Worldwide trade.The advantages and disadvantages of free trade and the relative comparisons to fair trade - Research Paper Example

?Running Head: WORLDWIDE TRADE The advantages and disadvantages of free trade and the relative comparisons to fair trade The advantages and disadvantages of free trade and the relative comparisons to fair trade Introduction Free trade is an economic concept in which trade between nations is opened up so that regulatory issues are minimized and equal opportunities for imports and exports can be experienced. The concept of free trade is dependent upon the idea that fairness will be established for those involved. However, there is a difference between free and fair, corporations finding ways to best exploit the lack of regulation in order to achieve the highest level of profit from the exploitation of resources. Free trade opens up the borders so that the movement of goods can flow back and forth so that maximum growth of a nations industry can be achieved. Free trade is established with the idea that fair competition exists, a mythological economic model in which all parties act in the best interests of all the stakeholders. However, free trade does have genuine benefits in creating an increase in industry in nations that are struggling to establish growth. When trade exists in a state where resources are more well utilized and allocated for the exchange on a global level, a healthier overall economy can be achieved. There are controversies, however, that come from the realities of free trade. People in the United States who are not in support of free trade fear it because they believe it represents losses in jobs and in industry through competition with nations who do not hold the same wage and environmental standards that are expected within the U.S. Defining Free Trade Free trade exists when respective governments allow trade across borders with very limited governmental interference. In a mutually beneficial agreement, the traders will find that they have comparative advantage and will achieve gains from the trade that have benefit for both parties. Supply and demand are the barometers from which the measurements of the amount of trade is divined. Free trade is a reflection of a global economy, each of the regions of the world benefiting from open borders where the exports and imports create better pricing. While this is the hope of free trade, this is not always the result. According to Irwin (2009), “Growing world trade has helped lift standards of living around the world, and yet today…free trade does not win many popularity contests” (p. 1). Free trade creates fears and insecurities about the availability of jobs and the sale of goods. When Japan rose in prominence as a dominating force in manufacturing during the 1980’s, there was a fear that the competition would wipe out a consecutive stream of businesses within the United States. Japan was competing successfully in the sale of everything from automobiles to super computers, diminishing the power that the United States had gained over innovation and industry in the previous decades. In the 21st century, that worry has been shifted to India and China. India is dealing in labor as industry is taking white collar jobs into that country due to the lower wages while China is excelling at manufacturing, creating product that is far cheaper than can be created in the United States. One of the primary agreements that frames free trade in association with the United States is NAFTA, the North American Free Trade Agreement. This agreement allows for free trade among Mexico, Canada, and the United States. The fears that were most associated with the agreement when it was signed in 1993 was that jobs would flow south into Mexico. However, the advantage to NAFTA was in abolishing the high tariffs that Mexico had imposed on exports, while the low import tariffs that the United States had maintained were insignificant (Irwin 2). This allowed for products to be exported from the United States into Mexico and increase trade flow southward. NAFTA According to Hufbauer and Schott (2005), NAFTA has been a tremendous success, trade within the three countries equaling over $700 billion annually with cross-border investments equaling extensive interaction. Success has been seen in the automobile industry, agriculture, and energy. As well, increases in the level of regulations in labor and environmental protections have been put into place through agreements in support of increased trade (p. xv). The success, however, is still tainted by the fears that the agreement is creating deficits within the United States in regard to manufacturing and employment. The pact was initiated through negotiations that were conducted under President George H. W. Bush and President Carlos Salinas. When Bill Clinton took office, he worked towards ensuring that labor and environmental issues were addressed in an additional agreement. The agreement, while not fully meeting the expectations of those within the environmental protection agency, it did put into place the beginnings of protections that could support the health of the planet. Furthermore, the labor issues were addressed in such a way to ensure that products coming out of Mexico were created using