Free Trade, Reasons for and Against Essay Example

Free Trade, Reasons for and Against Essay Example Free Trade, Reasons for and Against Essay Free Trade, Reasons for and Against Essay To Henry Clay â€Å"free trade† was pure fantasy. Clay thought â€Å"free trade† was an oxymoron. In 1832, he cried: â€Å"Free trade, free trade It never existed It never will. † Drawing on the theories of international trade to support your arguments, critically evaluate the case for and against free trade. â€Å"Free trade is the pattern of imports and exports that occurs in the absence of trade barriers. † (Wild et al. 2010) Free Trade zones have emerged on the scene as a planning tool to help boost economic development. They have their advantages but their policy pitfalls too. Free Trade as with most political and economic topics is very subjective and discussions can become heated. This is because opinions on the advantages and disadvantages of free trade depend largely on a person’s experience, personal beliefs and their knowledge about the issue. Some negative feelings come from misunderstandings of the subject of international trade. International trade is opening doors to new entrepreneurial opportunity across the world. It is also providing countries with a greater choice of goods and services while being an important engine for creating jobs in many countries. Trade theories are constantly being reviewed to try and improve the economy; however there will never be a method that will satisfy everyone and help those opposed to free trade see the benefits. Some of the key reasons why groups are opposed to globalistaion and international trade are because they blame it for eroding standards of living and ruining ways of life. However on the other hand supporters of international trade say it improves standards of living and makes possible new ways of life. Trade between many different groups of people has occurred for many thousands of years. : But it wasn’t until the 15th Century that people began to explain why trade occurs and how it can benefit both parties. Efforts to refine existing trade theories and to develop new ones still continue. Below is a timeline of when the main international trade theories were proposed. Trade Theory Timeline (Wild et al. 2010) The trade theory of mercantilism was developed in Europe in the 16th century. One of the main principles of mercantilism was that it was in a countries best interest to maintain a trade surplus by encouraging exports and discouraging imports. This was in order to accumulate financial wealth in the form of gold. A disadvantage of the mercantilist trade theory was that a nation’s well-being such as living standards or human developments was irrelevant to them and financial wealth was all that mattered. Government intervention and colonialism were another two key elements in implementing mercantilism. Governments actively intervened in trade to help maintain trade surplus, the governments of mercantilist nations did this by either banning certain imports or imposing various restrictions such as tariffs or quotas. Mercantilist nations also acquired territories around the world to serve as a source of inexpensive raw materials which they would ship back to their home nation and sell them as finished goods to the colonies. The trading between mercantilist countries and their colonies was a huge source of profit, which allowed them to build armies and navies to control their colonial empires and protect them against attack from other nations. Europe followed this economic way of life from the 1500’s to the late 1700s. The main mercantilist nations were Britain, France, the Netherlands, Portugal and Spain. Despite mercantilism being an advantage for any nation in relation to profit, implementing it was naturally flawed. Mercantilist nations believed that the world wealth was limited and therefore they could increase their wealth at the expense of its neighbors, called a zero-sum game. This causes arguments against international trade, if all nations blocked their markets from imports and force their exports onto other nations, international trade would become severely restricted and possibly cease to exist. In addition, charging nations little for their exports and charging them high prices for imports damages their economic development and therefore is unfair to developing countries especially. These negative aspects of mercantilism were made evident by the Absolute Advantage trade theory developed in the late 1700s. Adam Smith was the first to put forward the trade theory of absolute advantage in 1776. â€Å"An absolute advantage is the ability of a nation to produce goods more efficiently than any other nation. Therefore a nation with an absolute advantage can produce a greater output of a good/service than other nations using the same amount or fewer resources. † (Wild et al. 2010). Adam Smiths great contribution to human progress was that he recognized that the fewer impediments to trade there were, the richer everyone would become. He blasted them all royal charters, tariffs, cartels, monopolies. His opposition to restraints on trade made Smith free trades progenitor. (www. elegant-technology. com. 993) He believed international trade should not be banned or restricted and that it should be allowed to flow as dictated by market forces. The benefit of using absolute advantage trade theory allows countries to produce goods according to their ability and produce items in which they have absolute advantage and in return trade with other countries to obtain the goods it needs. Therefore each nation can increase its wealth according to market forces and as a result have a positive-sum ga me. Unlike the mercantilist trade theory absolute advantage measures a nation’s