Free Trade and General Agreement on Tariffs and Trade - Coursework Example

Running header: International Trade Student’s name: Instructor’s name: Subject code: Date of submission: Introduction Free trade is an economic concept that refers to selling of goods and services between different countries and nations without any imposed trade barrier and tariffs. It refers to the absence of government imposed barriers to trade among persons as well as corporate in different countries. International trade is restricted by certain barriers such as taxes, import duties as well as other non-tariff regulations. Trade agreements that are labeled as “free trade” often have their own barriers too towards entry or exit from the market among its members. In reality the free trade policy does not imply that the government abandons all controls revolving around imports and exports but rather that such government eliminates tariff barriers, trade quotas and currency restrictions. Adam smith urges for the case of free trade. He argues that different countries engage in specialization of labour which results to specialization. This results to increased efficiency and greater productivity. Countries should therefore be left alone to produce that which they can in order to remain competitive in the international markets. The General Agreement on Tariffs and Trade (GATT) is one of the major bodies that seek to liberalize trade by getting rid of barriers such as quotas. It is administered through WTO, World Trade Organization. It was formed in 1947 and it has since acted as a trade dispute negotiator mediator. It was originally made up of 23 nations but the number increased to 84 countries. Its aim was to tear down trade barriers through multilateral negotiations. The reciprocity concept was first adopted followed by the preferential trade treatment. These changes helped boost the international trade among the countries. However after the 1970s, global trade output decreased and the economic recession also hindered trade cooperation between the member states. For instance, the United States and Europe which were supporters of GATT started imposing protectionist policies on their industries. Although the 1994 reforms in the GATT and WTO initially increased trade as well as boosting the economies, countries were often involved in disputes. The usefulness of the two is limited as countries often impose barriers and the governments also offer subsidies and thus the free trade policy has not entirely been achieved. Although free trade has numerous advantages to both the developed and the developing countries, the government must remain very vigilant in the intervention of the international trade. The governments intervene in economical, political and cultural means. Economic motives Free trade has several characteristics. They include; industries have free access to markets, all the industries have access to free market information, there is trade of goods and services without any market barrier such as tariffs, quotas or any subsidies, the firms are not able to distort markets through government imposed monopoly power and there is no trade distorting mechanisms such as taxes, laws and regulations that favour certain household or households or factors of production over others. Protection of infant industries Infant industries are often new industries that have not achieved their possible optimum growth. The government therefore has to protect such industries from the international competition especially during their begging and developing stages until such industries are able to compete globally. Such industries will often charge higher prices for their goods and services in order for them to recoup their investment thus foreign goods would be a main threat to their growth if they were allowed to export at cheaper prices. ( Harris, 2008)25 (18).Moreover, such infant industries may have not invested much in research and development. Their raw materials, production processes and wastage is therefore likely to be higher as compared to foreign industries that have been in existence for a longer period and have acquired their market share. Such industries therefore must be protected from such powerful dominant firms. The infant industries are likely to achieve economies of scale, increased manufacturing skills as well as industrial infrastructure if they are protected for a while. For instance, if sugar was to be allowed into the US at reduced tariffs, the local sugar industries would have to sell their sugar at reduced prices thus lower profits. Promotion of strategic trade policy Government intervention will enable the local industries to experience economies of scale. Economies of scale refer to the advantages a firm experiences due to mass production. Such firms will also get a chance to be first movers in their industries as they will limit other firms from join the industry. Such firms enjoy huge profits thus contributing positively to the national income. However, the government should be careful not to over lavish government assistance as this will result to high prices and inefficiencies ( Harris, 2008)25 (18). Antidumping mechanisms Dumping refers to a situation where the developed countries sell their goods at a way low price in other countries than they are selling in their own country. This is mostly done on obsolete goods when such countries intend to improve their technology. However in the developing countries, such goods would not be regarded as obsolete and they will mostly have a ready market especially that they are inexpensive. Even though the citizens will benefit from reduced prices as well as variety of goods, the local firms in the same industry will suffer. The local industries would not be able to price their goods as the dumped goods and therefore the prices of their products will reduce. This will result to low revenues as well reduced national income. Such firms may not afford to spend much on research and development. They will be reluctant too to improve on their production efficiency which will result to lower production of goods as well as reduced quality of the same. Such firms will decrease their output and will not enjoy economies of scale. In the long run, such firms will be forced out the industry due to persistent loss making. For instance, the introduction of second hand clothes from the western nations led to the decline and closure of local cotton making firms in the developing countries. The government must therefore intervene to protect its local industries as closure of local firms’ lenders many of its citizens jobless. The government must therefore intervene international trade as the domestic goods would be at a disadvantage as compared to foreign products. Developed countries superiority In the past, it has been observed that the developed nations tend to force the developing countries to open up their markets for agricultural