Importance of Free Trade to World Economy - Essay Example

Importance of Free Trade to World Economy ‘Free Trade’ is one of the market models in which there is no government imposed restrictions on the flow of trade in goods and services between different countries. The restrictions may take the form of taxes and tariffs and non-tariff barriers such as legislation and quantitative restrictions. One of the principal advantages of free trade to any economy is the comparative advantage available to the parties involved. As a result of free trade, the comparative advantage is available to the countries, regions, or individuals when they have different opportunity cost of production existing in their trade settings. Thus when there is trade barriers applied they protect the producers of goods and services from competing in the international market. It obstructs easy trade flows between countries. The importance of free trade in a globalized world economy can be seen from the following distinct advantages resulting from free trade. Increased Production of Goods and Services Free trade enables the countries to concentrate and increase the production of those goods and services in which they possess the comparative advantages in terms of economies in cost of production. With the kind of specialization in different products the countries are able to enjoy the economies of scale and this largely reflects in the final prices to the international consumers. The indulgence in international trade results in the enlargement of the market for the firm. The increase in market size lowers the average production cost and enhances the productivity of the firms. When there is increase in the international trade the world economy also gets a boost towards growth. Increase in Production Efficiencies Another distinct advantage that is very important for the world economy is the improvement in efficiency of the production processes which leads to a proper allocation of available resources. The more efficient use of resources automatically leads to increased productivity. A higher output in terms of goods and services is another distinct advantage resulting from free trade. The efficient allocation of resources in the individual countries contribute to the growth of the world economy as there will be an all round increase in production of goods and services which can flow between different countries without any restriction. Greater Value for the Consumers The removal or reduction of tariffs and taxes will increase the benefits available to the consumers in different countries of the world. Because of the expanded market there will be increased competition among trades which will improve the quality of the goods and services which ultimately will benefit the consumers. One of the important aspects of free trade is to contribute to the growth of the world economy in all possible ways. The increase in value of the goods and services to the consumers is one way of providing thrust to the world economy, as the consumers would be induced to increase their purchases which eventually will make the world economy grow. Gains in Foreign Exchange The best way to improve the global economy is to enhance the chances of more international trade. This is the main objective of forming the World Trade Organization and entering into trade agreements like GATT so that the member countries will be encouraged to enter into trade and commercial transactions more freely. Such a situation where there are increased commercial activities between nations improves the free flow of foreign exchange from one country to another. If the world economy is to be strengthened there should be an all round economic growth in all the countries. This is possible only by encouraging free trade between the countries. The economic history of the world has witnessed the free flow of foreign exchange from the industrially advanced countries to the emerging economies in the form of ‘Foreign Direct Investments’ for promoting various infrastructural facilities in the developing countries. China can be cited as one best example for the development of the world economy through free trade. With the rapid changes the country brought about in the country in the form of market economy reforms, the country was able to attract more foreign investments. This has greatly facilitated the country to make an all round improvement in its economic activities. With the growth in the economy, other nations identified a potentially large market for their goods and services in China and this has made the United States and other Western countries to expand the scope of their presence in China. This had automatically led to the flow of foreign exchange between countries both in the form of trade related transactions and on capital accounts for investment purposes. The development of China and other third world countries can easily vouch for the importance of free trade to the global economy. Employment Opportunities Yet another important element of the global economy is the availability of adequate employment opportunities in all the countries across the world. The free trade and globalization has removed the geographical barriers of the business houses to plan their businesses and production in the countries where they have definite cost advantages, irrespective of their geographical location. The advancement in the information and communication technology has also facilitated this trend. With this development achieved through free trade the multinational and transnational business enterprises have increased the employment opportunities for both technical and non-technical people all over the world. Due to free trade there is bound to be increase in exporting industries which will create more employment opportunities in those industries. There will also increase in the general standard of living of the people and the economic well being of the people will be more pronounced in different nations. The transfer of technologies will also result in the improvement of technical knowledge and skills of the people offering them more chances of getting alternative employment opportunities. Without resorting to the free trade, the countries would have remained in isolation with each other and would not have seen the kind of economic development what the world is witnessing today. Thus enlargement in income levels of the people and rapid economic development in all the countries of the world would have been possible only by the free trade regime. However there is one potential danger of free trade is a high economic instability in the developing nations is inevitable due to the increased dependence on the developed nations. The excessive dependency on global market would adversely affect the economic development of the individual countries due to the incidence of international trade cycles. The Asian economic crisis of 1998 and the slow down in the global economy which affected all the countries in the year 2001 are illustrative examples of the ill effects of free trade (Ken Edge). It can reasonably be concluded that despite these occasional economic shocks and disturbances on an overall assessment the global economy would not have reached the present status without adopting the free trade mechanism and it explains the importance of free trade to the world economy. Reference Ken Edge ‘Free Trade and Protection: Advantages and Disadvantages of Free Trade’ Read More