Free Trade as the Primary Force Driving Economic Development - Essay Example

Free trade is the primary force driving economic development Introduction Nations have been engaged in doing business with each other in order to getprofits and cultivate their economies and also for the reason that they are not equipped with sufficient resources like territory, workforce, and resources to fulfill all the requirements of citizens of a country. Trading begins when a state has a product which is needed by some other state. Trade provides a chance to states to acquire those items that they are unable to get without difficulty or affordably manufacture themselves. International trade amongst countries increases standard of living inside the countries since resources are used more competently and a larger selection of items exist. Although this form of trade is going for centuries, certain countries in certain period of time have imposed restrictions on this international trade. That is, these nations due to one reason or other will actualize a protectionist regime, thereby blocking foreign companies to enter and do business in their territory. However, with the advent of globalization and the liberalization of the WTO regimes, this protectionist regime gave away to the regime of free trade. Many countries have opened up their economies as part of Free Trade and this paper will discuss how Free Trade regime is having an impact on the global economy Background There are several competitive advantages to process of international business. Free trade is the primary force driving economic development as countries import and export merchandise that can be developed at more cost efficient rates therefore promoting innovation, global competitiveness, increasing profits and suppressing prices that consumers pay. The very foundation of this theory is a fundamental lesson of economics. No one country can develop all goods/services in the most cost efficient manner, therefore free trade allows for other countries to develop goods/services at better quality and cheaper cost. One such ideology of this theory is the material needed to produce specific goods/services. Some countries natural resources allow them to produce specific products at cheaper rates as their land naturally ‘facilitates’ specific products. These products can therefore be shipped abroad at rates cheaper and with better quality opposed to another country that doesnt have the natural growth and environment to produce the same product. When a country produces specific goods/services better than another country can it is considered an absolute advantage. According to Chapter 1 of the book International Economic Law by Lowenfeld, an absolute advantage still doesnt necessitate cost benefits to the country who possesses the absolute advantage(5). Other factors have to be considered. For instance, the measurement of unit labour cost, dollars or other relevant commitment of resources must be considered. When considering these variables, it may be discovered that a country may have a what is known as a comparative advantage. The author goes on to say that a comparative advantage compares ratios between two products in the two countries and analyzes the gains from a country that may be more efficient at producing both products from specialization and trade (6). This specific model of comparative trade is known as the Ricardo model of comparative advantage and has been refuted by several twentieth century economists. Although absolute and comparative advantages are fundamental principles in the process of trading goods/services abroad, free trade induces the net benefits and promotes economic development. Globalization is the wave of the future. International economic integration has challenged countries to optimize production. Products/services that are made inferior directly adversely impact that country opening the gate of global competition. Inefficient work force, and poor quality produced products are now not only detrimental to the survival of that company but negatively impacts the country as a whole. The world has gone hi-tech. The innovation of the internet has connected the world through the world wide web. The ever rapid evolution of technology has created a boom in the purchase of cars, computers and electronics and has created a seriously competitive world. According to Andrew Glyn, author of Capitalism Unleashed Finance Globalization and Welfare, suggests in Chapter 4, Globalization and International Economic Relations, that a nation must produce well in order to live well (78). If a rich country such as the United States of America desires to continue to hold its powerful eminence then that country will have to produce well or their standard of living will pay the penalty. For instance, The United States of America was once home to the largest automotive manufacturers. Global competition has pierced this acknowledgment and now Japans Toyota presence is immense. In order for the American car companies to compete with Japanese car manufacturers, American car producers have began out-sourcing. Out-sourcing is when a company contract with another company to perform a specific task that typically is considered non-core to the operations. For example, in order to compete with the Japanese car companies, GM, once considered the worlds number 1 car company, out-sources the manufacturing of small parts that are needed to build the automotive product in an attempt to suppress overhead and remain competitive. The companies that GM out-source to also fall under the umbrella of free trade. This further supports the theory of free trade