Outline the Arguments against Free Trade - Essay Example

ARGUMENT FOR AND AGAINIST FREE TRADE Introduction The issue of free trade is one of the most controversial in the modern world. It is one of the most long standing controversies in the world since the tide of globalization started to take root. There have been many proponents and opponents on the issue with many people taking sides on the issue. Free trade remains to be one of the most debatable issues of the 21st century. This debate has been carried over from last century. In its simple definition, free trade can be said to be the art of existence of free flow of goods, capital and labour from one country to the other. Free trade doesn't not only happen between the continents but it also happens between neighbouring nations. Argument about free trade can take many dimension including economic, moral, and socio-political arguments. Free trade takes many dimension and the proponents and opponents of the idea takes stands on the issue depending on their beliefs. In the last century, arguments on free trade were centred on the inequality that seems to persist between developed and developing nations which seem to be the mother of inequalities. There have been many campaigners who have been arguing for implementation of free trade policies in the last century and they hoped that the new century would come with a new perception on solving the inequalities between nations in the world through free trade. Apparently the campaign by these human activists and trade unions all over the world seem to have led to the development of essentially what we have been calling trade blocs that seems to emerge in all corners of the world. Analyzing the origin of the trade blocs, we can make formidable conclusion that all the trade blocks are created with an original aim of enhancing trade between members of the trade blocks. Trade blocs seem to be the new ideas on what the argument on free trade has taken. As we stand, the European Union remains to be the largest trade bloc in the world. European Union has been able to campaign for trade policies of its members and there is some success that can be attributed to the formation of the trade bloc. The European Union seems to be engaged in a massive recruitment of new members some who are not considered as vital to the operation of the bloc but a move which is seen as to consolidate more region under the bloc to empower it negotiation base. In America NAFTA has been negotiating for free trade for its members. Though small in number of members, NAFTA has been able to create a formidable trade bloc that has been able to negotiate for fair trade terms between its members and between the members and the international market. In South America, MERCOSUR has been expanding year after year admitting new member in South American and soon there is a possibility of the whole region coming under control of MERCOSUR. It has been able to negotiate for fair trade terms of its members in the international market. (Congressional Budget Office, 2003) In African, there are a number of trade blocs including SADDC, EAC, COMESA and others all which negotiate for free and fair trade terms between the members and between the member and the international community. In the Middle East there is the Gulf Council which brings together most of oil producing countries in the region together and which enables members to negotiate for free and fair trade terms. In Asia there also trade block which brings together members of the Asian community. But one peculiar view of Asia as far as trade blocks are concerned is the growing recruitment of some countries into the European Union especially the Balkan countries. This simple analysis shows how the concept of free trade has become to the world. It is the motto the modern international market. Eventually it seems as the concept of free and fair trade will lead to formation of new axis in the world all which will be campaigning for free trade. Let us look closely at arguments for and against free trade Arguments for free trade Since the concept of free trade took root in the world, it has taken the dimension of two aspects, that is economic and the other being moral argument. Let us first focus on these two aspects of free trade. Economic arguments for free trade assert that free trade increases the level of output in the world because it permits specialization among countries. Specialization is the aspect of a country concentrating on what it can produce best and leaving other countries to specialize in other areas. Specialization can promote free trade since a country will try to exploit its own resources and will prevent rich countries from exploiting poor countries. In this regard, countries which are best suited to produce agriculture goods like those in the tropical region would concentrate in production of agriculture goods and export to other nation in exchange of industrial goods. In the same manner countries which have advanced in technology and have mineral resource would concentrate in production of technology driven goods and export to agricultural producing countries in exchange for agriculture goods. But his has not worked effectives due to disparities in natural resources between different countries and the fact that some countries opposes both agricultural potential and mineral resources. But specialization comes with many advantages. Specializations bring about economies of scale. This means that a country will produce what it is best suited to produce in large scale which means it can bargain for better prices and secure more market. It becomes difficult for a country to market its product well if it produces in small scale since the cost of production increase with increase. This has an effect in the price of produced goods which means a country cannot effectively market its goods. Economies of scale enable a country to produce and market its goods effectively. Take for example china. Products from china have reached almost all corner of the world