The Role of International Organizations in Regulating Trade between Countries - Essay Example

Analyse the validity of the objections to free trade and critically discuss the role of international organizations in regulating trade between countries. Show how the control of trade has impacted positively or negatively on a company of your choice. Contents Contents 2 Introduction 3 Free Trade 3 Restrictions to Free Trade: Tariffs, Taxes and Patent & Copyrights 4 Arguments for free Trade 5 Arguments against Free Trade 5 Regulators of Free Trade 6 Groups Opposing Free Trade 7 Tesla motors’ Trade Barrier in China 7 Conclusion 9 Reference List 11 Introduction The concept of free trade is based on the notion of comparative advantage for both parties, those who participate in free trade. The theory was promulgated by Adam Smith and further developed by David Ricardo. As per the notion of free trade, it is believed that countries that enjoy a comparative advantage, in producing a particular commodity, can freely provide their products to other countries. The other countries can in turn provide those products for which they enjoy a comparative advantage (Davis and Neacsu, 2001). Such mutual exchange of products and services between countries has been designed to increase prosperity of participating nations. This raises the standard of living of these nations through supply of goods that are not available, thereby, increasing competition. The paper is aimed at building an understanding of the concept of free trade through careful analysis of its pros and cons and also, the different aspects that hinder trade. The paper identifies the present regulators of free trade as well as the groups, which oppose free trade among countries. The review of free trade shall help to establish the view regarding how free trade is supported and recognize the potential roadblocks on the way of its complete implementation. The paper moves on to discuss the endeavour of organizations to conduct free trade and the problems faced during such an attempt through barriers to free trade in a country. The paper concludes in an argument, derived from the analysis, over the judgement of success of free trade. Free Trade Free trade is defined as a government policy where there exists no discrimination in imports and no interference is observed on the exports. The free trade policy does not imply that the governance of the country gives up or abandons all control and taxes over imports and exports; rather, it explains the role of government where it refrains from any action that might hinder international trade in any way. These actions include barriers, in terms of tariffs, quotas imposed on imports and restrictions exercised in currency. The theoretical base for free trade comes from Adam Smith’s theory of division of labour, which in turn lead to specialisation in countries, which is the cause for higher efficiency and aggregate production. Such division of labour is fostered, so as to allow one country to produce whatever it can do best, thereby gaining international competitive advantage in the global market. Restrictions to Free Trade: Tariffs, Taxes and Patent & Copyrights Tariffs are trade restrictions in the form of taxes, which are levied on imports of goods and services from foreign countries and are viewed detrimental to free trade. Such tax barriers can sometimes be quite harmful to a country’s economy. Smoot-Hawley Tariff Act, implemented in 1930, had pushed the average tariffs to about 60%. It has been accused to be a major contributor to the Great Depression that had followed. Hence, tariffs must be imposed with proper caution and analysis. In the absence of any tariff, the price of goods will be the same internationally. It is also beneficial for consumers because they shall now be able to buy products at a cheaper price, compared to with tariff imposition. Competition shall also reduce prices on the domestic front from producers, who produce similar products. A tariff tries to limit imports with the view to protect the interests of domestic producers, by limiting foreign competition. A tariff tries to raise the price of a product beyond the one at which market reaches the equilibrium. This in turn acts towards decreasing demand for the product, thereby lowering the supply of foreign goods (Gorman, 2003). Non-tariff barriers to trade include quotas restrictions and regulations on product quality and content, patents and copyrights. Product standards are probably the most common among non-tariff barriers. For example, United States does not allow for unpasteurized cheese imports from France, for the purpose of health protection of its people and also, to protect the domestic cheese producing industry. Quotas limit the supply of foreign merchandise to a certain specified quantity and this shortage raises the price beyond market equilibrium, thereby decreasing demand. Patents hinder, rather than promote, free trade. Patents in the pharmaceutical industry protect the interest of the innovator, but deprive poorer countries from life saving drugs and also, hinder free trade of those. These patent restrictions do not promote innovation in the field and thus, hinder product development and trade. Patents often raise the price of products, which makes them inaccessible for all and is, therefore, an enemy to free trade (The Economist, 2002). Other regulations like, shipping norms, packaging regulations, airport and harbour permits and long-drawn customs, hinder free trade and are anti-imports. Arguments for free Trade The fundamental argument for free trade is that it creates specialisation within countries, which are mutually beneficial for trading countries. Economists favour free trade because they believe that free trade allows high quality products to more people, than what it would been in the absence of free trade. With specialisation, greater number of goods can be produced. With the help of trade, each country can consume what it wants in larger quantity. Production also gets maximised and every nation produces on their efficient frontiers. Free trade allows countries to develop a comparative advantage, where government restrictions are minimal. Countries have difference in the opportunity cost associated with the production activity, which allows one country to produce a product better than the other. In this case, the country can specialise in production of that particular commodity alone, thereby gaining a