Pros and Cons of The FTA (free trade agreements) - Research Paper Example

Introduction Free trade agreements (FTAs) involve two or more countries coming together with a common goal of promoting cross boundary trade by removing trade barriers and other hindrances, which may limit the movement of goods and services from one country to the other (Mudinda, 2003). It is important to state that no country is self sufficient and therefore there is always need to import goods and services that are scarce and to export those that are in abundance. This becomes difficult without FTAs and the contemporary society has continued to embrace this important development.

This paper is a critical evaluation of the advantages and disadvantages of free trade agreements. Free Trade Agreements Free trade agreements are important in facilitating countries with a comparative advantage. In this context, a country does not necessarily have to engage in the production and manufacturing of goods and services in fields that are less viable (Bhagwati, 2001). Instead, a country gets an opportunity to specialize in areas where maximum production can be achieved thereby creating market for imports and exports.

For example, a country may be in a capacity to produce coffee in surplus, if it considers the production of maize as an opportunity cost. Another country may have the potential to produce maize in large quantities if it concentrates its labor force and resources on this economic activity. If these two countries engage in free trade then, they would be able to create sufficient markets for both maize and coffee. Free trade agreements are important as they discourage protectionism. Protectionism is a policy that is used by governments to protect local industries and businesses from competition brought about by cheap imports.

This is usually achieved through means such as; installing taxes on imports, restricting the importation of certain goods and services through quotas, promoting the consumption of locally manufactured goods by discouraging people from buying imported goods and also providing local industries with subsidies so as to reduce the cost of production among other methods (Field, 2005). In a free trade area, governments are required to allow fair competition of local and foreign industries by removing all artificial trade barriers and hindrances as per the negotiated trade agreements.

Without the barriers, commodity prices become cheaper thereby making them affordable to consumers, who are always the ones who carry the burden of paying for any extra costs involved in the chain of distribution (Roberts, 2000). Free trade agreements help to open up borders thereby encouraging foreign investors to open up new industries in their country of choice, as long as it is covered by the agreement. This increases competition between local and the foreign industries, which enhances the reduction of commodity prices thereby benefitting the consumers (Yarbrough, 2002).

In addition, the upcoming of these new industries creates more job opportunities for the local people thereby improving their livelihoods. The local people can also export labor to other countries thereby enhancing interaction between people at an international level, which is important in promoting world peace (Bhagwati, 2001). However, free trade agreements have their disadvantages. For example, comparative advantages have the capacity to influence a country towards over relying on limited economic activities (Bhagwati, 2001).

This is a genuine concern as such a country, for example which is dependent on coffee production, may find it difficult to cope with issues, such as a reduction of demand for coffee. A country needs to have numerous sources of income in order to be able to achieve political and economic stability so that it does not have to over rely on imports. As earlier stated, free trade agreements encourage foreign investors to set up industries and compete for the local markets at a fair level. It also encourages importation of goods and services irrespective of whether such goods are available locally in the receiving country.

Despite the fact that these practices promote competition, which is healthy in any democratic society, critics argue that they have a potential to kill infant industries (Krugman, 2002). Local investments need to be protected so that they can grow and this can not happen with foreign products competing at the same level with locally manufactured goods. Protectionism therefore becomes a necessity despite its expensive nature. Critics of free trade also argue that it has the potential of promoting political slavery.

In this context, countries tend to over depend on their trade partners and if one of the partners is more powerful in terms of technology and global influence, it may end up interfering with political structures of its inferior partners through dictatorial foreign policies (Krugman, 2002). Conclusion Free trade agreements (FTAs) are agreements between two or more nations, which compel them to remove trade barriers on certain goods and services so as to allow free and fair trade across the nations.

This is advantageous as it promotes specialization such that a country does not have to commit its resources on producing goods that can be better produced by another. It also discourages protectionism thereby allowing foreign companies to compete with local companies in a free market, where there is little or no government interference. Consequently, consumers benefit from reduced prices due to the competition, which would not be the case in a highly monopolized economy. However, FTAs drive infant industries out of the market especially if they cannot withstand competition from established multinational corporations.

In addition, these agreements may lead to countries over relying on limited economic activities, which has the potential of causing an economic crisis if the demand of such products goes down or diminishes completely. References Bhagwati, J. (2001). Free Trade Today. Princeton University Press Field, A. (2005). International Economics. McGraw-Hill/Irwin Krugman, P. (2002). International Economics: Theory and Policy. Addison Wesley Mudinda, R. (2003). Modern Economics. Focus Publishers Roberts, R. (2000). The Choice: A Fable of Free Trade and Protectionism.

Prentice Hall Yarbrough, R. (2002). The World Economy: Trade and Finance. South-Western College Pub