Economic Advantages of Free Trade - Essay Example

? There are various reasons why countries trade and this may be inescapable given that a nation may not have certain commodities in sufficient supplyand therefore will need to import them (Roos, 2008). There are many factors that shape trade in different countries where it can be seen that in certain blocs or member states, trade is free. To a larger extent, free trade can be viewed as beneficial to economic development in a given country. As such, this paper seeks to critically discuss the benefits of free trade to a particular country. The paper starts by explaining the meaning of free trade and the main body will focus on how this concept can foster economic development in member states. Basically, in a free trade area, “the member countries have abolished all impediments of trade between themselves, but each member country individually maintains its own sets of restrictions on trade with third, non-member countries,” (Roos, 2008, p. 268). The European Free Trade association (EFTA) which was established in the 1960s which liberalised trade between members but maintained its own tariff wall against third countries is a good example of a free trade area. The North American Free Trade Association (NAFTA) is another good example of free trade area which has the same characteristics with EFTA. “The NAFTA Secretariat, comprised of a Canadian Section, a Mexican Section and a United States Section, is responsible for the administration of the dispute settlement provisions of the North American Free Trade Agreement,” (NAFTA, 2013). In the same vein, it can be noted that the Economic Community of West African States (ECOWAS) is a regional group of fifteen countries, founded in 1975 and its mission is to promote economic integration in "all fields of economic activity, particularly industry, transport, telecommunications, energy, agriculture, natural resources, commerce, monetary and financial questions, social and cultural matters ....." (ECOWAS, 2007). The examples given above show free trade areas among member states and the main idea behind these organizations is to stimulate economic growth in different countries that are members. When country trades with another state, it either exports products to that country or it imports, procures products and services from that particular nation. When a country exports different goods and commodities to other member states, it can be seen that it stands better chances of generating revenue from that particular activity. Exports boost the wealth of the nation and imports also contribute to the welfare of the country (Roos, 2008). When a country sells certain goods to other countries, it generates revenue in the form of foreign currency and this money can be channelled into the economy and it can help it to develop. Precious commodities such as gold and other minerals are exported to other countries and they bring a lot of forex to the host country. Other industries such as textile also export different goods to other countries and these exports help to generate revenue for the host country. The money is used for other developmental purposes and it helps the host nation to improve its economy. Mohr (2000) also states that free trade with other countries help to bring forex to the host country which is then used to improve the welfare of people. With a thriving export market in a country, it can be seen that employment is also likely to be created as a result of the growing demand of the products that are locally produced and sold to other countries. This means that more money is injected in the economy and it can also be used for developing other social amenities such as health, education as well as infrastructure. The roads in a particular country are likely to be developed and buildings are also likely to be constructed as a result of free trade between member states that will help each other to gain the desired objectives in as far as economic growth and development are concerned. The other advantage of free trade among member states is that they can easily acquire imports from other countries. For instance, the host country might not have certain raw materials such as steel that is required for different purposes especially in the construction industry. In such a scenario, it can be noted that this country can benefit from free trade since it can procure the desired raw materials from member countries at relatively low cost. Without free trade, it can be seen that this country may have difficulties to procure the much needed resources that can be used for economic development. The host country can also import basic commodities like food from member countries and this will help to improve the welfare of the people. Healthy people can positively contribute to the economic development of their respective countries. Free trade stimulates economic growth through private initiative and market oriented economy that will increase the national income (Gildenhuys, 1997). Through increasing the national income, the tax base for the public sector will broaden and therefore secure more tax at relatively low rates. Competition is also promoted among different manufacturers of various commodities that can be sold at competitive prices. In a free market economy, the prices are likely to be determined by the market forces that are prevailing at a particular moment. However, it is imperative for a country to ensure that its balance of payments is maintained at desired levels. For instance, the money spent on imports should not exceed the revenue generated from exports. This will create a negative balance of payment or show a deficit in the amount of revenue generated from the exports. In this case, it can be seen that free trade is used to create a favourable environment where all barriers are adequately addressed so that all the players are winners. Free trade is not only limited to international trade. Domestic industries in a particular country can also trade freely and there are many advantages to economic development that can be obtained from this initiative. Basically, free trade is regarded as an effort to promote efficient and effective utilisation of resources in order to increase the economic prosperity of individuals to such an extent that they can take care of their own social welfare (Gildenhuys, 1997). If companies trade freely, competition is promoted and this helps to stimulate economic performance in a certain country. If the conditions for trading freely are favourable, it means that more goods and products will be manufactured and these will be sold at competitive prices. This entails that the consumers and families will have more money to spend on different products and commodities. This in turn means that the government will have the opportunity of raising more money generated from taxes. This money will be channelled into the economy and it will help it to grow. However, while free trade is good for economic development in a given country, it can be seen that if uncontrolled, trading freely can be detrimental to economic growth and development. For instance, there might be a tendency by other countries to dump cheaply manufactured goods in other countries. It can also be seen that free trade can kill competition in host countries if the influx of cheap imports are not properly controlled. This entails that the local industry will not be capable of manufacturing its own products that can sustain the economy as a result of the fact that people will prefer to buy cheap products that are imported from other countries. In such a scenario, it can be seen that government interference will be ideal since it will be intended to protect the interests of the local industry. The role of government is to maintain law and order while protecting individual property against malicious damage and injury (Gildenhuys, 1997). This can also help to stimulate economic growth if measures that are meant to protect the local industry are fully implemented. Over and above, it can be seen that there are many benefits to economic development that can be realised from free trade. All trade barriers among member states are removed and this helps to stimulate economic growth in different countries. This entails that each country is subject to generate reasonable amounts of forex from trading with other member states. This forex will in turn be used for economic development purposes in the host countries. Free trade can also help to improve the welfare of the people since they are in a position to trade their goods and services for a substantial profit. However, trade should be regulated among member states so as to enable the companies to operate in a competitive environment. This is also meant to protect the interests of local companies since there may be a tendency by other countries to dump cheap products in other nations for a profit. References Black, PA et al 2006, Public Economics, Oxford University Press: CT. Economic Community of West African States (ECOWAS). Viewed 06 November 2013 From: < http://www.comm.ecowas.int/sec/index.php?id=about_a&lang=en>. Gildenhuys, 1997, Introduction to the management of public finance, Van Schaick publishers: CT. Mohr P, 2000, Economic indicators, UNISA Press. NAFTA, 2013, Viewed 06 November, 2013, from: Roos, A 2008, Economics: An Introduction. Heinemann: JB. Read More