competitive vantage. For example, Japan has a competitive lead in technology-based products. Free trade allows production to be carried out in scale that helps to reduce costs to the minimum. This also allows a greater variety of the same product, which brings in competition and promotes innovation (McGrath, 2009). In the long run, lower prices of products help to increase standards of living across the globe. This might appear as oversimplification because the analysis leaves out transportation costs, quality difference; demand for product; and issues of national security. Despite so, each country does enjoy a definite comparative vantage and some form of real benefits accrued to free trade. Arguments against Free Trade The conclusion, advocating that free trade enhances economic welfare, makes assumptions while doing so. Nonetheless, a number of arguments crop up in retaliation to the validity of free trade benefits and applicability of free trade arguments. It is argued that free trade leads to dismantling of domestic industry, when international competition provides similar products at a much lower cost. Additionally, such intrusion into the industry also leads to taking down ancillary businesses, which supported the primary industry that faces international competition. Those against free trade also argue that infant industries need government protection at early stages in order to grow and become stronger. Such protection can come about only with restrictions and barriers to free trade. However, advent of international producers also brings in better technology and production techniques, while they kill those nascent industries at their learning curve. For the purpose of national security, some countries argue that they cannot rely on those with potential hostility for essential goods and services. Hence, they feel the need to protect their industries for security of the nation. Other proponents had also put forward the view that they can use quotas, tariffs and such restrictions to threaten international negotiations. This is done to protect nation’s best interest. Moreover, people argue that it is unfair if same rules of competition are applied to every nation. Developing nations want to keep their prices low and grow within, through development of domestic industries and therefore, might not support free trade. To summarise, arguments against free trade are not convincing enough to rule out the benefits accrued by countries through the same (Beggs, n.d.). Regulators of Free Trade The World Trade Organisation or the WTO is the apex global governing body for regulation of free trade among nations. This organization regulates trade between countries who come together with a motive of participating in trade. The WTO also offers a framework to negotiate between participating countries and lays down the procedure for formalised trade agreements. The work also involves dispute resolution, in the event of any trade related issues between parties and enforces rules as per WTO agreements, which were initially signed by the member countries and duly ratified by the parliaments. WTO issues focus primarily on derivatives of the Uruguay Round. Prior to the WTO, the General Agreement on Tariffs and Trade had established guidelines for regulating trade among nations by multilateral agreements that reduced tariffs. The GATT worked well, but was not free from limitations. GATT achieved a significant decline in trade tariffs and was replaced by the WTO in Uruguay Round, in 1986, with a view to liberalise trade in agriculture, apparels and textiles. Although WTO is the most important and relevant institutions, governing trade between and among nations, yet the present era has a host of FTAs (Free Trade Agreements) and RTAs (Regional Trade Agreements) that have proliferated within the system. The FTAs have been initiated to minimise tariffs by way of free movement of goods and removing restrictions on capital through such trade. The RTAs encompass over 50% of international trade agreements, working alongside global multilateral agreements, under the purview of the WTO. Such agreement might not necessarily be between countries of a particular region (Malkawi, 2011). Groups Opposing Free Trade Arguments against free trade are put forth primarily by managers and labourers. These two special interest groups have arguments that do not favour free trade between countries. Both labour unions and the management oppose free trade for various reasons. For labour unions, free trade takes away jobs of labourers and makes them worse off. It is argued that if a country loses 5000 jobs in the auto industry, then 5000 people shall be worse off. Even so, the counter-argument put forth is that there are innumerable houses that shall benefit from lower priced automotives, which arrive as a result of loss of those jobs due to advent of foreign automotive manufacturers with competitive advantage (Infoplease, n.d.). Management argues that advent of foreign corporations takes away their profits and hence, trade. It is put forward that foreign multinationals, with a competitive advantage in production of a particular product, shall provide similar goods at a much cheaper price than that offered by domestic manufacturers. So, consumers will quickly shift to the cheaper product with similar product features. This might eat away their profits and even business. Therefore, free trade is detrimental to their business. The argument can be contradicted by the fact that cheaper products will bring in the necessary technology required for production of cheaper goods and thus, increase competition. Such competition shall further induce price wars, which shall allow more consumers to be better off. Tesla motors’ Trade Barrier in China For the purpose of our analysis, we shall examine the problems faced by Tesla in China. Tesla is an automotive giant that specialises in production of luxury electric cars and is based in Palo Alto, United States of America. Tesla motors have annual revenue of US $413 million as per 2012 reports and employs about 6000 people. The company tried to enter the Chinese market in order to produce and sell electric cars of its luxury make there. It also joined hands with few Chinese manufacturers for the supply of necessary parts, required for production of Tesla cars in China. This trade entry was done with a view to tap the potential in the elite Chinese market, where pollution was so high that demand