Positive Impacts of Free Trade on Economic Development - Essay Example

? BENEFITS OF FREE TRADE ON ECONOMIC DEVELOPMENT Benefits of free trade on economic development Introduction Numerous studies have been carried out concerning the importance of free trade in promotion of economic growth of nations. The subject has elicited hotly contested debates and soaring interest owing to the increased magnitude and value of free trade within the last few decades. Trade is among the oldest economic activity that has ever been carried out in the world by man (Thirlwall and Pacheco-Lopez, 2008). In the last few decades trade has undergone transformation from the ancient traditional trading with goods for goods to modern exchange of goods and services for cash. Free trade can be defined as the cross boundary exchange of goods and services without government restrictions, taxes and tariffs. Free trade increases competition and efficiency. Countries that have actively been engaged in globalization have had to deal with risks and challenges. There has been a big development debate concerning free trade cost and benefits for different countries around the world. This paper seeks to explain contributions of free trade to economic development of countries. Free Trade and Development Countries that have shown active participation in free foreign trade originate from greater access of their manufacturers to larger international markets. A national economy that is accessible to other economies has an opportunity to benefit from global division of labor. On the other hand, it will expose itself to other trade competitors raising its competitive power. In this regard, domestic producers offer production efficiently owing to their global competition. In addition, international competition offers sufficient pressure required for economic elevation. When this happens, consumers get easy access to both domestic and international goods and services at a fair cost. Furthermore, a country that participates actively in international free trade easily benefits from innovative technologies that spill over from their trading partners. This may include productions knowledge and technology on imported entrenched equipment. Such spillovers are beneficial especially for developing nations since they serve as a driving force towards development in order to be at par with developed countries. Free trade is particularly vital in aligning a country’s economy with the global partners. It is worth noting that countries which had initially centralized their economy lost many years of enormous benefits due to their politically driven isolation from the market economies. Today, they have aspired to tap into the benefits of joining the trading global system. However, active involvements in international trade present potential or associated risks. This is caused by active participation in global markets that are characterized by stiff competition. For instance, a country risks shutting down upcoming industries - those that are less competitive or adaptable - owing to the stiff competition presented by free trade. This is the greatest risk of free trade and has to be looked into carefully before opening up borders for free commerce (Sen., 2004). In addition to this, free trade encourages overdependence on foreign suppliers. This is unacceptable especially when dealing with sensitive supplies or those that play a crucial role in the country’s economy. A good example is supply of food commodities where many nations prefer stabilizing their food security supply so as to avoid crisis in the event of uncertainties such as war or shortage in the supplying nation. Although many countries have opted to have free trade, economists from developing countries argue that newly developed industries ought to be protected until a stage that they are less vulnerable to global competition. Therefore, some governments do so by opting to reduce the amount of imports or prohibit imports at all through trade barriers such as quotas. Additionally, imposing tariffs on imports makes it expensive hence imported products become less competitive in the market. However, such protectionist measures can easily lead to economic stagnation as local producers continue to produce less efficiently. It is therefore wise for countries to open up their borders as opposed to using protectionist measures that will eventually harm the country’s economic progress. Some countries may opt to produce entirely everything they need to satisfy their domestic consumption failing to consider the huge economic benefits they would have through international specialization presented by free trade (Sally, 2008). It is important to note that thin international specialization itself is dangerous because it makes a country a country to be dependent on a few imported goods which may be susceptible to price increase due to increased demand in other world markets. In the occurrence of such a scenario, terms of carrying out business can extensively worsen. In order to avoid the above mentioned scenario, diversification of production and exports is essential. Every nation can find its own place in international labor division. Therefore, every country need to identify their path of supply based on her viable advantages, intensify it and make it the heart of their economic survival and progress. It is important to note that the cost and benefits of global trade is dependent on the magnitude of a nation’s domestic consumption. It