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The Benefits And Drawbacks Of Free Trade Economics Essay

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Published: Mon, 5 Dec 2016

Free trade is a system in which goods, capital, and labor flow freely between nations, without barriers which could hinder the trade process.

It is opening up of economies (markets) by bringing down trade barriers which in turn allows goods and services from everywhere around the globe to compete with domestic products and services.

Under free trade there is no creation of artificial prices or a false demand and supply of products as it gives true picture of the actual demand and supply.

And according to the law of comparative advantage the policy permits trading partners mutual gains from trade of goods and services. This means a country can specialize in producing goods or services where they have comparative advantage that is to produce at a lower opportunity costs and this specialization can bring about gains from the trade to the country such as

Lower prices for consumers

Greater choice of Goods

increased export markets for growing firms

Economies of scale through being able to specialise in certain goods

Increased competition

1:2 Features of free trade.

Free trade indicates the below features

Free movement of Labor and Capital between and within countries

Free access to markets and market information

Trade of goods or services without taxes (including tariffs) or other trade barriers such as quotas on imports or subsidies for producers.

Absence of “trade-distorting” policies such as taxes, subsidies, regulations or laws that give some firms, households or factors of production an advantage over others.

Inability of firms to distort markets through government imposed monopoly or oligopoly power.

1:3 Institutions which promote Free Trade

There are three institutions that support countries and their trade

World Bank – aids developing countries in their economic development by Providing financial support for developing countries and Helps smaller firms by investing in infrastructure

International Monetary Fund – promotes economic stability through monetary mean by stabilising currency exchanges through the release of special drawing rights (SDRs) and even though it does not directly favour smaller firms, but helps reduce economic instability which would injure small firms first

WTO – promotes free trade and regulates on trade disputes by providing progressive free trade through negotiation binding and transparent agreements which leads to fair competition, settling disputes as well as providing temporary protection of infant industries to specifically help small firms.

1:4 Free Trade Areas

Group of countries which have agreed to eliminate tariffs, quotas on most goods and services traded to them form a union called Free trade area. This allows the agreeing countries to focus on their competitive advantage to freely trade on the goods /services they lack the experience at, thus increase efficiency and profitability of each country.

Below is the list of some free trade agreements

North American Free Trade agreement (NAFTA)

Common Market for Eastern and Southern Africa (COMESA)

ASEAN Free Trade Area (AFTA)

Southern African Development Community (SADC)

Central European Free Trade Agreement (CEFTA)

Greater Arab Free Trade Area (GAFTA)

1:5 Foreign Market Entry Modes.

The Decision of how a company from one country can enter a market of another country can have a significant impact on the results. This is because the entry modes into a foreign market differ in degree of risk at hand, the control and commitment of resources they involve and the return on investment they assure

There are two major types of entry modes, equity and non-equity modes.

Non -equity modes

Exporting-which is a process of selling goods or services produced in one country to other country.

Licensing-which is an international licensing agreement that allows foreign firms, either exclusively or non-exclusively to manufacture a proprietor’s product for a fixed term in a specific market.

Franchising-which is a system in which semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system.

Equity modes

Strategic Alliances-which is a a variety of cooperative agreements between different firms, such as shared research, formal joint ventures, or minority equity participation

Wholly owned subsidiaries (WOS)-which includes Greenfield investments (establishments of a new wholly owned subsidiary) and acquisitions.

Direct Investment (FDI)- which refers to net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor

2: GLOBALIZATION AND FREE TRADE

Globalization is similar to what free trade stands for which is the integration of world economies through the reduction of barriers to the movement of trade, capital, technology and people

This has been fueled by two main factors, the first one being the technological advances which lowered the costs of transportation, computation and enhanced communication which would help a growing company to locate different phases of production in different countries and the other factor being the liberalization of trade and capital markets.

Most governments have reduced restrictions on international movements of products and services, for mainly the reasons below

Their citizens want a greater variety of goods and services at lower prices

Competition drives domestic producers to become more efficient.

They hope to induce other countries to lower their barriers in turn.

And that’s where institutions such as the WTO emerged to play important roles in order to help the countries involved to promote free trade in place of protectionism.