due to economies of scale. If you walk to a shop and compare the price of a product from china and the same product from your own country, you will find that products from China are able to sell at a much lower price than a product that have been manufactured in your country. What bring about this This is because China has been able to engage in large scale production of goods which has enabled it to take advantage of economies of large scale and hence market its product competitively all over the world. Many countries have not been able to achieve the same fete as China since China has been able to specialize in industrial production of commodities. Hence specialization in combination with economics of scale increases the global production possibility frontier. This indicates that the absolute quantity of goods and services that are produced is the highest that can be produced under free trade agreement. This has many advantages in the sense that not only is the quality and quantity of the goods produced higher, but it also increase the combination of goods produced which actual increase the utility of goods by global consumers. Looking closely at laissez-faire economic politics, free trade supports these policies. They dictate that the absence of governmental intervention in areas of trade, investment, and entrepreneurship has same results in increase per capita income of a nation. Free trade dictates that government and other authorities practice less interfere in trade. In most cases, government intervenes in trade in that it dictates the way trade will be followed by putting in condition like price control, quotas, tariffs and taxes which bars some traders from participating in free trade. With such interference the government practice tight control of trade in a country which also dictates how the country trade with other countries in the international front. The government can international trade through its direct control on the foreign exchange and trade policies. Laissez-faire politics have shown that if the government interferes less with trade and only concentrate on collecting taxes from business, it is able to raise the per capita income of it people. Let us look at China again. It has been practicing closed economy for along time and the economy of the country performed poorly for along time. Not until the country opened its boundaries and practice d open trade polices, the country had remained with a stagnant economy for many decades. Although the country cannot be said to be practicing free trade as such, there is acknowledgement from all quarters that it has been able to open its boundaries to other countries which has actually stirred its trade with the neighbours. Hence we can say that the less the government encourages the practice of free trade in a country, the more the country is able to advance in the economy. Free trade helps a country to increase its wealth and that of its people since it will distribute more to the people than it is distributed to the government. (Brown and Robert, 1996) If we look at the production possibility and indifference curves of a country, we will see that it will increase its income and trade of those commodities which are not restricted in trade. If we take a country A and assume that the country produces only two goods, potatoes and beans. As the country is limited in resources, an addition in production of extra units of beans means that the country will have to divert some resources away from production of potatoes. The rate of trade-off between potatoes and beans is not important in this particular analysis and hence we can ignore it. Country A Country B Beans Beans Potatoes Potatoes Let us take another country let us say B which can produce only the same kind of goods as country A that is beans and potatoes. Like in the other country, the resources of the country are limited such that the production of an extra unit of beans means that some resources will have to be diverted from production of potatoes. Like in the first instance let us ignore the rate of trade-off between beans and potatoes. Country B Beans Potatoes The difference between the two countries is given have different relative rates of trade offs is important and we have to consider that. The difference between the two countries will result from the comparative advantage that each country will create from its production. It goes then that even it the two countries vas absolute advantage in the production of the two goods, both nations may benefit from the trade arising from the comparative advantage that each will create. The first two curves represent the state of autarky which occurs when trade takes place between the two countries. In the third curve the outermost linear curve represent the production possibilities frontier for the world. This frontier for the world is made up of combination the two countries' frontier. If we compare the world's frontier possibility with that of the individual countries, it is clear that the world can produce and consume much more if free trade is allowed. To come up with such a world frontier, we have to use the vector addition which means that we have to add up the outputs from the two nations. Let us look at some more argument that supports free trade. The debate that has taken centre stage between the developed and developing nations on free trade has been purely moral. The developing nations argue that they are not in need of more aids for their development but they are in need of increased trade opportunities. The argument supports that wealthy nations force the developing nations to open their markets while they still put on restriction and standards for goods coming from developing nations. This follows a libertarian argument on the issue of free trade which asserts that restrain of free trade is immoral which amounts to restraining the rights of sovereign customers. (Brown and Robert, 1996) The moral argument on free trade also supports the postulation that increased free trade makes war between