is also dependent on the amount of natural resources at its disposal and the ease to tap such resources. For example, a country having huge domestic markets has their trade limited whereas those that have few natural resources within their reach buy and sell better (Mukhopadhyay and Thomason, 2010). Free trade is beneficial to a country as it raises production efficiencies in industries due to competition. It is therefore important for all countries to open up borders for free trade. This can be done through bilateral trade agreements and institution of open border routes. This practice expands borders at the same time increases goods or trade culture influx and efflux. This movement of goods creates a larger good multiplicity. As earlier mentioned, open trade leads to specialization in production of goods a country is best at and thereby gives it an opportunity to be the main supplier within a trade region. For instance, a country such as India may specialize in production and supply of fruits because of its warm climate that favor such production. Similarly, Netherlands with its cool climate may specialize in production of dairy products. The two countries can engage in free trade owing to the fact that each country is able to produce more efficiently what they are best at. For instance, it would be needless and costly for Netherlands to grow fruits as they would need to modify climatic conditions by building green houses and eventually harvest low quality fruits. From the above mentioned possible specialization ventures, India can produce more fruits efficiently and sell them at the cheapest price possible giving India a comparative competitive advantage over other suppliers whose cost of production is high. Therefore, efficient production raises competition among trading suppliers. Free trade leads to availability of cheap goods as offered by every specializing nation. This is vital in the improvement of the country’s base. However, companies in a country need to be very competitive if they have to remain in the market and be beneficial to the economy. To achieve this desire, there is a need to invest in the latest technology so as to enable efficient production of goods and place them in a strategic competitive location in the market. For instance, instead of employing 500 workers to pluck tea, companies may opt to use 5 tea plucking machines operated by 10 workers to do the same work and avoid expenses paid on wages. Free trade compels less developed nations to speed up development in order to keep in pace with global competition. It also enables less developed countries to acquire new technologies which would otherwise not be possible without free trade. Conclusion Free trade carries with it numerous benefits which should be tapped by developing countries in order to enhance their economic growth. First, free trade encourages the theory of comparative advantage through specialization in goods that can be produced more efficiently. Through specialization, producing countries will be able to produce cheap goods at a lower opportunity cost and in so doing countries using their produce will benefit economically as they buy at an affordable price (Karagiannis and Witter, 2004). Secondly, reducing tariff barriers encourages development of trade. Trade creation is important particularly in developing countries because consumption shifts from high cost manufacturers to stumpy outlay consumers. For instance, stamping out tariff barriers constitutes into a drop in consumer prices and an increase in buyer surplus. As a result, imports go high whereas domestic producers selling the same commodity encounters less volume of sales. However, there will be an increase in economic welfare but this depends on the elasticity of supply and demand. Thirdly, free trade encourages increased exports which are beneficial for domestic producers. This will see big improvement in economic scales of the partners because more exports boosts job creation and economic growth thereby improving economy. Fourthly, free trade gives countries an opportunity to benefit from economies of scale. This is particularly evident in industries that incur high fixed costs or those that need extreme levels of investment. Economies of scale contribute greatly in ensuring low cost of purchasing goods by the consumers and this is a positive trend in economic advancement (Irwin, 2009). Finally, international trade enhances increased completion among nations. This curbs the temptation to charge high prices by domestic monopolies thus enhancing economic growth. Free trade contributes positively to economic development and should be encouraged by all nations. References IRWIN, D. A. (2009): Free trade under fire; Princeton, N.J., Princeton University Press KARAGIANNIS, N., & WITTER, M. (2004): The Caribbean economies in an era of free trade. Burlington, VT, Ash gate. KAWAI, M., & WIGNARAJA, G. (2011): Asia's Free Trade Agreements Is Business Responding? Cheltenham, Edward Elgar Pub. MUKHOPADHYAY, K., & THOMASON, P. J. (2010): Economic and environmental impact of free trade in East and South East Asia. Dordrecht, Springer. SALLY, R. (2008). New frontiers in free trade: globalization's future and Asia's rising role. Washington, D.C., Cato Institute. SEN, R. (2004). Free trade agreements in Southeast Asia: Singapore, ISEAS. THIRLWALL, A. P., & PACHECO-LO?PEZ, P. (2008): Trade liberalization and the poverty of nations. Cheltenham, UK, Edward Elgar. Read More