This has made to prove some economic growth in e developed countries and some developing countries because not all developing countries are equally involved in globalization because most developing countries have been somewhat slow to integrate with the world economy.

2:1 Free trade in Developed countries

The biggest volume of trade occurs between the developed countries because they are capital- rich and therefore industrial leaders. Generally, as a country matures economically, its participation in foreign trade grows more rapidly than its GDP.

Developed countries as well because of globalization have managed to benefit from free trade by increasing inward investment, many firms manage to relocate to developing countries where they can find cheaper labor / raw materials for example many firms relocated their call centres to India because of cheap labor which is available there and thus increase in their market share and forces out local retailers, leading to less choice for consumers and less cultural diversity.

2:2 Free trade in Developing countries

Most developing countries were forced to join in free trade agreements due to globalization and the countries which embraced trade liberalization have seen several impacts which aggregate growth faster and improved way of life to its people.

Since many developing countries have abandoned protectionism in favor of freer trade in order to benefit in a way that enables them to develop competitive advantages in manufacturing of certain products. This is due to increased competition between different firms and countries which puts pressure on firms to increase efficiency and offer better products.

Free trade has also created employments in developing countries because rich companies invested in the countries due to availability of cheap labor for example many firms from developed countries have relocated their call centres to India because of that.

As well as availability of raw materials, for example Tanzania is the only country in which you can find Tanzanite gemstones by freeing the trade this gemstone is available for customers in other countries as well.

3: BENEFITS OF FREE TRADE TO THE COUNTRIES

One of the benefits of free trade is stated in the law of comparative advantage which says that a country should specialize in goods / services that it does best and trades it with other countries for its needs. This represents a true demand and supply of the market. This is true because when countries specialize in certain goods that are good at producing, they can take advantage of economy of scale and produce their goods at a lower production costs.

Free trade also leads to increase in both exports and imports which will make more products to be available in the countries involved and this will bring about healthier competition among growing businesses and in turn will prevent monopolies within them.

Free trade also increases economic growth and reduces cost of living since it does away with government interventions such as tariffs and taxes which allows the products and services to be available to consumers at lower costs as well as bringing about good relationship between countries involved which leads to healthier domestic governance and peaceful international ties.

4: FREE TRADE OPPORTUNITIES

4:1 Opportunities offered by free trade Agreements

Since Free trade is a tool for promoting fair competition and encourage foreign government to adapt open transparent rule making procedures as well as non discriminatory laws and regulations, it strengthen the business climate by eliminating commitments on issues of concerns along with reduction and elimination of tariffs which in turn give rise to opportunities for companies to do business.

These opportunities available by freeing the trade are mentioned

Absence of government control

Open new market and lower trade barriers

Protection of intellectual property rights

Access to government procurement contracts

Free movement of people such as workers and capital

Enhancing rules on foreign investments

Fair trade competition

Access to cheaper, more sophisticated and new types of intermediate inputs (raw materials, labour)

4:2 How opportunities created can be exploited by a growing business.

Growing businesses rely heavily on negotiated Free trade Agreements to ensure lower tariffs and transparent regulations as the opportunities to reach new market are there.

4:2:1 Absence of government control

By absence of government control it means that the country economy is market economy where by the prices of goods and services are determined in a free price system, which is good for business as the government will not be able to set the price but in reality there is no any country which is operating in purely market economy, most countries practice mixed economy in which there is some degree of government ownership and control.

4:2:2 Open new market and lower trade barriers

Free trade agreements help open markets and expand opportunities for growing business as it can help them enter and compete more easily in the global market. Many small businesses face variety of trade barriers that limit their ability to compete, by lowering tariffs and no-tariffs barriers the trade of goods and services would increase and these small businesses would be able to expand and compete because the tariffs and non tariffs are major competitive obstacles for small business since many of them do not have the capital or resources to pass complex barriers and compete.

4:2:3 Protections of intellectual property rights

Intellectual property refers to creativity and innovative expertise of a new product, service or idea and is protected in the form of patents, copyrights and trademarks. These ideas are the lifeblood of many businesses and the key that differentiate their products or services from competitors.

By protecting it gives right to control and derive the benefits from writing (copyrights), inventions (patents) processes (trade secrets) and identifiers (trademarks) to the registered owner.