being the primary force driving economic development as these companies competitively fight for the contracts on an international level. Out-sourcing along with export and import allow for higher quality products at the most cost efficient prices. Globalization has allowed underdeveloped countries opportunities to manufacture and produce products supplying that country with considerable job opportunities. In certain countries where poverty levels are exorbitant, these countries are more than thrilled to produce products at minimal wages and their work ethic proves essential to the parent company that utilizes their services. Global out-sourcing also allow larger more sophisticated companies to maintain production costs and retain domestic skilled employees who receive higher compensation but contribute to the overall success of the company. In some instances, skilled employees are who the jobs are out-sourced too. Although their education level is compatible with their foreign country counterparts, their home country cost of living allows for cheaper wages and the quality of work performed is comparable. Along with increased profits or more manageable overhead, there are several intangible advantages to utilizing a global workforce. First, is culture recognition. Utilizing international economic integration increases appreciation for other cultures and exposes culture preferences potentially exposing new markets. Globalization and its correlation to Free Trade In literal meaning Globalization is defined as a collective alteration, an elevated association between various societies and their fundamentals because of the transculturation, the explosive advancement of communication and transportation technologies to assist an exchange of global economy and culture. The arrangement of a global community in such a way there is an immense contact linking various parts of the globe, with elevating potential of individual switch over, communal understanding and companionship among "world citizens", thereby leading to economic cooperation. When one looks at the economic or financial part of globalization, it is clear that globalization has given liberty to the business to initiate an entry into various prospective markets, based on the Free Trade regimes of the entering countries. Thus, globalization is a process of interaction and integration among the companies as well as the people of different nations, a process which is mainly process driven by international trade and investment for the benefit of the investor as well as the host country, (Rothenberg 1). The blurry perception of globalization has been clearly explained in financial vocabulary. Corporate globalization may be viewed as the movement of items, services and money assets or savings across global boundaries. In this manner, globalization has turned out to be a predominately ‘financial umbrella’ of the world, with national organisations developing into international corporations, and countries are no longer seen as self-governing and closed monarch states, but as a fraction of single large financial system with their Free Trade regimes. Role of Free Trade From earlier times, during international trade certain countries will have natural comparative advantage or will try to maintain a comparative advantage for itself. The theory of absolute comparative advantage states that a country contains an unconditional advantage in the production of a product when it can produce more of that product with the same amount of resources than another country. Absolute advantage can also result in higher incomes for a country as one hour of labor output should increase and the country should become more efficient as a result of trade between countries. Realistically, one country should have an absolute advantage over another country in the production of some goods. As an example, Saudi Arabia would have an absolute advantage in the production of oil compared to a country such as Japan. However, the act of nations to maintain unfair competitive or comparative advantage has become a thing of the past, with globalization and WTO regulations, preventing nations from doing so. Free trade regimes are being actualized in many countries and Free Trade has been promoted by decreasing or abolition of tariffs, creating free trade zones with minimal imposition of tariffs, reduction in transport costs through containerization for ocean shipping, reducing or abolition of capital control measures as well as balancing subsidies for local businesses. Free trade is also encouraged by harmonizing the laws that regulate intellectual property across most nations and by supranational acknowledgment of intellectual property and patent rights. The basic principle of Neoliberalism is the actualization of free markets and free trade. So, it involves market deregulation, minimum intervention from the state and its government, and also increased privatization. With the actualization of this kind of political economy perspective, there will be break down of barriers to international trade as well as foreign investment. Thus, there will be adequate transfer in the control of a nation’s economy, from the state actors or government to the private sector players. Positive impact of Free Trade on the Global Economy The main strength of Free Trade is that, it puts forward the notion that minimalistic state role or intervention resulted in better economy and importantly better society. That is, with greater role for private sector and importantly entrepreneurial role for individuals, there will be better productivity. Free trade proposes that