Benefits of Free Trade - Essay Example

Essay Global Political Economy “To what extent can free trade be viewed as beneficial to economic development?” Submitted by: Submitted to of tutor) Business May, 2015 Global Political Economy – “To what extent can free trade be viewed as beneficial to economic development?" Free trade is a branch of globalization that is governed by a treaty between two or more countries to establish a free trade area where goods and services can be exchanged and served across its common borders, without tariffs or hindrances. Trade agreements have been entered into between countries for a long time already, so that it is interesting to know if free trade has been beneficial to economic development, and to what extent? Benefits of Free Trade In the strength of globalization today, policy makers, analysts and economists ascribe that free trade is a source of growth and benefits. World Trade Organizations (WTO) , European Commission, US Trade Representative and Fronning, 2005 are all conclusive that countries derive benefits. I believe there are benefits to free trade because according to Bordeaux D, 2015 and WTO, (trusted information): Free trade encourages growth and jobs since lowering trade barriers is good for employment. However, it is noted that as trade expands ,some jobs are lost because of technology and competition from imports. In terms of job creation, EU Commission calculates that the creation of its single market meant 300,000 to 900,000 jobs to be created. Job prospects are enhanced in companies involved in trade. WTO reports 12 million people in the United States owe their jobs to exports; 1.3 million well paying jobs were created between 1994 and 1998. In Mexico, best jobs are those related to export activities, workers of sectors that export 60 percent of its production or more are paid 39% higher than the rest in the economy and those working in in-bond assembly plants are paid 3.5 times the Mexican minimum wage. Free trade brings competence in the system. It helps cut costs because of rules involved. For instance, when there is no free trade, different tariffs and duties are imposed; and if you were an importer of parts for your own production, it would be difficult to calculate different tariff rates charged on imports, thus buying would be very difficult. So in this aspect, free trade brings simplification and standardization of procedures, transparency, and increased certainty on trading conditions. Free trade discourages lobbying in the sense that governments are protected from lobbying of interest groups. For instance when a pressure group asks for protectionism, government can safely reject it on the basis of free trade agreements. Free trade encourages good governance since the rule reduces opportunities for corruption. Take for example quota system as a trade barrier. The quota system is the allocation of a specific amount for import or export. This system is prone to corruption because it can limit supply, thus creating an artificial high price. Corruption is also prevalent in quota allocation among traders. The system promotes peace, because it helps trade to flow smoothly, disputes are settled amicably, and internal cooperation and confidence are reinforced. FTA allows disputes to be resolved beneficially because they conform with agreements. Free trade is a system based on rules rather than power which makes life easier. The system reduces inequalities, because smaller countries enjoy more bargaining power and at the same time, making life simpler for bigger countries. Why, because free trade agreements are negotiated and approved by all members; and that agreements apply to everyone, rich and poor countries alike. Without an FTA, powerful countries are free to impose their will on their smaller trading partners. Smaller countries have to deal with the bigger countries one by one, and in most cases be unable to resist the unwanted demands. Trade agreements makes things easier because a single rule based on non-discrimination simplifies the trading system. Free trade cuts cost of living because the lowering of trade barriers reduces cost of production, cost of goods and services that ultimately lowers the cost of living. For instance, food, clothes and other goods becomes cheaper because custom duties and trade barriers are reduced, if not totally eliminated. WTO says: “, in 1980s, high custom duties and import restrictions valued US clothing and textiles by 58 percent. If there is no FTA, UK consumers had to pay £500 million more per year for their clothing due to this restriction . In Canada, it would mean paying C$780 million more. For Australians, it would mean paying an average of A$300 per family annually. Limiting of imports raise prices, as in 1980s, when US limited importation of cars in Japan. Immediately, price rose by 41 percent. If Australia had kept its tariffs in the 1998 levels, they would be paying A$2,900 more per car today.” Liberalization of trade made services cheaper because, telephone services was made lower by 4 per cent per year in developing countries and 2 percent in industrialized countries. Competition in mobile telephone services cut its prices by 30 percent in the price of a call in China, and 50 percent in Ghana. Free trade gives consumers more choices since