International Business - Free Trade Disadvantages - Coursework Example

Free Trade Disadvantages People in Developed Countries’ Introduction Free trade is trade that take place when governments do not attempt to influence, through duties or quotas, what their citizens can purchase from other countries or what they can create and offer for sale in other countries. In essence this means that free trade occurs when citizens are free to conduct trade across the borders of different countries without the respective governments of the countries involved intervening to restrict such trade. Free trade has both advantages and disadvantages. The advantages include the ability of a country to specialise in what it can best produce and export to other countries. On the other hand, the disadvantages of free trade include the point that free trade can lead to some countries depending on other countries for some manufactured goods and services due to the inability to produce such services or goods locally. Against this background information, this essay will evaluate the statement that “free trade disadvantages people in developed countries”. The analysis will involve looking at the advantages and disadvantages of free trade in relation to the affairs of people in developed countries. The essay starts by providing a definition of the term ‘developed countries’. Definition of developed countries There is no universally accepted definition of the term ‘developed countries’. However, developed countries can be regarded as those countries that are characterised by high industrial development, high incomes and high levels of human development (Nielsen, 2011). Developed countries generally have high levels of industrial production and technology, high-performing market economies and high per capita income as well as literacy levels among other features (Armstrong-Mensah, 2017). Examples of developed countries include the United States, several countries in Europe such as Germany, the United Kingdom and France, and Japan, Canada and Australia among others. In contrast, developing countries are countries with low levels of industrialisation, lower incomes, lower literacy rates, and poor infrastructure among other characteristics (Armstrong-Mensah, 2017). Such countries include Ghana, Ethiopia, Cambodia, Peru and Kazakhstan among others. Free trade implies that both developed countries and developing countries are able to trade with each other without restrictions such as quotas and duties. This denotes that a developing country like Ghana is able to produce and sell goods such as cocoa to the United States. As well, a developed country such as Japan is able to produce items such as electronics and other technologies and sell them to both developing and developed countries. The implications of free trade are such that free trade presents advantages as well as disadvantages to both developed and developing countries. As noted above, this essay will dwell on the implications of free trade for developed countries. Analysis of the statement ‘free trade disadvantages people in developed countries’ As noted above, free trade has both advantages and disadvantages. Therefore, the statement ‘free trade disadvantages people in developed countries’ only tends to address one part of the implications of free trade to developed countries. To address the two sides of the implications of free trade, there is need to analyse the advantages and disadvantages of free trade to developed countries. Advantages of free trade to people in developed countries The benefits that accrue to developed countries in relation to free trade can be explained using the theories of comparative advantage and absolute advantage. Comparative advantage is the idea that even if a county could efficiently manufacture by itself the things that it requires and uses, the country could still gain more if it specialised in manufacturing what it is best endowed to make and then trading with other countries to get other items that it requires (Goldstein, 2007). For instance, Japan, being a country that is advanced in terms of technology, has specialised in the export of items such as machinery and vehicles. On the other hand, Japan is a major importer of items such as petroleum products from countries that have a comparative advantage in the production of petroleum. As such, free trade enables developed countries such as Japan to focus on areas in which they have a comparative advantage (mostly technical areas), thus enabling them to promote the advancement of high-skill-intensive products (Brakman, Garretsen, van Marrewijk & Witteloostuijn, 2006). Therefore, as a result of free trade, developed countries are able to specialise in the production of what they can best produce and get access to a larger market for the goods and services produced. Specialisation also leads to improved allocation of resources and this leads to increased economic growth for the developed countries (Buultjens, 2002; Schumacher, 2012). The benefits that developed countries derive from free trade can also be explained using the theory of absolute advantage. This theory states that in a free trade system, a country benefits by specialising in economic activities in areas in which it possesses an absolute advantage (Peng, 2014). For instance, the United States has an absolute advantage in the production of software and information technology (Baumol & Blinder, 2012). As such, the country is able to export software and IT-related products through companies such as Google, Apple and Microsoft. The idea behind having an absolute advantage is that by specialising in a given area, a country