and industrial products yet they are reluctant to do the same to the agricultural goods from the developing countries. This results to poverty in the third world countries and therefore the need for the government intervention. Moreover, free trade supports movement of employees which in most cases favors the developed countries due to brain drain. The government must therefore weight its profits against any expected adverse effects in order ensure that the countries involved have a common goal of economic growth and development and not exploitation. Intellectual property rights protection Domestic labour markets often oppose free trade agreements. This is because wages and employment tend to suffer adversely from foreign competition. Unskilled and trade workers face declining employment opportunities and often find themselves moving towards lower wage service industries. The saturation of workers in the industry results into low wages which in return reduce the purchasing power of such individuals. In the 1970s the decline in real wages over most sectors resulted into energy crisis that had been brought about by the rapid increase in international free trade. Free trade movement is hostile to the notion of intellectual property. Free trade advocates managed to reduce the length of the patents available in most European countries. Netherlands had even abolished their patent system temporarily. Property rights are very crucial to the innovators of products as such people would not recoup their investment if such rights were abolished. The government must therefore remain very vigilant in the regulation of international trade as this will also control movement of information among trading countries. (Oliver, 2003) 47 (27) Market failures The principle of optimization holds it that the marginal benefit should always exceed the marginal cost in any policy change or adoption. The marginal benefit should equal to marginal cost for the particular choice to be optimal. The government uses this principle in order for it to decide when and how to intervene to the state’s economy and the international trade. The consumers apply the same principles for them to get satisfied with the products they intend to buy while firms apply the same to determine the most profitable product as well as their levels that should be produced. The government must therefore intervene in international trade so that through its policies the country will economically move towards the preferred state. It therefore comes up with levies or subsidies for business people involved in international trade in order to alter the involved benefits or costs. This result into equilibrium and the benefits are felt by the local state (Keating, 2000) 45 (3): 23-14 The government uses the following tools in regulation of trade: Tariffs: these are taxes imposed on imported goods. They vary according to the type of goods being imported. They increase the cost of the item as well as its demand in the local markets therefore lowering the quantity of goods imported. Export tariffs may be applied to exports though such a move is hardly implemented ( Dawson, 2009)36 (12) Import quotas: these are regulations imposed on the quantity of goods that can be imported from a foreign country. This will reduce the amount of goods that will compete against the local products. The government will reduce the level of Import if it wishes to reduce the competition among the local producers. For instance, the government may limit the import of second hand clothes to promote the production of new clothes in that particular country. However, during shortage the government may lift such quotas in order to allow movement of goods into the country. Export quotas: these are regulations that, although rare are meant to regulate the quantity of goods leaving the country. The country may be experiencing g shortages in a certain product and the government may not favor their export. Although their prices will be higher in the foreign country thus attracting local producers, the country is likely to experience future shortages (Colin, 2006) 56 (16) Local content requirement: the government may require that a certain percentage of goods be made domestically as compared to the imports. It may be done on the total amount of goods imported or on their value. Licenses: licenses are granted to businesses by the government in order to allow them to import a certain good into the country. A government may for instance restrict importation of cheese into a country. Only licensed companies will be allowed to import such products. These will restrict competition and also increase the price consumers will be required to pay for the cheese. Voluntary export restraints (VER): this is a voluntary trade barrier that is created by the exporting country. It is levied at the behest of the importing country and in some cases it is accompanied by a reciprocal VER. For instance, Brazil could place one on the exportation of coffee to the Canada. Canada could also place a VER on the exportation of coal to Brazil. In this case both the prices of coal and coffee will increase but will protect the domestic industries in both countries. Political motives Countries may involve themselves in international trade for political reasons such as: National security Countries involved in international trade without any government regulations may pose an issue of national security. The government must therefore be involved in the regulation of trade to check on the goods leaving and entering into the country. For instance fire arms and other war equipments would be dangerous even they got into the wrong arms. The import or export of such equipment must therefore be regulated. Defense related industries such as aerospace must be protected from international interference. Poor handling of such fire arms would result to civil war and other disruptions. Gaining influence over other nations The governments of large and more dominant nations establish trade relations with less powerful and small nations in order to gain influence over them. For instance the US government has over the last century established strong trade links between itself and countries such as Caribbean. Such countries are very dependent on the business provided by the USA. Any political disruption in these countries would result into disruption of the businesses among these countries. Moreover, the government will often do what the producers want in order to seek their votes. Different political parties will engage in helping such producers in different ways in order to remain in power during elections. Wealthy states that control international trade also have high GDP (Gross National Product) as compared to those that export low value products. For instance oil and diamond producing countries often have a higher one than those who mostly engage in Agriculture (James, 2002)14 (2): 13-17. Job protection