humane working conditions with agreed upon measures to insure good labor practices. As Mexico entered the NAFTA agreement their objectives were focused upon improving agricultural industries through modernization which will increase productivity efficiency and decrease the high cost of agricultural subsidies. However, the benefits have had a negative social consequences to some level of farming. Smaller farm operations have not been able to afford to maintain their production levels and the lack of the same kind of subsidies that are seen in the United States has made competition difficult for all levels of farming. Labor practices have cost the farmers more in terms of cost of business and have hampered the advantages of the modernization requirements from fully showing benefit. As well, traditions that have been a part of the area have been affected by the changes and have displaced some aspects of the culture, thus creating some deficits in the overall social construction as adjustments to change have had to be implemented (King, 2006, p. 29). Overall, however, NAFTA has shown success. The initial deficits that were observed toward the United States have been remedied and the loss of employment to Mexico has not been the major concern that was once feared. However, the fears and insecurities that the agreement brings forth in the American population has made it a focus of politicians seeking populace approval. Hilary Clinton said in 2008 that NAFTA was a mistake and suggested that a ’time-out’ be implemented on further negotiations. President Barack Obama promised during the campaign that he would renegotiate the terms of the agreement. The issues with the agreement that have been addressed have not quelled the fears of the losses that the United States fears to other countries in terms of employment and sale of goods. WTO The World Trade Organization (WTO) was organized in 1995 under the Marrakech Agreement. The purpose of the WTO is to regulate trade between the participating nations and to provide resources from which to negotiate disputes and to regulate commerce. The WTO currently has 153 participating nations which represents approximately 97% of the trade within the world. The decisions made by the organization are formed through consensus with the top decisions making body being the Ministerial Conference which meets in two year intervals unless needed to meet within a sooner timeframe (World Trade Organization). The WTO lists its overriding objective as “to help trade flow smoothly, freely, fairly, and predictably”. The subordinate objectives of the organization are to: administer trade agreements, act as a forum for trade negotiations, settle trade disputes, review national trade policies, assist developing countries in trade policy issues, and create cooperation with international organizations (World Trade Organization). The secretariat of the organization is housed in Geneva with a staff of about 600 and has a budget of about 160 million francs per year. There are no outside offices as all decisions are made by the members, thus the secretariat is merely an administrative branch and needs no extended arms into other regions, although some legal services are provided for members through the administrative offices. In 1999, the Ministerial Conference was held in Seattle, Washington where groups supporting the anti-globalization movement within the United States staged a series of protests which included approximately 40,000 protesters who filled the streets and made movement within the city difficult. The perception of protesters is that the WTO is a tool of corporate interests that create detriments to the interests of third-world countries. Rather than viewing the organization as a facilitator towards free trade, the protesters believe that the WTO is the beginning of the end of cultures that will be pulled into the globalization in such a way that traditions and successful ways of life are usurped by industrialization that disintegrates social structures. The intent of the protesters was to overwhelm the streets, blocking intersections and making travel difficult so that the delegates could not get to their destination. Mistakes were made by government during the protests. The protesters were creating a great nuisance, as was their intent, and a rogue faction had begun to do vandalism in the name of the cause. Police used tear gas, stun grenades, pepper spray, and eventually, rubber bullets on the crowds. A police order was issued that prevented the sale of gas masks downtown. The confrontations between the police and the protesters became violent with reports being made of protesters throwing Molotov cocktails at the police, but this report was later retracted as an error. Over 600 people were arrested and there were dozens of injuries reported, but the protesters considered it one of the more successful protests of the century, accomplished at the eleventh hour of the 20th century. Advantages and Disadvantages of Free Trade Free trade allows for equitable exchange of imports and exports without high tariffs impacting the ability of one country to export its goods into another with the impact on the price making it not feasible. One of the benefits that comes from free trade is that from