Free Trade on Market - Case Study Example

Free Trade In the study of social science the repetitive outcome of the attempt of understanding its various elements have projected the lowest common denominator as the human struggle of livelihood. To live, food for belly is needed; as human, other association that it has developed need its own specific food. But the most important for the human growth is money. Today’s money had different forms through out the past, but the very first mean to earn this money was/is trade. The starting of trade goes back as primitive as the starting of communication in ancient times. Trading was the main facility of that time, who bartered goods and services from each other before the innovation of the modern day currency. The history of time dates the history of long-distance commerce from circa 150,000 years ago (Watson). Trade is the exchange of goods, services, or both. Trade is also called commerce. A mechanism that allows trade is called a market. The invention of money and later its credit system, paper money and non-physical money, have greatly simplified and promoted trade. Trade between two traders is called bilateral trade, while trade between more than two traders is called multilateral trade. In these kinds of the trades the overheads can be shared among more than one trader, across the intra or international borders. As per economical and political view, this system is called free trade. The paper will rationalise why the individual countries protect their economy from the free trade. Trade exists for many reasons. Due to specialisation and division of labor, most people concentrate on a small aspect of production, trading for other products. Trade exists between regions because different regions have a comparative advantage in the production of some tradable commodity, or because different regions size allows for the benefits of mass production, which is for the demographic composition. As such, trade at market prices between locations benefits both locations. It is the mutual benefit of the traders involved in free trade. (Sloman, and Sutcliffe) Free trade is a system in which the trade of goods and services between or within countries flows unhindered by government-imposed restrictions. Only the parties who are actively involved in it play the main role. Government as 3rd party has no role to impose any law on the trade practice or can not play any importance by attesting any permissions and procedures that the traders need to avail. And these government interventions generally increase the costs of goods and the services to both consumers and producers as it increases the length of the production chain. Interventions include taxes and tariffs that can be direct or indirect, non-tariff barriers, such as regulatory legislation and quotas. Free trade opposes all such interventions. Free trade policies have battled with mercantilist, protectionist, isolationist, communist, and other policies over the centuries. Wars have been fought over trade, such as the Peloponnesian War between Athens and Sparta, the Opium Wars between China and Great Britain, and other colonial wars. All developed countries have used protectionism at some time, due to special interest pressure or, prior to the 19th century, a belief in mercantilism, but usually reduced it as they gained more wealth (Chang). As every Government has her special interest it does not want to share the same even through its trade as in free trade it can not impose any condition for the accessibility to the special interest. The interest can be the national human resource, use of special region, country’s geographical location etc. As per the comparative cost trade theory all the traders involved in the business get mutually benefited in the free trade. But it also requires comprehending the economics of the system of free trade. The literature analysing the economics of free trade is based on the theoretical and empirical effects. Nonetheless, the neoclassical trade theory focuses on one dimension, i.e., the price at which a commodity can be delivered and is extremely narrow in cutting off a large number of other considerations about impacts on employment in different parts of the world, about environmental impacts and on culture (Post-Autistic Economics Review). It is important to highlight the mentioned issue where some important factors been isolated and for which this trade system faces restrictions from the Government. The simple way to understand the free trade, for the motion is by analyzing the impact of a tariff or import quota. The pink regions are the net loss to society caused by the existence of the tariff. A simple economic analysis using the law of supply and demand and the economic effects of a tax can be used to show the theoretical benefits of free trade (Landsburg). The graph at the left analyses the effect of the imposition of an import tariff on some imaginary good. Prior to the tariff, the price of the good in the world market (hence in the domestic market) is P world. The tariff increases the domestic price to P tariff. The higher price causes domestic production to increase from QS1 to QS2 (Stockamn) and causes domestic consumption to decline from QC1 to QC2. This has three main effects on societal welfare. Consumers are made worse off because the consumer surplus (green region) becomes smaller. Producers are better off because the producer surplus (yellow region) is made larger. The government also has additional tax revenue (blue region). However, the loss to consumers is greater than the gains by producers and the government. The magnitude of this societal loss is shown by the two pink triangles. Removing the tariff and having free trade would be a net gain for society (Stockamn, Mankiw). Thus, the model is narrow enough for its only transactional point of view, but broad again on social gain in terms of money on axis Q. Free trade creates winners and losers, but theory and empirical evidence show that the size of the winnings from free trade is larger than the losses (Landsburg). Despite the larger winning size, the Government intervention and objection is making it clear enough that there must be further issues regarding the ownership of the winning size. And how many sectors of society are gaining their worth, follow this system is the extension of the issue, inviting Government intervention and its say. One gross backlog is that the system’s segmental thinking process for social gain. It has failed to contribute the over all society as an economic entity, thus losing the rational ground. For the above causes that are acting against the system many countries protect their economies from free trade. This is often opposed by domestic industries that would have their profits and market share reduced by lower prices for imported goods (Baumol and Blinder 722). For example, if United States tariffs on imported sugar were reduced, US sugar producers would receive lower prices and profits, while US sugar consumers would spend less for the same amount of sugar because of those same lower prices. Moreover the indigenous market