International Business Environment: Free Trade Agreement - Term Paper Example

Free Trade Agreement Countries which eliminate tariffs and quotas create a free trade area where preference is given to most goods. The prerequisite for free trade area is if the economic structures of the participating countries are the same. The member countries have different policies with respect to non member states (Lawrence, 25, 2005). Rules of origin are implemented within a free trade area to prevent re exportation to other countries. A free trade area is formed by free trade agreements. It reduces trade barriers and ensures easy exchange of goods. It is believed that a free trade area increases income and wealth. It brings prosperity. However it may be a disadvantage for protected industries which are at a comparative disadvantage (Anderson, 22, 1997). Governments worldwide are considering setting up free trade areas which they believe will open markets and improve the standard of living of their people. However there has been some opposition for the establishment of free trade areas also. Some people say that it would be disastrous for the trade and stability of smaller countries (Daniells, 54, 2005). Free Trade areas open up markets and eliminate tariffs. However this would be disastrous for small countries since their industries and agricultural products would not be able to compete with the corporate goods of powerful countries. Foreign agricultural imports would destroy a small country’s agriculture. The country would be dependant on imports to survive and feed its population. Small countries have been reluctant to join free trade areas because of concerns that their small industrial bases would be unable to compete with corporations of powerful and industrialized countries (Anderson, 22, 1997). According to economists free trade areas have short impacts on member states as they adjust their production and consumption according to falling trade barriers. They also initialize improved specialization of resources and create more opportunities for exchange within the region (Frumkin, 71, 2000).This allows consumers to benefit from lower prices. Production is also increased due to reallocation of resources according to the comparative advantage. Free trade areas also cause transitional costs as companies begin to reallocate their activities which can cause short term unemployment (Esser, 65, 1999). Free Trade areas also cause long term impact on economic growth as economies grow in scale and scope (McInnis, 61, 1995). Competition increases between companies. There is also an increase in technology and investment. Companies expand their activities in the greater market. It also causes innovation and efficiency in companies. A free trade area also causes greater dependence of economies. This can cause some vulnerability and instability in a trading partner. But the trading partner also benefits from multiple links with the better performing trading partner (Esser, 65, 1999). There are other difficulties in the establishment of free trade areas. Countries with different political, legal, social and economic systems will have difficulty if trade and investment are opened between them (Walford, 51, 2005). This also can create larger transition costs. Free trade area however helps to remove barriers which prevent trade between nations, hinder production and breed corruption. A free trade area can help in reducing corruption in developing countries. They also help in promoting trade and investment. They can also help in developing the infrastructure of poor countries (Webb, 54, 2005). China has been pushing for the establishment of a free trade area in Asia and the world despite being a developing country (Ackroyd, 34, 1997). It has participated in numerous talks and negotiations. China currently has an agreement with ASEAN. It is also negotiating with Australia and New Zealand for the establishment of a FTA. Further talks have been conducted with Japan and South Korea. These three countries have been studying the possibility of a free trade area (Pomfret, 77, 2002). China and ASEAN signed an agreement on goods which was aimed at the creation of the world’s largest free trade area (Chow, 145, 2005). This huge trade area has two billion people and a combined GDP of three trillion dollars. China’s government aims to establish FTAs with other regional nations. The agreements aim to reduce tariffs for valuable products (Chenery, 101, 1995). China, Japan and South Korea have also conducted meetings in which they aimed to promote cooperation on economic, political, military and educational issues. They also agreed to setup a committee to study the possibilities of the establishment of a FTA. All three countries have a strong incentive for economic cooperation (Chan, 71, 1993). They are all present in Southeast Asia. They have close trade relations with each other. Trade between China and Japan has also increased. Both Japan and South Korea have also invested billions of dollars in China. There has been some concern as Japan has a more developed economy than China and South Korea. Japan fears it could be flooded with cheap products. Both South Korea and Japan are also suspicious of China’s political motives (Pomfret, 77, 2002). According to the WTO countries cannot impose a higher tariff against one member as compared with another member. Further a reduction in a country’s trade barriers must also be accompanied by reduction in trade barriers of imports of all member states. This increases competition in imports and will result in displacement of domestic production. It will not affect imports from other countries. However in the case of FTA reductions in trade barriers increase the competitiveness of imports from other parties as well as imports from other countries. Any rise in imports can displace domestic production. This is known as trade creation according to economists. This results in a net increase in trade (Timmons, 87, 1990). The difference between trade creation and trade diversion is important because the former is more likely than the latter to produce a net economic benefit. Trade creation is beneficial in economic terms because it only happens if the price of the import in question is lower than domestic cost. This allows obtaining goods at lower costs. Trade diversion is less beneficial for an importing country because it allows imports at a higher cost to the economy. The tariffs paid by purchasers constitute the government’s revenue and it does not go to the foreign economy. Countries have been trying to push for FTAs because there has been little progress in the creation of multilateral trade negotiations (Cerny, 41, 1993). Critics fear that FTAs might divert world attention away from multilateral trade liberalization and lead to the creation of large and competing trade blocs (Timmons, 87, 1990). Other concerns about FTAs are that larger countries with powerful economies would give them an advantage in negotiations with individual countries. Such unequal bargaining power could result in significant trade restrictions by the large countries remain in