the increase in the volume of exports, industry achieves economies of scale as the increases create expansion and growth. According to Merritt (1996), “Trade allows smaller countries to specialize and produce a few commodities at high enough levels of output to exploit the available economies of scale” (p. 36). The theory behind free trade is to provide each nation the opportunity to maximize the benefits of its resources in order to export product and increase the level of production in order to reach a maximum of growth. Some of the problems with the attempts to use free trade to the best advantage are founded upon the fact that perfect competition is not achieved within the world. Because of the cross investments of many of the worlds corporations, the benefit of trade for the companies exporting from a nation may not be going to nation of origin. As an example, free trade has been actively pursued in Canada in order to help Canadian industries grow and reach their optimum economy of scale, but Canada exports 70% of total trade and investment to the United States. The value of the shipments going from Canada into the United States attribute 35% of to American subsidiaries operating in Canada. Of those shipments, about 75% of the product is intra-firm shipments that do not create the benefit to the Canadian industry intended through free trade. In other words, the economies of scale are being exploited in order to create higher profits, but do not necessarily benefit the nation of origin (Merritt, 1996, p. 37). One of the concerns of free trade is with the impact of integration on trade. The two effects that can be observed are trade creation and free trade diversion. Trade creation occurs when high-cost domestic production is replaced by low-cost imports. This should improve the allocation of resources and represent a move towards free trade. Free trade diversion occurs with the “displacement of lower cost imports of a product from a non-member state by higher cost imports from a member state” (El-Agraa, 2007, p. 165). This is result of the discriminatory nature of an imposed tariff which will worsen the allocation of global resources and make a step towards protectionism (El-Agraa, 2007, p. 165). While the effect of integration can vary, the results of how it impacts income is the primary factor in considering the impact of global trade. The impact that trade will have on income can either enhance or decrease economic welfare. Trade creation is most often welfare enhancing while trade diversion will decrease the economic welfare. The elimination of tariffs can provide trade creation, enhancing economic welfare. The benefits of tariff elimination can be calculated by multiplying half the tariff reduction by the volume of extra trade created. Decreases in economic welfare from trade diversion can be assessed by multiplying the volume of trade diverted by the world, free trade price, and the union price (El-Agraa, 2007, p. 166). This does not take into consideration the feedback of a tariff cut on other aspects of the impact of the change in the positioning of the product. The balance of payments effect can be affected by integration as seen in the European Union. A favorable balance of payments is realized when integration provides for an increase of exports over imports. However, an unfavorable balance of payments will occur when imports increase over exports. When the European Union was formed there was a great fear that Italy would experience an unfavorable balance of payments. However, the forming of the EU increased industry in Italy, allowing the integration to create a high amount of benefit for the nation (El-Agraa, 2007, 167). The effect of free trade on inflation can have a positive impact. When liberalization of imports by reducing and minimizing tariffs results in a deflationary effect. As an example, when the prospect of opening up free trade into the Caribbean the deflationary effect was a large consideration. Approximately 80% of the total product in the Caribbean is imported from either the United States or Europe. In reducing tariffs by 10% would reduce the costs of products by an overall 8%. Through import liberalization, the Caribbean expected to see deflationary impact that could range anywhere from 1 to 22%. The downside of reducing tariffs is that the revenues that were generated through exports would have to be recouped somewhere else, which would most likely be through consumption taxes, which would render the savings almost a moot point. Fair Trade and Free Trade Fair Trade is an alternative model that is a social movement that is more interested in stakeholders than shareholders in the economic landscape. Fair trade is designed to be to the advantage of the disadvantaged, having social interests and sustainability as primary concerns in regard to industries at a global level. The focus of fair trade is on developing nations in order to ensure that the methods of industry are of a standard to best promote humane and beneficial results with all that are involved in the creation of product. The principle concerns of fair trade are: fair wages in the local context, good working conditions, equal opportunities in employment and advancement, environmental sustainability, and