International Business - Assignment Example

Running header: Free trade agreements Student’s name: Instructor’s name: Subject code: Date of submission FREE TRADE AGREEMENTS Introduction Bilateral free trade and other regional blocks threaten free trade progress made by the world trade organization. This is due to the many demerits that are associated with the trade. They go an extra mile to see to it that the trade is not successful and it does not go according to the demands and the requirements of the World Trade Organization. Free trade is defined as a system whereby the governments of certain international countries allow free imports and exports between the countries. Through this, the business people in the member countries transact their operations freely with no restrictions whatsoever. It therefore enables the nations of the member countries to pay key focus on their competitive advantages (Holbein and Musch, 2002). This is in an effort to maximize the economic output that their citizens have. It also helps raise they income that they make from their operations. Through increase in incomes, the economies of the countries are bound to develop. This is also characterized by the development and improvement in the living standards of the local people. A good example of free trade areas is the European Union. Despite all the advantages that are associated with trade agreements, there are several disadvantages that have been raised against it. These disadvantages have reduced their effectiveness of the trade in the regions. This is what highlights why not all countries in the world have engaged in trade agreements. They are as listed below. a. Introduction of political slavery – One of the characteristics of trade agreements is that they increase trade dependencies between the member countries. This is where; they rely on others to produce the goods that they are not able to produce. This is at even better prices. Such dependencies result to the creation of a sense of political slavery. Political freedom is characterized by utmost independencies in all aspects (Peloso, J2005). Economic independence by being absent, results to the development of political slavery between the member countries. This is a disadvantage that makes the trade agreements not to be effective in the market. So as operations to be successful in a country, there must be utmost and complete political independence. This is however an aspect that has been omitted in free trade agreements. The lack o political independence can in other words be explained as political slavery and this is a demerit on the side of the free trade. b. It also results to unbalanced development – Free trade has given rise to international specialization. This is where countries solely develop what they are good at producing. Thisresults to an imbalanced state of the national economies of the countries. This has the long-term effect of causing development in the sectors that are developed only. As such, they have a comparative advantage as compared to those sectors that are less developed. The developed due to this, will experience more development while the least developed will weaken in their activities (Stevens, 2010). This hence has an effect of causing a one sided development. It hence causes imbalanceinthe economy of the country. For an economy of a country to achieve maximum growth and development, the economic growth must come from all sides of the divide. This is from the low income earners and the high income earners. With this, theeconomic growth and development will be equitable and well assured. The free trade agreements on their part foster developmenton one side while neglecting the other. This is a demerit on their sideas it results to unequitable economic development. c. The increased cases of dumping Dumping refers to the process whereby inferior quality goods are disposed of in a country from another at a low price. Some of the commodities that are subject to dumping are outdated computers and second hand clothes. This is especially so to the less developed countries. They result to the use of outdated technology by the countries and hence do not foster economic growth. The price is usually low to an extent that it even falls below the cost of production of the goods. This results to the lack of market for the locally produced goods. This is because their price is higher than those that are dumped in the country. Through the reduction in the sales for local goods, the returns that are made by the local producers and business men are reduced and they eventually make losses in their businesses (Baier and Commission of the European Communities, 2004). Through making losses, the incomes that they make are greatly reduced. This hence results to lower living standards and higher cases of unemployment. This has an effect of resulting to economic stagnation and lowering the economy of a country. Economic backwardness of a country has many effects to the citizens beginning with high costs of products and high unemployment cases. This is what is caused by the dumping cases that are prevalent in the free trade agreements. d. The development and sale of harmful products Trade agreements are characterized by no restrictions to the trade between the member countries. Assuch, it is characterized by the trading with commodities that are below standards that are allowed. The production and trade of below standard goods may cause the sale of harmful products to the market. This can cause health effects to the people who consume it (Grossman and National Bureau of Economic Research, 2003). They may be sold at low prices and these risks the lives of the low income earners who more frequently than not consume low priced goods. This hence dictates the need to put in place restrictions in the trade to see to it that the importation of such harmful goods is not allowed. This is in an effort to protect thelives of the local consumers. The sale of below standard goods can result to the development of certain diseases and health complications. They also result to the consumers not getting value for their money in the purchases that they make. e. The development of international monopolies In international trade is fostered by trade agreements. Free trade encourages the development of international monopolies. These are large international companies whichare able to make their presence felt in the local markets. They have a resource endowment which makes them be able to penetrate all markets with ease. They also have price control. They have the benefit of economies of scale and hence have low prices for their goods and services. The potent they have makes them acquire a monopoly position in the market. With monopoly power, they dictate the prices