human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights, free markets, and importantly free trade (Harvey 2). From earlier times, many Third World countries including Asian and African countries only indulged in agriculture for their livelihood. However, with the onset of globalization and the opening up their markets as Free Trade regimes, these countries and their governments started to focus on industrial development, by improving their own industries and importantly by facilitating entry of foreign companies. Thus, globalization and the resultant Free Trade turned out to be a great boon to these countries. These countries as part of their Free Trade regimes opened up their markets and enticed the foreign companies with a slew of beneficial financial and social schemes. Foreign firms for their part optimally invested tapping the existing cheap labor and other resources, thereby garnering for themselves good profits. Importantly, a sizeable portion of good profits reached the local employees, thereby improving their economic standing and also optimizing country’s economy. With booming economy, there is rapid growth as well as poverty reduction in many Third World countries including China, India, and other African countries that were poor 20 years ago, all because Free Trade regime actualization. Today a company in the US which is in the west approaches a company in India in the east to fulfill its software requirements. Hence an integral part of the business process done by the US firm lies on the other side of the world. This way both the parties get major benefits - good service and lesser costs for US, Indian software professionals get higher salaries. Because of these benefits, Free Trade regimes were appreciated and welcomed by majority of the people in those countries, with only a minority against it. The minority’s arguments against Free Trade are not valid at all and it only exposes their inabilities. Foreign firms entice maximum local customers by offering quality products or services and also by means of effective marketing strategies. However, the indigenous businesses does not upgrade to the levels of the foreign companies in terms of quality as well as other factors, thereby being ignored by the local customers. Thus, loss of customers and market share, happens mainly due to the inability of the local businesses, however they wrongly fear that large multinationals would drive them into extinction and cripple domestic entrepreneurship. (Bhagwati 181). Negative Impact of Free Trade on Global Economy However the one of the weaknesses of Free Trade is the uneven distribution of income. That is, with the emergence and success of private sectors and international players as part of Free Trade, the resultant wealth or income gets stagnated in few hands, with uneven wage distribution. It leads to poverty, industrial problems, etc. Another weakness is the uneven geo-economic development due to Free Trade regimes. However, globalization has also generated significant international opposition over concerns that it has increased inequality among the local population and also causing environmental degradation (worldbank.org). That is, certain countries or even organizations develop at the expense of other countries, by ‘tapping’ their weak policies. “The rise of neo-liberal economic thinking in the West led to the view that the underdeveloped states had approached development in the wrong way. Instead of establishing inefficient state run import substitution industries, it was argued; they should have concentrated on areas in which they possessed comparative advantage (Best and Hanhimaki 329). In the book, “The Travels of a T-Shirt in the Global Economy” presents, Rivoli comes up with important conclusions regarding the inferior status of poor countries with supporting evidence. Rivoli concludes that poor countries’ economy and importantly its people stay poorer, without improvement mainly because of the direct and indirect suppression of their products. That is, farmers and manufacturers of developed countries succeed and indirectly suppress farmers and manufactures of poor or Third World Countries because of various tax exemptions and the scenario of unprotected global trade provided by corrupt governments. According to Rivoli, even the used up dresses with cheaper price tag did not reach the Africans, because they are worn by Americans and Japanese as part of vintage clothing. Even though, Rivoli pessimistically talks about the poor countries, he concludes positively by seeing some hope for them. Conclusion Thus proponents of Free Trade agree that Free Trade allows poor countries and their citizens to grow economically and as a result improve their standard of living and importantly optimize the economic standing of their country. While the opponents of Free Trade argue that the establishment of unregulated free markets has instead benefited the multinational companies in the western world at the expense of the local companies, local culture and the ordinary people, who are deprived of their livelihoods and thus undergo many problems. Best, Anthony and Jussie M. Hanhimaki. International History of the Twentieth Century and Beyond. New York: Routledge. 2008 Bhagwati, Jagdish N. In Defense of globalization. New York : Oxford University Press. 2004. Harvey, David. A Brief History of Neoliberalism, New York: Oxford University Press. 2005 Rothenberg, Lawrence E. Globalization 101: The Three Tensions of Globalization, American Forum for Global Education. 2002. http://www.globaled.org/issues/176.pdf. worldbank.org. Globalization. http://www1.worldbank.org/economicpolicy/globalization/ Read More