Does Free Trade Exist in Reality - Essay Example

The Freedom of Trade: Does Free Trade Exist In Reality? Introduction As the world rotates, the flow of trade among nations also circles around those that are involved in it. Basically, these nations engage in trade for the benefit of the economy and the establishment of alliances. The common perception of many regarding the concept of free trade based on the word itself is that it is a free form of trade, and that anybody or any nation may enter any marketplace without having to deal with any complexities because certainly it is free. This conventional idea of free trade is to some degree justifiable; however, the non-vulnerability of free trade to any complexities is something that needs a more concise explanation. Because if one will consider free trade as trade without complexities, then the entrance of illegal objects from one nation to another is possible, but if free trade will become subject to a particular number of restrictions, then its administration becomes less complicated. Definition of Free Trade According to Colton (1849, p. 61), free trade is an influential phrase. It leads many people to believe that commerce means freedom, that ports are open to all traders, and trade can be done anywhere to anyone. He further argued that these notions may seem reasonable enough with reference to the meaning of the word free, but the enchanting character of these phrases are actually misleading. Because the true definition behind the phrase “free trade,” lies in the opposite of the obvious meaning that it expresses. Therefore, Colton (1849, p. 61) justifies the idea that free trade is not inherently free; that it is subject to laws and regulations, which impedes the assumption of its being free. Rather than formulate a concise definition of free trade, scholars opted to assume that free trade has an understandable (yet vague) definition (Driesen as cited in Choi & Hartigan, 2004, p. 2). Driesen has stated that in academic writings and in the interpreted decisions of the General Agreement of Tariffs and Trade (GAAT), vague terms such as trade barriers and trade restrictions are being used to exemplify the things that trade must become free from of (as cited in Choi & Hartigan, 2004, p. 2). However, the presence of these terms still does not help in the formulation of an exact definition for free trade (Driesen as cited in Choi & Hartigan, 2004, p. 2). It goes to show that, in spite of free trade’s long existence, its concept has remained broad and ill-defined. Baggini and Fost (2010, p. 32) have taken as an example "the justice of free trade." They have stated that when it comes to providing a definition for free trade, many do consider it as trade, which is not disrupted by any local or international trade restrictions (Baggini & Fost, 2010, p. 32). This meaning according to some philosophers refers to a fixed definition of free trade based on the thought of the words itself; however, with this definition many people will argue that they have a precise or more appropriate definition of the term. These arguments will eventually result to varied justifications of free trade leading to contrasting conclusions in due regard to its justice (Baggini & Fost, 2010, p. 32). Creating clear definitions for difficult concepts as claimed by Baggini and Fost (2010, p. 32) is crucial to refrain from having further discussions with its definition. The development of a single definition for free trade is still at the stage of discussions; therefore, its definition may vary and is still unfixed. Thus, a clear definition of free trade has to be developed not based on the term itself but based on its application in the world of trade, to put an end to this confusion. Hence, it can be said that "free trade refers to" the omission "of barriers to international trade" (Gorman, 2003, p. 257), barriers that hinder its smooth sailing entrance to the international market. Some Barriers of Free Trade Over the last twenty years, "the definition of trade barriers" does not only limit to treatise or ratifications. The economic, political, and social dilemmas, which are not actually part of the production process, are now taken into consideration as trade barriers (Dewitt & Hernandez, 2003, p. 200). Despite the effort of the World Trade Organization to abolish these barriers, free trade policies are still being imposed by most national governments (Reeher, 2012). For instance, the products made by prisoners are not allowed for export in some countries. The reason behind this is the issue on human rights where only a little portion of the profit is given to the prisoners, while the larger portion is taken by the penal institution (Dewitt & Hernandez, 2003, p. 200). In this situation, it is evident that trade barriers act as a hindrance to free trade. In reality, although these barriers are hindering free trade, many nations consider it a shield that protects their economies from any unwanted harms brought by openly engaging in international trade. Import duties/tariffs. Tariffs are taxes imposed on goods and services that are imported from other countries (Rittenberg & Tregarthen, 2009, p. 434). In the United States, approximately 4% of tariffs are imposed to imports, but this may vary depending on the imports’ category because higher tariffs are imposed to other imported goods (Rittenberg & Tregarthen, 2009, p. 434). According to Ungerer and Scott (1991, p. 19), the imposition of tariffs has to be done while referring to a set of objective criteria. Also, they have emphasized the importance of transparency in publishing the desired percentage to be imposed on the imported products. Practically, tariffs allow nations to obtain more import revenues adding up to their national budget that is spent for projects and programs for the welfare of the people. However, in spite of this benefit, when a nation gets to become overly overwhelmed with the revenues it obtains from import tariffs, the one that suffers is the nation's local industry. Nonetheless, nation's still consider it as a barrier that controls the effect of free trade. Figure 1. Teddy Bear Tariff Graph source: ("Tariffs and Quotas," n.d.). The teddy bear producer is compelled to pay a tariff because it is a foreign firm. (Domestic producers of teddy bear do need to pay tariffs). If a $10 tariff in each one of every imported teddy bear price increases to $50, supply of domestic quantity increases to 65 and the demand for domestic quantity declines to 80; therefore, teddy imports decrease to JK=K-J=80-65=15. Tariffs lead to increases in prices causing consumers to suffer the consequences ("Tariffs and Quotas," n.d.). Import quotas. Import quotas impede the physical quantity of goods, which may be imported. In comparison with tariffs, quotas are more restrictive since these only allow the importation of a specific number of goods whereas tariffs increase import price, but it permits the entrance of imported goods (Thomas & Carson, 2011, p. 389). There are two main types of quota, namely absolute quotas and tariff rate quotas (O connor, 2006, p. 208). Absolute quotas absolutely restrict an amount imported during a quota period while tariff quotas allow a "limited quantity of the quota product at a reduced rate of duty" (Onkvisit & Shaw 2009, pp. 87-88). Quotas do not give revenue to a nation because of the limitations that these set to regulate the importation of goods. However, while importation is being regulated local manufacturers are able to benefit since the competition versus imported goods is lessened allowing them to penetrate the local markets. Figure 2 Quota Graph Source: (Edge, n.d.) Figure 2 illustrates the impact of imposing quotas to lower imports from Q2Q to Q1Q3. Domestic price increases from OP to OP1 benefiting owners of import licenses and domestic producers--increases from OQ2 to OQ1 in domestic supply while there are increases in price for domestic consumer (Edge, n.d.). Domestic support. As defined by the Organisation for Economic Co-Operation and Development, (2011, p. 179), domestic support refers to the yearly monetary support given by the government oftentimes for agricultural production. Domestic support, according to the World Trade Organization stimulates overproduction, thereby affecting chances of imports (as cited in Lawrence, Lyons, & Wallington, 2010, p. 82); eventually resulting to dumping in world markets. "Domestic support distorts free trade" (Lawrence, Lyons, & Wallington, 2010, p. 82) because it permits the overproduction of domestic products, even if, less is needed in the local market in order to sell it in world markets (Karapinar & Haberli, 2010, p. 304). In a certain degree, this strategy is somewhat like a desperate move by a nation's government to impede the entrance of foreign products in their territory. On the other hand, this will give local producers the opportunity to improve production since the government is giving them enough monetary support. Export subsidies. Export subsidies permit nations to export goods in the international market, but at a cost that is much lower than what exists in their domestic markets (Organisation for Economic Co-Operation and Development, 2001, p. 73). Export subsidies are conditioned based on the recipient that exports the product or service, which is set to be subsidized. Now, members of the World Trade Organization (WTO) have prioritized the elimination of using these export subsidies because they consider it a serious impediment to operations in the international market (Kerr & Gaisford, 2007, p. 282). When the government provided subsidies to exporters, it not only punishes foreign nations but also the domestic consumers and taxpayers (Kerr & Gaisford, 2007, p. 282). Apparently, the giving of export subsidies does not provide significant benefits to the local citizens. As a matter of fact, it adds to the heavy burden that they are carrying because of the taxes that they have to pay, so that the government can finance these subsidies for the exporters. In this situation, domestic consumers are the ones who are negatively affected. Figure 3 Subsidy Graph Source: (Edge, n.d.) Trade protectionism. It has been an old belief that trade protectionism can ruin the economy of a nation that enforces it (Bhagwati, 2008). When the economic crisis hit the world, trade protectionism amongst national economies heightened. Countries increased their tariffs and enforced other non-tariff measures, in order to remedy problems brought by declines in production on some industries (United Nations, 2010, p. 16). Proponents of trade protectionism believe that restricting imported goods will rescue more jobs, thus providing domestic industries an opportunity to regain stability and decrease trade deficits, but to Miller and Elwood (1988), all these beliefs do not have a basis, at all. Miller and Elwood (1988) believe that protectionism brings in more problems rather than protect the country from the effects of the crisis. What is unclear at this instance is the purpose of imposing trade protectionism by nations. The presence of trade protectionism can lead to higher prices, so now, even if the supply goes up, consumers are not able to satisfy their wants and needs. If it is for the protection of the people, then this approach definitely does not protect them because prices are now being set higher than usual. Arguments For and Against Free Trade Even at this point, the idea of free trade is still not totally accepted, although, slowly, some nations are considering it an alternative to boost the economy. Still, there are plenty of those who do not believe in the capacity of free trade, the reason why arguments in favor and against it have remained a big issue in the international marketplace. Free trade pays respect to "individual dignity and sovereignty" (Griswold, 2011, p. 12). Trade Barriers impede free trade, and as it happens nation to nation trade is somewhat being restricted by certain regulations that the government imposes. Basically, any nation in this world "has the right to enjoy the fruits of their labor" (Griswold, 2011, p. 12), and engagement in free trade is the only means to achieve this aim. The government’s role here is to manage the flow of trade even without having to impose trade barriers. Government of nations seems to think that free trade restrains them from exercising their power to regulate trade. This is a belief, which is way far beyond the truth. Free trade does not hold back their authority to regulate trade, but it opens the door for trade partnerships with other nations. The government’s role here is to manage the flow of trade even without having to impose trade barriers. On the other hand, it is considerable to infer that free trade bridges the gap between nations. Obviously, free trade enables the interaction between nations, and so, eventually it brings them closer, thus leading to unity and international partnerships. Engaging in free trade is one way to extend the willingness of government leaders in establishing a good relationship with other nations at the same time allowing them to promote the products or services that their country has to offer. Conclusion Despite the presence of trade barriers, people have knowledge about free trade, and they have an idea about it because it is still present in today's modern world. Free trade does exist, and the only reason why some question its existence is due to the fact that nations are trying to impede it by making use of these trade barriers. In this highly-globalized world, it is no longer surprising why nations argue about free trade. There are nations who are open to free trade, and there are those who do not welcome the idea simply because they have varied strategies and approach into dealing with the protection of the well- being of their own national economies. Apparently, their choices have to be respected not to spur any tensions or disagreements. Also, the decisions of nations to impose trade barriers have to be accepted because again all they want is to perform their obligation to protect their economies. 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