imports gives consumers the benefit of more choices of goods and services from a wider range. Local manufacturers are challenged to improve on quality in order to compete with imports. Trade allows more export and import. Free trade boosts income in that when trade barriers are lowered, incomes increased. WTO estimated in 1990 that between $109 billion to $510 billion would be added to the world income with free trade. Source: World Trade Organization I argue that the European Union have received far more benefits in free trade due to the following circumstances. The European Union The EU is one of the largest economies in the world, a big exporter and importer, a leading investor and recipient of foreign investment. The EU is composed of 28 member countries. EU needs a trade policy because speaking as one voice carries more weight in international trade negotiations than when done individually by member countries. EU is said to be the most- outward oriented economies in the world since from 1999 to 2010, EU imposed reduced taxes or none to almost three quarters of imports, or in cases where duties are still payable, the average rate is 2.2 percent for industrial products and 2.6 of others. EU is the biggest trading partner of 29 countries. In comparison, China has 36, and US, 24. EU imports agricultural products from developing countries, Australia, Canada, Japan, New Zealand and the United States (EC). EU free trade policy imposed on emerging economies brings growth prospects and trade openings to the Union. It is expected that by 90 percent of EU’s growth will be generated from outside Europe; one third is coming from China. Free trade is more important now for EU for its economic growth and job creation given that two thirds of its imports are raw materials needed for production. The United States Moreover, I think that the US is the biggest benefactor of free trade because trade is very important feature in the U.S. economy since it is the world’s largest exporter and importer of goods and services (Fronning , 2000; US Trade representative, n.d.) US has benefitted from free trade in the following ways: US is the world’s leader in trade with exports amounting to an estimated amount of $2.3 trillion in 2013 Export trade supported an estimated 11.3 million jobs in 2013 About 25 percent of manufacturing jobs are supported by exports An estimated 929,000 agricultural jobs on and off the farm have been supported by US agricultural exports in 2012. Every billion dollars US agricultural exports required 6,577 jobs throughout American economy. US jobs supported by goods export pay more taxes (13-15%) more than the national US average Exports share of US GDP IN 2013 IS 13.45 percent Trade expansion makes businesses more productive and be able to pay higher wages Trade gives consumer variety of choices for consumers and businesses Trade encourages investments and rapid growth. Source: US Trade Representative (n.d.) Other regional free trade agreements, the ASEAN Trade Agreements, the Common Market for Eastern and Southern Africa and the Southern Cone Common Market have increased trade in agricultural markets. .(Korinek and Meltos, 2009). But it is noted that lack of transport and communications infrastructure have lessened the impact of the trade Conclusion Based on the foregoing, there is no doubt that free trade has been beneficial to countries involved; however the extent of benefits in these countries cannot be measured. But seeing that the last free trade agreement was entered twenty years ago, I feel there is a need to revisit its policies. There are considerable changes in technology, communication and infrastructure as we enter globalization era. There is a need to adjust its policies to come parallel to the times. For instance, world tariff declined from 15 percent to 7 percent since FTA. In EU, US and Japan , tariffs have been close to an average of 3 percent. (WSJ, 2015). While I think it is good news for some, it is bad to others, since there is very little gain left by lowering tariffs further. The idea that strengthening the free trade agreement thru a new treaty as proposed by Pres Obama (WSJ , 2015) would be the best deal of defending US leadership against China. w.c. 1549 REFERENCES CITED Bordeaux, D. 2015. The Benefits of Free Trade: Addressing Key Myths. Mercatus Center. George Mason University. http://mercatus.org/publication/benefits-free-trade-addressing-key-myths European Commission. Trade. http://europa.eu/pol/pdf/flipbook/en/trade_en.pdf Fronning, D., 2000. The benefits of Free Trade . A Guide to Policy Makers. http://www.heritage.org/research/reports/2000/08/the-benefits-of-free-trade-a-guide-for-policymakers Korinek, J. and Melatos,, M. 2009. Trade Impacts of Selected Regional Trade Agreements IN Agriculture. OECD Trade Policy Working Papers, No. 87, OECD publishing, © OECD. doi:10.1787/225010121752 Office of the United States Representative (n.d.) .Benefits of Trade. https://ustr.gov/about-us/benefits-trade Wall Street Journal.(WSJ).2015. Obama’s Uphill Push for Free Trade. Economy. http://www.wsj.com/articles/why-obamas-free-trade-push-makes-sense-1430324511 World Trade Organization. . The 10 Benefits. Retrieved from https://www.wto.org/english/thewto_e/whatis_e/10ben_e/10b04_e.htm [accessed 30 April 2015] Read More