that will be charged by goods in the market (Films Media Group, 2006). They are also characterized by customer exploitation. This is due to the lack of competition for their goods. With this, they can produce goods that are below standards and yet they are consumed. Through their monopoly presence, they hinder the development of local businesses operating in the same field. This hence results to the loss of jobs for the local people. This is in the long term translated to the decrease in their living standards. This is further translated to the economy where it develops a negative growth trend. The monopolies can also put to use strategies that are deemed unfair for the consumers. This is due to the advantages that themarket power gives to them. One of the benefit is price control. They can set unfairly high prices for the commodities that they offer to the market. Another advantage that they have is quality control. They can sell low quality products with the anticipation that they will be bought regardless of their quality. This is due to the absence of competition in their field. Monopolies are hence disadvantageous to the local markets. f. Free trade has also allowed for the adoption of unrealistic policies The operation of free trade assumes that there is no government intervention in the affairs of the market. This is also known as a laissez-faire assumption. It also assumes that there is perfect competition in the market. These are factors which in the real world do not exist. For example, the government has control overall affairs that are happening within its boundaries. This includes in the taxation, random quality checks and other measures. Perfect competition is also an unrealistic factor I the real world (Cummings and Manchester City Art Gallery, 2003). By being based on such unrealistic policies, its effectiveness and accuracyin the development process is limited. The free trade approach can hence be said to have an unrealistic approach in the market. This is through having unrealistic policies based assumptions. g. The lack of cooperation from some countries The success of free trade is dependent on the cooperation from all players I the trade. The players in this case are the member countries to the trade agreements. It is based on utmost cooperation from the member countries. This is where its success is dependent on utmost compliance from all themember countries to the agreement. In that case, if some countries make a decision to impose restrictions on the quantity of goods that areentering or leaving their boundaries will have great repercussions to the effectiveness of the trade. Noncompliance to the agreement is tantamount to its failure.by being dependent on the cooperation on all the member countries; it is subject to much instability in the undertaking of activities (Young, 2009). A trade that is inclined on the cooperation of other countries is limited in its success. This is due to the fact that it raises the weary attitude among the member states where they all hope for maximum cooperation from the others so as to achieve their goals. As such, they do not functionto their full potential. Instability is because it cannot work if some members do not offer full compliance. h. The trade is also harmful to the less developed countries This is through several ways. The first way is that it results to unfair competition in the market. The competition that is created is also not healthy for the development of the indigenous companies of the country that is less developed. It creates an environment whereby the countries that are less developed find it difficult and impossible to compete with the most developed ones. This is due to such factors as resource and capital endowment. There also issues such as technology that facilitate this (Kowalski, 2008). Another factor is that under free trade, the returns and the gains that are made through the trade are distributed n an unequal means acrossthe member countries. It is unequal due to the fact that they are distributed according to the level of economic development in the country. This makes the trade to be advantageous to the economically developed countries and very unfair to the countries that are not economically developed. This makes it a one sided trade. The trade is also not favorable to the less developed countries because it results to balance of payments that are not favorable. This makes them difficult to solve under free trade situations. The trade also makes the countries that are less developed to have difficulties in the protecting of their indigenous companies. This is because free trade agreements open doorsfor the entry of multinational companies to operate. They are powerful and they limit the operation of the local industries. Their growth and development can hence not be achieved. Conclusion In conclusion, free trade agreements despite having benefits have demerits that are attached to them. The demerits that are present make the trade to fail to achieve its full potential in the undertaking of business across regional borders. The member states should hence strive to their level best to see to it that the demerits that arise are eliminated. This can be done through the elimination of such things as monopoly powers of multinational firms. This can be done through the governments subsidizing the infant industries in their country. They can also use mechanisms to control and reduce the levels of dumping in the country. The demerits of dumping are many to the country. Such things as leaving the country to be technologically backwards among others are the disadvantages ofdumping. Through the elimination of such, the economic growth and development of the countries will be well assured. References Holbein, R& Musch, D2002,North American free trade agreements. Dobbs Ferry, N.Y: Oceana Peloso, J2005,Free trade, Bronx, NY: H.W. Wilson. Stevens, R2010, Trade and development: Focus on free trade agreements. New York: Nova Science. Baier, S&, Commission of the European Communities, 2004,Trade agreements and trade flows: Estimating the effect of free trade agreements on trade flows with an application to the European Union - Gulf Cooperation Council Free Trade Agreement. Brussels, Belgium: European Commission, Directorate-General for Economic and Financial Affairs Grossman, G& National Bureau of Economic Research, 2003, The politics of free trade agreements. Cambridge, MA: National Bureau of Economic Research. Films Media Group, 2006, Free Trade. New York, N.Y, Films Media Group. Cummings, N&, Manchester City Art Gallery, 2003, Free trade, Manchester, Manchester Art Gallery. Young, M2009, Free trade, Detroit, Greenhaven Press. Kowalski, K2008, Free trade, Tarrytown, NY: Marshall Cavendish Benchmark. Read More