for electric cars seemed very evident. Also, the Chinese government had been providing subsidises and a lot of government support to manufacturers of electric cars with a view to fight the pollution problem in China (Shirouzu and Shen, 2013). However, Tesla faced a non-tariff trade barrier in the country. Ownership of Tesla’s logo and trademarks had been taken by a local Chinese auto manufacturer, who claimed the rights to intellectual property and had sued Tesla for infringement of its logo and trademark. The company is now fighting a case for its trademark and logo in China. Since 2012, the United States of America has been filing complaints with the WTO against China regarding rare earth elements and automotives. The trade deficit of USA reached to $315 billion in its trade with China, as per reports of the Census Bureau. It accused China for having weak protection of Intellectual Property rights. Trade barriers in China include tariffs, localisation, export subsidies and corruption. The country favours the domestic industry at the expense of foreign multinationals and is moving increasingly towards localisation (Wingfield, 2013). The local automaker owning Tesla’s logo and trademark in China also enjoys and reflects the prevailing weak protection of intellectual property. The country wants to promote local auto manufacturers and as a result, cheap copies of Tesla’s cars are being manufactured in China. Tesla finds China to be a huge market and has two ways to get back in operation. It has to either fight the long and costly legal battle to win its trademark and logo or it can buy the logo and trademark from the local owner in China and avoid legal proceedings. Last year, Apple Inc. had to pay $60 million to buy the name, iPad, which had been bought by a local tech company about a decade ago (Young, 2013). Such cost bearings to fight legal proceedings or to buy out trademarks and logo in China shall block cash, which might otherwise be used in plant establishment. The trademark problem has also stalled the company’s plant establishment, thereby delaying production processes. Time lag might also let other domestic car manufacturers capture the market for electric cars in China. Conclusion The globalised world of today views trade as one of the most powerful sources of connecting lives. It is also viewed as a source of unprecedented wealth. Global trade has had restrictions, since the colonial times, in the form of taxes, bans and tariffs. Such taxes have increased cost prices of imported goods or exported products and henceforth, their relative selling price for the country to which it is imported. Bans protected the British textile industry from nations that could pose as serious threats. Trade barriers and tariffs can also discriminate against poor countries or be in favour of the same (EthicalFashionForum, n.d.). The case of China is somewhat similar. China resorts to putting barriers to trade from multinationals through non-tariff modes. They exercise intellectual property and trademark bindings for foreign multinationals for the purpose of protecting small domestic industries, thereby allowing them to thrive and grow, without being run over by large multinationals. Chinese government is intensely protective of its domestic industries and offers preferential treatment to them. From the analysis of Tesla’s experience in China, it is evident that China wants domestic industries to develop along with Tesla and then gain benefits of competitive advantage, in terms of lower costs of production of Tesla cars as well as local manufacturers. The primary cause behind establishing a plant in China for Tesla is to share the huge market and also, benefit from cheap labour and low cost of production. China wants to borrow Tesla’s technology and share benefits by producing such cars locally. Global interaction is the basis of economic progress of countries all across the globe. No country can work or exist in isolation. Trade, communication, migration and transfer of technology have helped in a huge way to eradicate poverty and slow progress of countries, due to lack of any one of those. Despite this, trade and tariff barriers are loathed and seen as nasty measures, which hinder profits as well as industrial development across the world. It can be seen that free trade has been successful, yet the income distribution has not been as desired. What is needed today is creation of conditions, which allow for a fairer and fuller share of the numerous benefits derived out of free trade. With use of a market economy and enactment of antitrust regulations and patents, such motives can be achieved. The market economy shall then automatically generate better prices, terms of trades and income redistributions (Watkins, 2002). Reference List Beggs, J., n.d. The Arguments against Free Trade. [online] Available at: [Accessed 29 January 2014]. Davis, M. H. and Neacsu, D., 2001. Legitimacy, globally: the incoherence of free trade practice, global economics and their governing principles of political economy. UMKC Law Review, 69, pp. 733-49. EthicalFashionForum., n.d. Trade Tariffs and barriers. [online] Available at: [Accessed 29 January 2014]. Gorman, T., 2003. The Complete Idiots Guide to Economics. New York: Penguin USA. Infoplease., n.d. Arguments Against Free Trade. [online] Available at: [Accessed 29 January 2014]. Malkawi, B. H., 2011. Rules of origin under US trade agreements with Arab countries: Are they helping and hindering free trade? Journal of International Trade Law and Policy, 10(1), pp. 29-48. McGrath, J., 2009. Arguments for and against Free Trade. [online] Available at: [Accessed 29 January 2014]. Shirouzu, N. and Shen, S., 2013. Electric carmaker Tesla hits roadblock in China over trademark. [online] Available at: [Accessed 29 January 2014]. The Economist., 2002. How poor countries can avoid the wrongs of intellectual-property rights. [online] Available at: [Accessed 29 January 2014]. Watkins, K., 2002. Rigged Rules and Double Standards: Trade, Globalisation, and the Fight against Poverty. [online] Available at: [Accessed 29 January 2014]. Wingfield, B., 2013. China Cited by U.S. for Trade Barriers on Autos, Steel, Beef. [online] Available at: [Accessed 29 January 2014]. Young, A., 2013. Tesla Motors’ (TSLA) Trademark Problem In China: What Multinational Companies Can Learn From Tesla About Securing A Trademark On The Mainland. [online] Available at: [Accessed 29 January 2014]. Read More