wealth by the living standards of its people and not by how much silver or gold it has accumulated. However, there is one potential problem with the absolute advantage theory, what happens if a country does not hold an absolute advantage with any product, will there be any benefits of trade or will it be able to continue? David Richardo an English economist expanded on Adam Smith’s free-trade idea by developing the theory of comparative advantage in 1817. He said that a country has comparative advantage when it is unable to produce a good more efficiently than other nations, but produces that good more efficiently than it can produce any other goods. For example, â€Å"The rapid increase in Australia-China bilateral trade stems not only from the fact that the two countries have both been experiencing rapid economic growth recently and reaping the benefit of trade liberalisation undertaken by both countries as part of the Asia-Pacific regional economic cooperation, but also from complementarity in the production and trading structure of the two economies. As an agriculture- and resource- based country, Australia exports its comparative advantage in agricultural and mineral goods, such as wheat, milk and animal product, textile fibres, iron ores and energy products to China, which provides China with low-priced raw materials for her industrial production. As a rapidly industrialising country, China absorbs raw materials from Australia and exports its comparative advantage in labour-intensive manufacturing goods, such as textiles and clothing, electronic products, and some general machinery to Australia, which in turn provides Australia with cheaper goods for consumption. Thus, Australia-China bilateral trade has been driven mainly by the two countries underlying comparative advantages, which forms a special pattern of international specialisation between the two countries. Such specialisation plays a key role in each countrys overall trade with the rest of the world. † (www. goliath. ecnext. com, 2008). The above example shows that when nations have comparative advantage and are allowed to trade freely then it benefits all nations in the long run by increasing their wealth and efficiency. Some economist say that by removing all the remaining barriers to trade would be a great advantage for countries as it would boost global income and greatly benefit developing nations. The theories of absolute and comparative advantage have some limitations in real-world application for example we assume countries are only driven by production and consumption, which is not always the case, we presume only two countries engage in production and consumption and obviously this cannot be the situation as there are more than 180 countries in the world and numerous products being produced, traded and consumed worldwide. Transport costs and other resources of production other than labour are not taken into account. Economic researchers continue to develop and test new hypothesis to explain international trade theories. In the early 1900’s Eli Heckscher and Bertil Ohlin took the theory of competitive advantage and redeveloped it. Their theory known as the Factor proportions theory focused its attention on the proportion of resources in a nation. They said that a country specializes in producing and exporting goods using factors of production that are most plentiful and those which are cheapest, not the goods in which it is most productive in. The next theory in the evolution of trade is the International product life cycle theory. Raymond Vernon put forward the theory for manufactured goods in the mid 1960’s. It suggests that a company will begin by exporting its product and later undertake foreign direct investment as the product moves through its life cycle. The theory also states that a country’s exports eventually will become its imports. This theory was developed for the US but it can be generalised and be applied to any developed and creative market. His international Product Life Cycle described an internationalisation process wherein a local manufacturer in an advanced country, which Vernon viewed to be the United States, begins selling a new, technologically advanced product to high income consumers in its home market. Production capabilities build locally to stay in close contact with its customers and to minimize risk and uncertainty. As demand from consumers in other markets rises, production increasingly shifts abroad enabling the firm to maximise economies of scale and to bypass trade barriers. The international product life cycle follows three stages, the new product stage where it may need protection, then into the maturing product and finally standardized product. â€Å"As the product matures and becomes more of a commodity, the number of competitors increases. In the end, the innovator from the advanced nation becomes challenged in its own home market making the advanced nation a net importer of the product. This product is produced either by competitors in lesser developed countries or, if the innovator has developed into a multinational manufacturer, by its foreign based production facilities. ( www. provenmodels. com, 2005) Following on from the International Product Life Cycle theory, another theory emerged during the 1970’s and 1980’s to explain trade patterns. This was called the New Trade Theory. According to (Wild et al, 2010) this theory states three things; that there are gains to be made from specialisation and increasing economies of scale, th e companies with first mover advantage in the market can create barriers to entry and finally government may play a role in assisting its home companies because the theory emphasizes productivity rather than a countries resources. This theory is in line