible for raw materials effective uses. This is very common for highly limited and highly valuable raw materials. For example, the Middle East has a lot of deposit for oil, but there is very little else in these countries. Free trade ensures the limited resource is distributed to other countries that do not have this resource and the Middle East gets other goods which are crucial from other countries that produce them. Lesser cost of living The addition of taxes and tariffs by government to protect their interests it translates to industries fixing higher prices to incorporate the additional cost. This means that consumers are punished with higher prices leading to increasing cost of living. Krueger (2000) specifies that in free trade the government eliminates subsidies, taxes and tariffs. Services and products are produced efficiently at a reduced cost. Lower prices means reduced cost of living. Increased choice Free trade results into increase in both imports and exports. Consequently more products are made available in the market. A consumer has the chance to purchase goods basing on budget and quality requirement. The choice available to the consumer is definitely increased. Peaceful international ties and good governance Free trade does not allow the need for government policies that are protectionist. Such policies have seemed to translate increased corruption malpractices among the officials of the government. Consequently free trade makes governance to be healthier. A healthy economy stems from a healthy government. This result into healthier and smoother political and trade relationships between different countries. Hence free trade occasions peaceful international ties and healthier domestic governance. Global mass media will tie the world together ass it leads to more cooperation among the member nations of the trading block. Increased flow of communications permits vital information to be shared among the country in the free trade region (Fukase & Martin, 2002). Exchange of technological know-how The developing country can gain a lot in technological terms when it interacts with a developed country. The developed country will have automatically superior technology as compared to the developing country. Through frequent interaction the developed country will transmit a lot of its technological prowess to the developing country. The developed country sometimes it will set up industries in the developing country to enable it to catch up. Increase in liquidity of capital The countries that are more developed invest in the developing country leading to increased liquidity of capital. More capital will be transferred to the less developed countries. This will consequently empower the developing countries in man power empowerment. Exchange of skills and expertise According to Fukase and Martin (2002), it is always definite that countries that have less expertise will have their able bodied citizen going to work in the more developed countries. The citizens of the less developed country will get advanced expertise and skills from the developed country and in turn transmit the same to their native countries. The developing country stands to gain in the event there is an exchange in the expertise and skills of the workers. A developing country will benefit from the above advantages that result from free trade practices. However, free trade or elimination of trade barriers comes with its own share of disadvantages that should be analyzed carefully before any country jumps to the bait of removing the trade barriers. As previously stated free trade is a double sword that has both the bad and the good side. The following are the disadvantages that come about with free trade: Disadvantages of free trade Increased competition A developing country that has opened her borders to free trade by eliminating all the barriers to trade may invite fierce competition from member nations in the trading region. According to Rodrik (2007) the countries in the same region could be competing for the same customers whop may turn to a producer with the best quality and low cost. This will definitely hurt the developing nation if for instance then members in her trading zone are more developed and can produce the same goods as her at a reduced cost. This will hurt the domestic industries. Increased levels of unemployment Owing to increase in competition some countries will automatically gain a competitive advantage over the others. This could be as a result of possessing the latest technology that leads to high levels of efficiency and reduced production costs. Consequently industries in the less developed or developing country may collapse leading to increased levels of unemployment. North America Free Trade zone comprises of Canada, Mexico and the United States of America. America is superior in technology as compared to Mexico. Higher levels of unemployment will be felt in Mexico due to reduced opportunities for employment as a result of low technology levels. A developing country will be hard hit. The developing country because of low level of technology it possesses may not be in a position to protect her domestic industries leading to them collapsing. Opening the boundaries of a developing country will invite the other international companies to enter the country freely (Rodrik, 2007). Corporate Restructuring Companies within the free trade regions are always in constant competition with each other. The competition necessitates the need for restructuring. Companies that are disadvantaged in the competition need to restructure their operations in order to catch up with other companies superior to them. Restructuring is a cost task for the companies and will involve operation aspect, ownership, and the management team overhaul. Economic underdevelopment Martin and Mitra (2001), argues that free trade regions will result into some regions being more economically developed than others. Some areas will spark off greater economic activity due to attracting more economic development as compared to others. Some others result into underdevelopment of other areas more than others within the same trading zone embracing free trade. Underdevelopment will result into negative effect of the gross domestic product of a given country and bring down the total exports of a country. Revenue reduction With agreeing to free trade the government of a particular country does away with tariffs, taxes and other extra levies that it uses to raise revenue to support the domestic budget. If a country cannot maximize in the collection of the revenues then they will drop drastically leading overdependence on international donors or borrowing from other developed countries. Many of the developed countries sell their surplus goods to the developing countries. In many cases some of the goods would have been rejected in the developed country and it will subsequently dump the unwanted good in the developing country. This will result in the consumers in this countries being supplied by substandard goods. The international bodies such as the World Trade organization infringe on individual and national sovereignty. Individual countries cannot just perform their trade activities without being influenced by the trade umbrella internationally and regionally (Krueger, 2000). Environmental degradation In many cases the less developed countries will over exploit its reserves of raw materials leading to sometimes total depletion. The country may export its reserves of raw materials plunging itself into an environmental turmoil. More so where there is strict pollution controls some consumers will import goods from countries where the legislation is less strict and pollution is permitted. Balance of payment Deardorff (2004) argues that a developing country may realize a decrease in the balance of payment due to importation of very expensive machinery from developed countries and exporting mostly agricultural goods to the developed country. The country will spend a lot buying goods from developed countries and get less from its exports hence leading to reduced balance of payments. Conclusion As it has been seen from this essay it is not enough just to look for the superficial facts about free trade. The developing country has to look at the advantages and the disadvantages of free trade before removing all the barriers and opening its borders to the international player. It is important that the country should analyze at what stage is at as per as economic growth is concerned to decide what kind of barriers to eliminate without inviting destruction to the domestic firms. All in all free trade has both disadvantages and advantages. References Fuller, D. & Geide-Stevenson (2003). Consensus among Economists. Journal of Economic Review 34 (4): 369–387. Andriamananjara, S. & Schiff, M. (2001), ‘Regional cooperation among microstates’ Review of International Economics 9(1):42-51. Blackhurst, R.. Lyakurwa, B. & Oyejide, A. (2000), ‘Options for Improving Africa’s Participation in the WTO’, The World Economy, 23: 491–510. Deardorff, A. (2004), International Provision of Trade Services, Trade, and Fragmentation, Policy Research Working Paper 2548, World Bank, Washington DC Fukase, E. & Martin, W. (2002), Free Trade Area Membership as a Stepping Stone to Development, Discussion Paper 421, World Bank, Washington DC. Krueger, A. O. (2000), ‘Trade policy as an input to development’, American Economic Review 70(2):288-92, May. Wolf, Martin. (2001) Will the nation-state survive globalization? Foreign Affairs 80(1):178-190. Rodrik, D. (2007), ‘The economics of export performance requirements’ Quarterly Journal of Economics 102:633-50, August. Martin, W. and Mitra, D. (2001), ‘Productivity growth and convergence in agriculture versus manufacturing’ Economic Development and Cultural Change 49(2): 403-22. Read More