place that would more likely be eliminated under circumstances of more-equal negotiating power. Small countries also face the risk of negotiating disproportionate concessions in FTAs (Bird, 21, 1987). This may prove to be difficult in WTO talks because the smaller countries won’t have anything special in return for the more powerful countries to remove barriers (Timmons, 87, 1990). Others however believe that removal of trade barriers would benefit all countries. Free trade agreements could deregulate services sector. They could expand access to direct foreign investment. They could promote transparency rules. Transparent administrative procedures and regulations would be implemented. Productivity would also increase as millions of workers would become skilled due to the opening of new businesses. Workers could earn more money and increase their standard of living. Rise in living standards results in people enjoying their lives and they have an interest in preserving these benefits. Peace and stability is thus promoted due to the creation of free trade agreements. The likelihood of civil strife decreases. Improved incentives inside host country also allow the workers to work and live there instead of migrating to other nations (Biersteker, 51, 1995). This can also be beneficial for developed countries as illegal immigration decreases. Free trade agreements thus promote economic development, increase employment and play an important role in promoting peace and development inside developing countries (Timmons, 87, 1990). China is an emerging economic power. It demands a great variety of products. Despite the fact that it has many resources it cannot specialize in everything. The law of comparative advantage still applies. A free trade agreement would provide foreign manufacturers to invest in China. (Bergsten, 71, 1999) Tin, wood, charcoal, rubber, animal, vegetable fats, oils and other products are scarce in China. Companies which provide these products would benefit. Removal of tariffs and non tariff barriers would lower transaction costs. It would allow free flow of products in the region. Consumers would have wider choice of products. Each member country would have different products to offer (Weston, 61, 1995). A free trade agreement between China, Japan and Korea would improve efficiency and productivity for various organizations. Product specialization and efficient utilization of resources in suitable sectors would happen. Minimizing transaction costs would also allow cheaper prices for consumers. It would also raise productivity level. Organizations can also learn from each other by cooperation. The intensity of competition would increase and reduce internal inefficiencies. Productivity level would also increase due to the establishment of a free trade agreement. China’s ample supply of low cost labor would be able to erode the market share of other countries (Weston, 61, 1995). It is estimated that trade liberalization measures would allow China and ASEAN to increase market access and trade opportunities (Bergsten, 91, 1996). This could be achieved through trade flows with income and welfare increase on both sides. China’s demand for imports from ASEAN is expected to rise 11 per cent a year. Imports are expected to reach US$35.5 billion in 2007. Export value of ASEAN countries will increase to 49 percent. The combined GDP of the ASEAN countries is expected to rise by US$5.4 billion and China’s by US$2.2 billion because of the free trade agreement (Weston, 61, 1995). With regard to the composition of trade flows, the ASEAN-4 may directly gain some additional market share in China in the field of resource-based goods. Notably, these include: oil, gas, and hydro-energy; several other mineral commodities; many forestry and agriculture items (such as food grains, sugar, edible oils, timber, and furniture, etc.); and fishery and aquaculture products in fresh, processed, and frozen forms. In addition, through rising income and affluence, there will be higher demand from China and the ASEAN-6 for a variety of high-value, income-elastic agro products, including high-quality rice, fish and seafood, cut flowers, tropical vegetables and fruit, nuts and spices, and so on. In the process, furthermore, the ASEAN-4 producers can expect a large premium for environmentally preferable, natural products--including those from organic farming, and from farming with plants and species which have not been subject to genetic modification (Weston, 61, 1995). Countries which eliminate tariffs and quotas create a free trade area where preference is given to most goods. The prerequisite for free trade area is if the economic structures of the participating countries are the same. The member countries have different policies with respect to non member states. Rules of origin are implemented within a free trade area to prevent re exportation to other countries. A free trade area is formed by free trade agreements. It reduces trade barriers and ensures easy exchange of goods. It is believed that a free trade area increases income and wealth. It brings prosperity. However it may be a disadvantage for protected industries which are at a comparative disadvantage (Weston, 61, 1995). China is an emerging economic power. It demands a great variety of products. Despite the fact that it has many resources it cannot specialize in everything. The law of comparative advantage still applies. A free trade agreement would provide foreign manufacturers to invest in China. Tin, wood, charcoal, rubber, animal, vegetable fats, oils and other products are scarce in China. Companies which provide these products would benefit. Removal of tariffs and non tariff barriers would lower transaction costs. It would allow free flow of products in the region. Consumers would have wider choice of products. Each member country would have different products to offer. Others however believe that removal of trade barriers would benefit all countries. Free trade agreements could deregulate services sector. They could expand access to direct foreign investment. They could promote transparency rules. Transparent administrative procedures and regulations would be implemented. Productivity would also increase as millions of workers would become skilled due to the opening of new businesses. Workers could earn more money and increase their standard of living. References Anderson, Kim. "On the Complexities of China's WTO Accession". Worm Economy 20, no. 6 (1997): 749-73. Esser, Klaus et al. "Systemic Competitiveness: New Challenges to Business and Politics". Economics. 59 (1999): 62-85. Pomfret, Richard. The Economics of Regional Trading Arrangements. New York: Oxford University Press, 2002. Timmons, Jeffrey A. New Venture Creation: Entrepreneurship in the 1990s, 3rd ed. Boston, Massachusetts: Irwin, 1990. Weston, Ann. 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Strout. 1995. “Foreign Assistance and Economic Development.” American Economic Review 56, no. 4:679–733. Chow, Gregory C. 2005. “Tests of Equality between Sets of Coefμcients in Two Linear Regressions.” Econometrica 28, no. 3:591–605. Read More