with the theory of comparative advantage and but is at odds with factor proportions theory. However there are implications of the new trade theory, as productive efficiency may not be the result of factor endowments or specific national qualities, instead it may be the result of the first mover advantage. New theory factor doesn’t contradict competitive advantage, rather it identifies an element of it; the ability to move first and it has an extension of this in that it states that governments should consider strategic trade policies. In return these policies could nurture and protect firms where first mover advantage and economies of scale are likely to be important, as some may end up as global winners. The final theory to be developed was put forth by Michael Porter in 1990 and this theory was to explain why certain countries are leaders in the production of certain products. Porters National Competitive Advantage theory states that a nations competitiveness in an industry depends on the ability to be innovative and upgrade. Porter’s theory developed upon existing theories whilst also making new discoveries in regards to trade. Below is the Porter Diamond diagram which he used to demonstrate four elements that vary in nations and that form the basis of national competitiveness. (Porter and Martin, 2001) Firms are likely to succeed when all the factors of the diamond are present. There are two things that can influence the diamond and they are chance, major innovations and technology and secondly the governments can have a huge influence in regards to the introduction of new regulations, investments’ and developing an infrastructure. Nokia is an example of Porters Diamond working effectively, all elements for Nokia were in place for it to be successful in Finland and then it was able to go global. It is understandable why people are against globalisation especially when local firms are closing down and moving to areas where labour and materials are cheaper and people in the local economy struggle to find employment and pay mortgages and other daily bills. A local example of this was the closure of Seagate’s Limavady plant in 2007 which was a massive blow to the town, the Ulster economy and the ambitious plans to grow Northern Irelands knowledge ndustry. It had a workforce of around 2,100 in the province and it spent almost ? 60m a year in the Ulster economy, it transferred its plant to Malaysia in South East Asia. (www. belfasttelegraph. co. uk , 2008) Those against the globalisation of trade say that it eliminates jobs in developed nations especially manufacturing jobs, they criticise good-paying manufact uring jobs abroad to developing countries where wages are a fraction of the cost for international firms. However they admit importing products from china and other countries and lower consumer prices for goods such as televisions and sporting goods is a little consolation for workers who lose their jobs. Companies constantly are pursuing low-cost goods, and they force suppliers to move to china and other low-wage nations. Lower wages and the exploitation of workers in developing nations are another two major concerns for those against globalization. They say it causes decreased employee morale, loyalty and job security and it causes fear in home nations of any additional lowering of trade barrier. The arguments for and against globalisation also cover the arguments that can be presented against free trade. However there are numerous other influences to reinforce the pros and con’s of free trade. There are many key arguments against free trade; the first is the ‘infant industry argument’ it entailed that if developing countries have industries that are relatively new, the infant industry argument suggests that an industry may be developed under the umbrella of the government’s temporary protection as it may struggle against international competition. It’s thought by some economists that the best way to tackle the matter is by limiting importation of similar goods into the country, and this is usually addressed by a government that imposes  tariffs or limits, that make imported goods less attractive or available to consumers in the less industrialized countries. However if they invested in the industry then in the future the infant industry may be able to gain competitive advantage. This shows that competitive advantage can change over time and therefore protection would allow them to progress and gain experience to enable them to compete in the future with international industries. The second arguments I have found against free trade is the ‘Senile industry argument’, this argument says that if industries are declining and inefficient they may require large investment to make them efficient again. Protection for these firms would encourage them to invest and reinvent themselves. However protectionism could also be an excuse for protecting inefficient firms. Countries than have to rely on agricultural products have several disadvantages as the price of their primary products in which they have competitive advantage can fluctuate due to environmental factors and goods have a low income elasticity of demand, therefore with economic growth demand will only increase a little. It is argued that free trade can harm the environment because less developed countries may use up natural reserves of raw materials to export. Also countries with strict pollution controls may find consumer import the good from other countries where legislation is lenient and pollution allowed. However, supporters of free trade would argue that it is up to the individual countries to create environmental legislation. According to the (BBC, 2003) free trade is an advantage to the environments as it enables production to occur