is able to produce more, and by trading, it can benefit even more (Peng, 2014). Schumacher (2012) argues that developed countries are able to benefit more from having an absolute advantage in a given area because they are able to utilise the technological abilities that they already have. This means that people in the developed countries will benefit from phenomena such as employment of highly skilled people and better incomes as a result of specialisation. Disadvantages of free trade to people in developed countries Despite the gains that free trade brings to developed countries, free trade also hurts some areas in these economies. One particular area is employment. To start with, it is important to note that free trade applies even to issues such labour. Free trade implies that firms in developed countries can source their labour from countries that provide cheap labour. The result is that many companies in the developed countries are outsourcing their production functions to countries that provide cheaper low-skill labour such as India and China. When this happens, it means that many jobs are moved from the developed countries and taken to the developing countries. For example, Carbaugh (2015) argues that Apple Inc. employs 40,000 people in the United States, where it is headquartered, but has approximately 700,000 employees in China. Even though most of the jobs that Apple has ‘exported’ to China are low-wage jobs, it can still be argued that these jobs could have helped some unemployed people in the United States. Another notable company whose operations have resulted in a shift of employment from a developed country to a developing country as a result of free trade is Nike. It is argued that the growth of Nike in the 1980s resulted in the United States (where the company is headquartered) losing more than 65,000 shoemaking jobs (Bradshaw & Wallace, 1996). By the 1990s, Nike was manufacturing most of its shoes in countries such as Malaysia, Taiwan, China, Thailand and Indonesia due to the low cost of labour in these countries (Bradshaw & Wallace, 1996). Another argument in support of the disadvantages that people in developed countries face due to free trade is in regard to the loss of comparative advantage in a given area of production. Kowalski (2008) argues that one country may have a competitive advantage in a particular area, but the advantage is not permanent. Notably, many developed countries lose their comparative advantage in some aspects of production because it becomes difficult to offer high wages for jobs that require a low level of skills. Over time, it becomes expensive for firms in developed countries to support labour-intensive jobs such as textile manufacturing. The comparative advantage for low-wage jobs has thus been shifting to countries such as those in Asia and Latin America. This has in turn meant that people in developed countries like Canada and the United States have had to inevitably lose some of their jobs (Rahnama-Moghadam, Samavati & Dilts, 1995). Conclusion Therefore, as it has been noted in the discussion, free trade presents both advantages and disadvantages for developed countries. That is, to some extent, it is true that free trade disadvantages people in developed countries; but it must also be mentioned that there are many benefits that people in developed countries get as a result of free trade. The benefits stem from the comparative and absolute advantages that many developed countries have in terms of their industries and level of technology and skills. As a result of free trade, firms in many developed countries can specialise in what they are able to produce best and thus create jobs and help in economic growth. On the contrary, people in developed countries are hurt by free trade in that over time, many firms have shifted their manufacturing units to countries that offer cheaper labour. Also, aspects such as comparative advantage are not permanent; and as developed countries lose some of their comparative advantages, this too comes with loss of jobs and other negative effects on the economy. References Armstrong-Mensah, E. A. (2017). Lecture notes global health: Issues, challenges, and global action. Chichester, West Sussex: John Wiley & Sons Ltd. Baumol, W. J., & Blinder, A. S. (2012). Economics: Principles and policy (12th ed.). Mason, OH: South-Western. Bradshaw, Y. W., & Wallace, M. (1996). Global inequalities. Thousand Oaks, California: Pine Forge Press. Brakman, S., Garretsen, H., van Marrewijk, & Witteloostuijn, A. (2006). Nations and firms in the global economy: An introduction to international economics and business. Cambridge: Cambridge University Press. Buultjens, J. (2002). Economics. Sydney: Vivienne Petris Joannou. Carbaugh, J. J. (2015). International economics (5th ed.). Boston, MA: Cengage Learning. Goldstein, N. (2007).Globalization and free trade. New York: Facts On File, Inc. Kowalski, K. M. (2008). Free trade. New York: Marshall Cavendish. Nielsen, L. (2011). Classifications of countries based on their level of development: how it is done and how it could be done. IMF Working Paper, No. WP/11/31. Retrieved from https://pdfs.semanticscholar.org/bc7f/5b086b8db9adaa3f51645896fda5d1e46659.pdf Peng, M. W. (2014). Global business (3rd ed.). Mason, OH: South-Western. Rahnama-Moghadam, M., Samavati, H., & Dilts, D. A. (1995). Doing business in less developed countries: Financial opportunities and risks. Westport, Connecticut/London: Quorum Books. Schumacher, R. (2012). Free trade and absolute and comparative advantage: A Critical comparison of two major theories in international trade. Potsdam: University of Potsdam. Read More