nations and between communities in a nation to be less likely. This is from the postulation that free trade supports equal distribution of resources among nations and among individuals which makes their life more equal. Most of the wars in the modern world have been propagated by unequal distribution of resources. Free trade would go a long way to affect economic interdependences between nations which reduce the possibility of one nation rising against the other due to the dependency factor as it would lose in the act. In this regard free trade has been said to reduce poverty levelly in many instances since people have equal access to resources. Increasing poverty in the developing nations has been directly attributed to inequality in trade which decrease opportunities for advancement of a nation. Free trade has also been shown to enrich culture those interaction of people and also to enhance national security. (Arvid, 2006) Let us not look at the arguments that have been advanced against free trade. Arguments against free trade There are many arguments against free trade same as there are arguments for free trade. Argument against free trade takes the same dimensions as arguments against free trade but mostly appears to be economical reasons. Most of the developed nations have argued against free trade with the assumption that it will have negative economic impact on the economy. For one, free trade opens the market to competition which means that a country must be able to produce economically in order to compete well in a free trade environment. One of the factors that have hampered free trade has been the need by countries to protect their infant industries. This is because once the market is opened, these industries are not able to compete effectively firms producing same commodity in developed markets. Hence there is need to put some tariffs and quotas on importation of commodities which are produced by the infant industries that needs to be protected. The main argument here is that the local industries need to be protected till they mature enough to be able to compete with the foreign market. This may help to pay later as they become able to compete effectively. The theory of protection of infant industry has been argued since 1840s and it is being challenged by the new trade theorist who challenges the assumption which is made on diminishing return to scale. (Susanata, 2005) There are other factors that have been advanced against free trade which are not directly related to the economic situation of a country. It has been shown to increase civil and national wars in some instances. For example, it was shown that countries that had discovered minerals ended up in chaos as dealers entered those regions to search for the minerals. Liberalized trade makes some of these dealers to fuel civil were so that in the process they can exploit the resources. Take an example of Congo and other countries like Liberia. Civil wars in these countries were fuelled by the need to exploit diamonds and other minerals. It has been shown the developed nations which uncover natural resource may suffer from free trade. For example the massive capital influx to the Netherlands once it started exporting oil led to increase in the Dutch disease. This is an instance of other effects that comes along with the opening of a country to free trade. Free trade leads to interaction of people from different areas of the worlds and may bring some other problems which may not be directly related to trade. (Susanata, 2005) Another argument against free trade takes the dimension that free trade requires a lot of resources to distribute between the populations in order to be effective. Sustainability of free trade depends on the competitive productivity of the domestic market in relation to those of foreign markets. Let us take an example of energy. If the foreign market has greater productivity, it may be able to offset the fuel expense on delivery. On the other hand if the domestic market does not maker good use of resource, importing goods mare constitute a better way to save energy on the alternative. This is the case of China made products that we gave in the beginning. (David, 2001) It has also been argued that free trade favour developed nations which are more developed with established industries more than it favours the developing nations. Developed nations have an advantage and can create a competitive edge more than developing nations. It has also been argued that free trade increases the incidence of offshore since it allows companies to seek the expert of foreign firms which are likely to charge less on services compared to domestic market. For example the cost of production in china is very cheap and hence most companies have been running to china to seek commercial services at the expense of their domestic labour. This undermines the development of local trade. (David, 2001) Conclusion It is therefore clear that there are disadvantages of free trades same as there are advantages of free trade. But after this analysis, it comes out clearly that it is the poor nations which have developed their industries which suffer due to lack of free trade polices. Therefore there should be free trade which is based on the competitive advantage of a country and which protects the infant industries in the growing countries to stimulate market growth. References Arvid, P. (2006). Free Trade Skeptics. Economic Times, January 2006. Retrieved from, http://www.columbia.edu/ap2231/ET/et86_January25-06.htm,on 11th March 2008 Brown, D., Robert, M. (1996). Modelling multilateral trade. Asia-Pacific Review, Vol. 2: 21- 24 Congressional Budget Office, (2003). The Effects of NAFTA on U.S - Mexican Trade and GDP. Congressional Review, May 2003 David D. (2001). Trade, Growth and Poverty. Retrieved from, http://www.imf.org/external/pubs/ft/fandd/2001/09/dollar.htm on 11th March 2008 Susanata, D. (2005). Evolution and Political economy of Trade protectionism. IIMB Management Review, Vol. 17(4): 45-48 Read More