A registered owner can decide who may use it for another purpose (eg manufacture of a product). This will help growing businesses gain competitive advantage.

This means protecting intellectual property is critical to country’s economy, jobs, and consumers.  A violation of intellectual property laws directly affects a company’s brand, market share, bottom line, ability to export, and creates a number of safety concerns for consumers. 

4:2:4 Access to government procurement contracts

Free trade gives growing businesses access to government procurement contracts ,this is when the government does the procurement of goods and services on behalf of a public authority, such as a government agency. And it is based on the principles of openness, transparency and non-discrimination, which apply to Parties’ procurement covered by the Agreement, to the benefit of Parties and their suppliers, goods and services. Growing businesses can benefit on this and even when businesses could not afford to operate additional operations outside their countries they can rely on established suppliers within their countries.

4:2:5 Free movements of people such as workers and capital

Free movement of people and capital is guaranteed by the Internal Market which is intended to be conducive to increased competition, increased specialization, larger economies of scale, allows goods and factors of production to move to the area where they are most valued, thus improving the efficiency of the allocation of resources

This means workers have the right to move to a different Member country, to look for work and be employed under the same conditions as nationals of that country

One reason often given for the need for liberal regulations on the international movement of labour, especially into developed economies, is that the locals don’t want to do the jobs which others are only too happy to do. Examples low paid work (e.g. housekeepers). Many citizens of the countries are generally unwilling to take such work. Therefore by freeing movement of people growing businesses would be guaranteed to get workforce needed.

International free movement of capital is also another means by which growing businesses can benefit from, they can buy and sell shares in companies in countries where they are not operating and can acquire companies in other countries, or sell their company to a person or group from another country. It is intended to permit movement of investments such as property purchases and buying of shares between countries.

4:2:6 Enhancing rules on foreign investments

Free trade also enhanced rules on foreign investments since before the FTAs investors (such as growing businesses) were faced with regulations and restrictions on FDI. Free trade agreements liberalize FDI policies in FTA partner countries. The provisions on FDI in FTAs are meant to give investors of the contracting parties more concessions in doing businesses in the contracting countries of the FTAs. These include easier market access and the right of establishment, the rendering of national treatment and the regulation of performance requirements such as local content and employment. However, FTAs still contain several safeguard measures that also include restrictions on foreign direct investments based on laws at the national level.

4:2:7 Fair trade competitions

Free trade as well promotes fair competition between businesses of the countries involved, FTAs lead to a system of rules dedicated to open, fair and undistorted competition. These rules on non-discrimination and national treatment are designed to secure fair conditions of trade as well as those on dumping subsidies. These are complex matters and governments are imposing rules of what is fair or unfair by charging additional import duties to compensate for damage caused by unfair trade. This assures growing businesses that the unfair play between businesses in the countries involved especially from larger businesses will not be possible.

4:2:8 Access to cheaper, more sophisticate and new types of intermediate inputs

And Lastly Free trade ensures growing business with access to cheaper raw materials. Thus free trade is an advantage to manufacturing businesses as it can guarantee access to a large supply of raw materials at minimum prices which will enable manufacturers to reduce costs and become more competitive in markets around the world. This will bring high competition which will force growing businesses to be efficient and innovative which are keys to profitability and prolonged existence.

As well as businesses can relocate certain process of their operations to a certain location within the FTAs countries in look for cheaper labour. For example many firms relocated their call centres to India because of cheap labour which is available there.

5: CONCLUSION

We have seen that growing businesses are the most important elements to the economic growth of the country, and that the opportunities to expand into foreign markets are there of which a growing business can take advantage of and learn from other businesses especially larger ones.

There are opportunities such as advantage of economy of scale, increased imports and Exports as well as to take advantage on government procurement systems which would help a growing business to expand further since growth of a business is important for sustaining its viability, dynamism and value enhancing capacity.

6: RECOMMENDATIONS

Since the opportunities are there and favorable for the growing business to enter a foreign market, I recommend that a growing business such as manufacturing business should explore these opportunities and learn from larger manufacturers especially technologically.

This will help to increase efficiency, profitability and manufacturing better goods to its customers and succeed in the industry competition as well as gaining a competitive advantage which will help the growing business becoming a larger business world wide.


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