accountability and transparency (DeCarlo, 2011, p. 32-47). One of the most important aspects of the fair trade movement is the development of relationships between import and export entities with the purpose of addressing all of the principle considerations of the ideals that are represented by fair trade. In creating these relationships, a value chain is formed in which the beginning of the chain and the end of the chain endeavor to have equitable ideals and support functions that will provide for the best results for all the stakeholders involved. An example of a chain of relationships that can help an artisan get their product to market can be seen from the perspective of a potter in a third world country who desires to have their product exported to the United States. Relationships can be formed that will evaluate trends in order to inform the potter what kind of products are desired. Help with the export process and a valued wage that can support the family within the context of the economy of their origin can be assessed, and finally, the product put into the hands of a wholesaler who can get it distributed to retail outlets (DeCarlo, 2011, p. 48). The point of fair trade is for all members of the chain to benefit while sustaining resources for future industrial use. The difference between free trade and fair trade is that free trade is more geared towards the interests of shareholders, despite the intent of perfect competition, while fair trade is concerned with all levels of the transactions in order to ensure that trade is accomplished for the best benefit of all. Fair trade assesses the needs of the workers as the foundation of production, their needs having the first and primary concern so that each level after their contribution has their needs attended. The concept looks at realities rather than looking at utopian economic models that depend on the hope that corporations will allow equitable trade. As in the example of the exploitation of Canadian resources by American subsidies, thus lowering the benefit of free trade, a shareholder model of governance will provide for the profit that the owner see without much regard for the overall effect on all of the stakeholders. Fair trade is concerned primarily with all of the stakeholders. Conclusion Free trade has been developed with the intent of allowing for nations to have the uninhibited flow of imports and exports in order to take the best possible advantage of resources. If fair competition was in play, free trade would be a highly valuable resource from which the global market could be built. However, because of the shareholder model of governance from which most United States corporations base their ideologies, the exploitation of resources creates a deficit in the true benefit that could be realized from free trade. While free trade has created some advantages in lowering tariffs and opening up markets for nations so that the act of trade can be better negotiated, there are some aspects of the business arena that have been left out of the equation, thus creating problems for those who do not have enough power to implement their needs in the system. Fair trade has been designed to take everyone’s needs into consideration. In this model, those who craft the product are considered for their needs with as much concern as those who have the power and money to export and distribute the product. Stakeholders are considered for their needs and individuals find themselves taken care of through the interest of the system in making sure that fair wages and treatment are supported by the sustainability of the industry. A mark of fair trade means that a product has been created with concern for methods as much as concern for savings. While free trade has the potential to benefit nations, fair trade is interested in benefiting people, assuring that the treatment of the workers is put at the top of the concerns of the economic structure. Free trade has many advantages, but the fair trade movement has pushed past the concept and developed a model in which all members of the economy find benefit in the production and sales of goods. In shifting the ideology towards people, food finds its way to the table and roof stays over their head - the best possible scenario for an economy. References DeCarlo, J. (2011). Fair trade and how it works. New York, NY: Rosen Pub. El-Agraa, A. M. (2007). The European Union: Economics and policies. Cambridge: Cambridge University Press. Hufbauer, G. C., & Schott, J. J. (2005). NAFTA revisited: Achievements and challenges. Washington, DC: Institute for International Economics. Irwin, D. A. (2009). Free trade under fire. Princeton, N.J: Princeton University Press. King, A. (2006). Ten years with NAFTA: A review of the literature and an analysis of farmer in Sonora and Veracruz, Mexico. Mexico: CIMMYT. Merritt, C. (1996). Free trade: Neither free nor about trade. New York: Black Rose Books, Ltd. Nicholls, A., & Opal, C. (2005). Fair trade: Market-driven ethical consumption. London: Sage. Saborio, A. S., Morici, P., & Overseas Development Council. (1992). The Premise and the promise: Free trade in the Americas. New Brunswick, N.J: Transaction Publishers. World Trade Organization. (2010). The Organization. WTO. Accessed from Read More