will lose its grip from the overall market and the national economy will come under the spell of overseas market at large. This proves the losing of economical equilibrium of the nation. Economics says that consumers would necessarily gain more than producers would lose; making it a one sided game (Stroup, Gwartney, Sobel 46). More generally, producers often favor domestic subsidies and tariffs on imports in their home countries, while objecting to subsidies and tariffs in their export markets. In the socialists economic setup they oppose free trade as a consequence of the exploitation theory and opposition to employment wage slavery. For example, Karl Marx wrote in The Communist Manifesto, "The bourgeoisie... has set up that single, unconscionable freedom -- Free Trade. In one word, for exploitation, veiled by religious and political illusions, it has substituted naked, shameless, direct, brutal exploitation." It is quit clear for the socialists will not buy the idea which is not supporting the concept of master plan. According to the mainstream economic theory, global free trade is a net benefit to the society, but the selective application of free trade agreements to some countries and tariffs on others can sometimes lead to economic inefficiency through the process of trade diversion. It is economically efficient for a lowest cost good to be produced by the country, but will not always take place if a high cost producer has a free trade agreement while the low cost producer faces a high tariff. Applying free trade to the high cost producer but not to the low cost producer as well, can lead to trade diversion thus a net economic loss. This is why many countries hold it of high importance on negotiations for global tariff reductions, like the Doha Round (Landsburg). Thus, in reality free trade is something, giving too much of liberty, which again going out of control with much of free space. This is helping the inequality to strike the market. Even in case of bilateral or multilateral trade practices, Governments hold the key to national interest as trading can influence the economy, situation, demography, environment and the society as a whole. In general the entrepreneurs mainly focus on their growth of business by instinct and this leads to reluctance trade practice. Still due to the industrial operations the burn the nature bears needs to be healed. And for this Government interfere in the trade to collect fund from the concern for whose trading activity nature is getting affected and also rationalise that it should be business responsibility of the particular trader to compensate for the ecological damage of a nation. The above mentioned action shouts to be justified as, after all traders are making their bottom line on these damages. So it is about cutting a chunk of its margin to compensate the unavoidable scars and to pay the toll of running their trade. The whole practice is a system observed by both or all the parties. Since the traders are busy developing their own trades the attention of the social security goes ashtray for which the national economics play the voluntary role of raising funds for its social and infrastructural development. In fact, all the kind of Government interventions is the avenues to earn revenue for the country from the external sources. Some free trade economists have also recently begun to express their own doubts concerning the concept and practice of free trade. Alan S. Blinder, for example, a professor of economics at Princeton University, and former Federal Reserve Board vice chairman and advisor to Democratic presidential candidates, had previously argued in the motion, along with most economists, that free trade will enrich the U.S. and its trading partners. However, as he now says the boom of new communication technology that will put 30-40 million American jobs at risk in some couple of decades. Still, Blinder has not completely rejected free trade or Ricardos ideas about comparative advantage. As per Blinder, trade changes types of jobs, not the number. But the Technology allowed Indians in call centers to do the work of Americans at a way down lower wages. "Tens of millions of additional American workers will start to experience an element of job insecurity that has heretofore been reserved for manufacturing workers," (Baumol and Blinder, 561), said Blinder. Thus, this new face of Free Trade as Liberal Trade practice have rang the alarm bell of how the job market is losing its balance with unexpected changes. While entertaining Free Trade, Latin America performed poorly since tariff cuts in 1980s and 1990s, compared to protectionist China and Southeast Asia, who saved their economies from the same. Paul Samuelson, in his 2004 essay (135-46), condemned "economists over-simple complacencies about globalization" and said that workers dont always win. Lawrence Summers, advocate for trade expansion as Clinton Treasury Secretary, said retraining is "pretty thin gruel" to the middle class. Ralph Gomory, former IBM chief scientist, says the rise of China and India could make the U.S. lose important industries. This is what the developed nations have sheltered as their trade practice due to the large corpus they have, but now they have started thinking. Harvard economist Dani Rodrik says against the motion that trade barriers should help poor nations build domestic industries and give rich nations time to retrain workers. Blinder has created a list of highly offshorable jobs that could be lost in the next two decades, which claims that 1,815,340 bookkeeping, accounting and auditing jobs could be lost (Wessel and Davis A1). By now, the paper has revealed the face of Free Trade, which was behind the mask. In nutshell if a society wants to develops, it requires fair and equal distribution of income where the over all sector of its needs to come under an economical system that is balanced in itself and thinks of long term effects. Reference Chang, Ha-Joon. Kicking Away the Ladder: Policies and Institutions for Economic Development in Historical Perspective. UK: Anthem Press, 2002. Watson, Peter. Ideas: A History of Thought and Invention from Fire to Freud. UK: HarperCollins, 2005.  Landsburg, Steven E. Price Theory and Applications. Sixth Edition, Chapter 8 Mankiw, N. Gregory. Macroeconomics. Fifth Edition, Chapter 7. Post-Autistic Economics Review, Sept 2007. Paul A. Samuelson. “Where Ricardo and Mill rebut and confirm arguments of mainstream economists supporting globalization.” Journal of Economic Perspectives, 18(3) (2004) : 135-46. Sloman, John and Mark Sutcliffe, Economics for Business. Prentice Hall, 2004 Stockamn, Alan C. Introduction to Economics. Second Edition, Chapter 9 Stroup, Richard L., Gwartney, James D. and Sobel, Russell S. Economics: Private and Public Choice. USA: Thomson South-Western, 2005. William Baumol and Alan Blinder, Economics: Principles and Policy. USA: Thomson South-Western, 2005. Wessel, David and Davis, Bob. “Job prospects: Pain from free trade spurs second thoughts; Mr. Blinders shift spotlights warnings of deeper downside.” Wall Street Journal Mar 2007: A1. Read More