in places where it is most environmentally appropriate. For example, most aluminum is produced in places where there is plentiful hydroelectric power, which is less resource intensive than gas or coal. Therefore the gains from trade are environmental as well as economic. Free trade is blamed for many problems in the world, rightly or wrongly, it’s a matter of opinion. Nevertheless a lot of the arguments against free trade encourage the argument for those who seek to carry on controlled trade. As well as being seen as good for the environment free trade is a benefit for poorer producers also. Most trade barriers, whether they are tariffs, quotas or subsidies hurt producers in poor countries most. A tariff has two effects; it reduces the amount of the products sold and also the amount that is received by the people making the product. By reducing trade barriers it will increase consumption. The comparative advantage by countries specializing in the production of goods is an advantage of free trade as nations continue to have a lower opportunity cost and therefore increase in economic welfare for all countries. Having comparative advantage also means that countries can benefit from economies of scale and lower average costs; the ultimate benefit of economies of scale is for the consumers as prices will be lower. Free trade provides an engine for economic growth and promotes a healthy economic climate, it allows firms to become more competitive internationally nd this also benefits the consumer as it prevents domestic monopolies from charging too much. The final argument of free trade depending on people’s personal opinion can be seen as an argument both for and against. The use of surplus raw materials in countries in areas such as the Middle east are very rich in oil reserves and without trade there would be no benefit for them having so much oil. As well as this Japan has very few raw materials and without trade it would be very poor. Despite the advantages and disadvantage of open and free trade among nations, governments have long intervened in the trade of goods and services. The do this for reasons that are political, economic or cultural, sometimes it can be a combination of all three. In tough economic times businesses and their workers often lobby their government for protection from imports that are eliminating jobs in the domestic market. Trade can be restricted by introducing quotas, tariffs and currency controls. In the past there had been many attempts to develop a global trading system. There was the General Agreement on Tariffs and Trade (GATT) which was a treaty initially designed to promote free trade by reducing both tariff and non-tariff barriers to international trade. The ground rules of the GATT resulted in many ‘rounds’ of negotiations among its members. In the early years they were short and straight forward but later grew to be long and complex. The Uruguay round of negotiations developed the existence of the World Trade Organisations and this would be the international organisation that would regulate trade between nations. The three main goals of the WTO were to help free flow of trade, help in negotiations for further opening markets and to settle disputes between its members. The WTO is still the international organisation that regulates trade and they still continue to help in negotiations. Conclusion Is free trade only a theory? In the economic history of the world there has never been completely free trade, barriers to trade between countries has always existed in an attempt to provide advantages for domestic providers. But the world has moved towards more open markets which I think is good if barriers can be reduced. Taking into consideration the advantages that free trade provides for all nations in increasing their economic welfare and standards of living. It is an engine for economic growth and promotes a healthy economic climate, it allows firms to become more competitive internationally and this benefits the consumer as it prevents domestic monopolies from charging too much. â€Å"The debate over open markets has changed markedly in tone and substance. Support for liberalisation has eroded in some segments of civil society in recent years because of concerns about jobs, wages, the environment and national sovereignty. Waning support points to a deficit in communications and in policy. The communications deficit can be remedied if the proponents of open markets explain clearly what trade and investment can and cannot do and what liberalisation is and is not responsible for. But it is not sufficient to point to incontrovertible evidence that liberalisation creates wealth or to the social and economic costs of failure to adjust to changing conditions. It is also necessary to confront the worries of citizens who are adversely affected by change. The challenge for policy-makers is thus to design policies to help citizens and communities take advantage of the ongoing, unprecedented, technology driven structural transformation of national economies, a transformation in which trade and investment play a part, but only a part. † ( www. oecd. org, 1999 ) Reference List. Wild, J. J. AND Wild, K. L. AND Han, J. C. Y. , (2010) Page 198 International Business: The Challenges of Globalization. 5th ed. New Jersey: Pearson Education Inc. Wild, J. J. AND Wild, K. L. AND Han, J. C. Y. , (2010) Page 179 International Business: The Challenges of Globalization. th ed. New Jersey: Pearson Education Inc. Wild, J. J. AND Wild, K. L. AND Han, J. C. Y. , (2010) Page 180 International Business: The Challenges of Globalization. 5th ed. New Jersey: Pearson Education Inc. Larson, J. , (1993) The History of Free Trade [online]. Minnesota. 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