The government intervenes with international trade in order to protect the local jobs. Foreign investors may be required to employ a certain percentage of its workers from the local country in order to operate in another nation. The government will also offer subsidies to local industries in order to decrease their production cost which will in return increase their demand as well as the profitability. For instance the government of Kenya offers subsidies for its rice producers in order for the m to compete with imported rice from Pakistan. This ensures that the farmers get funds and that they remain in this business. If the government does not intervene, they would experience losses and abandon the practice thus rendering them jobless. The government also does this in order to respond to other nations’ unfair trade practices. This is because free trade is not really fair as one country is seeking to protect its local industries at the expense of other foreign firms. They must therefore protect their industries by instituting tariffs and quotas (Golder, 2005)18 (1): 66-72. Social motives: There are certain social reasons why the government must intervene in international trade; this will include drug and human trafficking, illegal goods, moral erosion and pollution among others. Drug and human trafficking The government must regulate international trade in order to curb some problems that may be associated with it. Cases of illegal drug trafficking have been rampant over the period. Such drugs would freely move across borders if the government does not restrict their movement. The governments have come up with highly punitive measures for the culprits caught in the act. Some of the illegal drugs include cocaine, heroin and marijuana among others. Such drugs are known to have devastating health complications in human beings. Human trafficking on the other hand involves involuntary migration of people from one country to another. This is most common in third world countries especially among the children. The government must therefore remain very vigilant in fighting such crimes as well as protecting its citizens (Harris, 2008)25(18). Illegal goods The government may intervene in the international trade to restrict the movement of certain goods which although are not illegal, are harmful to the natural habitat. This will include game meat, hide and skins from various animals, tusks, horns and ivory from the wildlife. Elephants are poached for their ivory which is believed to be of high medicinal value. Continuous poaching of wildlife will render them as endangered species or extinct. The numbers of elephants have significantly dropped in most sub-Saharan countries due to illegal poaching. This wildlife is a major foreign exchange earner for these countries and the government would lose on this income if such wildlife is not protected. The government must therefore remain involved in the international trade. The government may also experience a massive brain drain of its citizens to other developed nation, although it will acquire remittances from such individuals it must put regulations to control the number of skilled labour leaving the country ( Kirpatrick, 2011) 36 (25). Pollution The rampant industrial and technological advancements have resulted into increased pollution in countries. Governments and other local authorities are involved in the regulation of gasses, solid matters and liquids being emitted into the environment. Foreign firms especially from the developed countries that move their operations into the third world countries are known to cause pollution to these countries. Oil spills have been known cause death to sea animals. Culture International trade facilitates movement of people which also results to exchange and adoption of foreign cultures. Some countries erode the cultural practices of others. The government must intervene international trade in order to regulate the some material that may not be beneficial to the state. This includes pornographic materials that should not be accessed by children under the age of 18 years. Other practices that are legal in some countries may be transferred in other countries where they are illegal. For example, prostitution is legal in Netherlands where as it is illegal in Kenya. The government must therefore through its legislative arm ensure that such rules are not broken as a result of international trade. It is therefore the duty of every government to clearly stipulate what is legal or illegal in a given country in order to guide international traders as rules and regulations tend to be different in different nations. It is important for countries to also maintain their heritage and culture. The developed countries which have attained technological advancements are often blamed for the brain wash of culture in the less developed countries. The traditional wear, food and beliefs such as the animal skin attires promote tourism and therefore the governments have to ensure that the same is not completely wiped out. Law and Language Different traders involved in international trade often are guided by different laws in their country. The government must therefore intervene to ensure that its traders are not treated unfairly under foreign laws. The governments also provide an avenue for traders who do not speak the same language in order to ensure that they are not dragged into unfair deals and thus committing themselves to voidable contracts. For instance the liability of good may differ in different countries if such goods are stolen or destroyed during transit. Conclusion Free trade is beneficial to customers as it provides an avenue for them to get an avenue for a variety of goods to choose from as well as reduced prices. Although a country will enjoy economies of due the specialization of certain products, regulations are important for the countries. Tariffs and taxes act a source of revenue to the government. However, the concept of regulation should be handled with care as trade between different countries is very crucial for economic growth and development. The government should however promote and protect the local industries in order to maintain high employment levels while reducing poverty. References: Kaplan, A. and Haenlein, M. (2010). Economics. Horizons 53 (1):59-68. Harris, k. (2008).Economic growth and development. Data alaysis 25(18) Kirpatrick, D. (2011). Modern Economics. The New York Times. 36 (25) Golder, S. (2005). International Trade. Business Horizons 18 (1): 66-72 James, z. (2002) Modern Commerce. Sydney, MacMillan 14 (2): 13-17 Dawson, M. (2009). Trade in Africa. Oxford: Oxford University Press. 36 (12) 37-33 Keating, P. (2000) . Economic Growth in Developing Countries. Sydney, Macmillan. 45 (3): 23-14 Colin, M. (2006). International Economics. Melbourne, MacMillan 56 (16) Oliver K. (2003) . Industriallization. Oxford: Oxford University Press 47 (13) Read More