Free Trade: For and Against Arguments - Coursework Example

None of the countries, in recent decades, has accomplished economic success, regarding substantial improvement in its people`s living standards, without opening up its economy and engaging in free trade with the rest of the globe. For example, trade opening together with opening economies to foreign direct investment, constitute an important element in the growth of economies of East Asia. The average import tariff in these economies has fallen to 10 percent from 30 percent over the last 20 years. Several Asian countries have become more successful since they opted to participate in global trade which has also helped them in attracting the bulk of direct foreign investment in developing countries as an expansion of their market. This is undoubtedly true of India and China since they both have embraced trade liberalization as well as other market-oriented reforms. China currently invests and trades with East African countries as a result of a free trade agreement between the nations.

Trade liberalization offers the ideal policy prescription since the economic benefits that accrue from free trade are relatively simpler to illustrate. Countries in the world are generally confronted with just two prices for goods and services within the global economy: the world prices and the domestic price. In a situation where the world price is lower than a country`s domestic price, say Brazil, then domestic consumers from Brazil will purchase the services and goods offered by other international markets since they are cheaper. However, firms in Brazil can respond to the effect of free trade by seeking government support by imposing import tax or applying for investment incentives.

In addition to the argument that free trade functions best in promoting efficient allocation of resources, it has also been asserted to occasion additional long-run benefits like; economies of scale, improved productivity since prices for intermediate services and goods decrease, and growth externalities via technology transfer. Economies of scale apply to industries that require a very huge volume of production before reaching the lowest average cost (AC). Examples of these industries are the movie and film industries of Nigeria and Hollywood. Without a doubt, such industries will hardly arise in an environment where free trade is restricted because, based on the reality that such industries need large markets to be efficient, their market will be narrowed only to the domestic market (United States, 2004).

Growth externalities mean the production benefits which may originate from the incorporation of recent technologies acquired by other globe`s production firms through enhanced interaction with foreign countries as a result of free trade. Therefore, free trade offers numerous opportunities for innovation and learning, which are necessary for the global economic growth and strength of international economies, then are offered by a system of the closed economy or managed trade (Maddison, 2001). An example of this growth externality is seen in Kenya when it adopted new technology, acquired from China, in building its Thika super highway- a road network that was to facilitate the free flow of goods from Somalia to Nairobi.

Finally, free trade arguably allows for a large variety of intermediate inputs used in production processes to enter the market of other countries in the world. This potentially expands the production possibility curve of numerous participating global countries through the influx of the much-needed capital goods used in their assembly production (Quinlan & Stevens, 1998a). A good example of this is seen in the expanded production possibility curve of Kenya`s motor assembly industry which receives numerous intermediate inputs from Japan.

However, the idea of free trade is not welcoming to the ears of firms in developing countries. The infant industry in these developing countries' argument revolves around the fact that trade protection is essential to grant domestic industries enough time to develop before competing with industries in developed countries, which are more mature. Free trade kills domestic industries in developing countries by providing cheaper world prices for domestic consumers while causing conditions of unhealthy competition for domestic producers (Hudson, 2005). With no short-term government protection policies, it is very difficult for industries in developing countries to enjoy economies of scale in presence of competition hailing from large foreign companies.

Free trade is undoubtedly the driving engine of global economic growth and the strength of international economies as discussed in this paper. The debate concerning practical benefits accruing from free trade is countless. However, it is beyond no doubt that there is still a disconnect between firms from developing countries and firms from developed countries in terms of who benefits most from free trade with firms in developing countries being disadvantaged.