Global Free Trade Agreement - Report Example

Name: Lecturer: Course name: Course code: Date: A free trade agreement is global agreement between two countries that aim to ensure that trade barriers between the countries are eliminated. This is important because it smoothen the process trading and enhance commercial tie and thus increase economic incorporation between two countries. Resource allocation in free trade area is solely determined by the price of a commodity. This price is achieved at the point of intersection between demand and supply curve because there is no external factors as well government policy affecting the price of the commodity other than market forces of demand and supply. Free trade area is important to Australian investors in that it help widening up more marketing opportunities abroad. Market entrance in each and every part of the country is enhanced. The net of this is that, the manufactured product and service produced by firms locally will be able to compete globally and within the country and thus stimulate Australian economy. Resident consumers will get advantage also from free trade area in that, they will be in a position to have admittance to an extensive variety of superior and enhanced produce and service of highest quality and standards which is globally appreciated. Recently, china and Australia made an agreement on free trade area that will yield strong economic partnership and intensifying it more. China in the recent years has turn out to be the principal Australia business collaborator and indispensable to Australia’s prospect economy opulence. The major advantages and significance on the exclusion of trade barrier s that, there will be an improved trade efficiency and condensed charge on trading between the two countries, withdrawal of restriction concerning service which lead to enhanced trade flow across, goods and service of concern to both countries as well as execution of dealings that will give confidence to more overseas venture, the impact of this is that, a strong platform for the prospect economic integration will we achieved. A classical economy studies reveals that a greater out is envisaged when two or more countries have a free trade area. This is due to the fact that free trade area encourages specialization of product between the two countries. In this case, a country with limited resource would be able to specialize on manufacture of that commodity for which a country has comparative advantage. Theory of comparative advantage explains that where unhampered market place subsist, every basis of production will have a propensity to concentrate on the activity in which its comparative advantage is at utmost beneficial and thus the effect would be increase in production, net profit and improved living standard amongst those in the free trade area. The net benefit is that, specialization together with economies of scale leads to augment of worldwide production possibility frontier. This implies that free trade area encourages production of more goods and service. Thus uppermost potential utility to worldwide buyers would be envisaged from a combination of good and service essentially manufactured and the complete capacity of production. From the qualitative point of view is that, free trade areas are connected to laissez faire economic politics and festivity, this consent a more rapidly growing economy. When two countries have a deliberate trade then both will be advantaged. Ceiling of deliberate swap over confines business and eventually the build up of possessions in the deficiency of real-world externalities safeguards such as young and growing industries Production possibility frontier and the indifferent curve Australia A B From the figure above, a production possibility frontier for Australia is assumed. If Australia produces only two commodities (A & B), then due to scarceness of resource, extra unit of product A implies that extra resource would be required and thus resource used to produce commodity B would be shifted to produce extra of A China A B The figure above shows the production possibility frontier for china as assumed. Like Australia, it is assumed china can produce only two products (A& B).due to scarcity of rice, extra unit of product A requires extra resource implying that some extra resource used in production of commodity B would be foregone. Though Australia and china have diverse relative, rate of trade off is vital. And the disparity would lead to creation of comparative advantage between countries. Even if one country has absolute advantage over the other, both countries can still gain from commerce because of comparative advantage. World A Q B From the figure above, an autarky is envisaged from the two images. This implies that there is non-existence of trade between the china and Australia. A production possibility frontier is observed by the line Q for the whole world combination of production possibility frontier for two countries forms world’s PPFs If a comparison between worlds PPF and PPF for china and Australia are made, it’s clear that the world can produce and consume supplementary when a free trade area is permitted. Word PPF is arrived at by using vector addition. Production of the two commodities between different countries must be sum up for each probable production point An intuitive way of arriving at the world's production possibilities frontier is to first assume that each country tries to specialize by producing only one product. In the graph at right, the first units of meat are produced only by Country B (red). Once Country B is using all its resources to produce meat, then Country A (blue) begins shifting resources away from the production of rice and into the production of meat. On the other axis, assume that the first units of rice are always produced by Country A. Additional units of rice can only be obtained if Country B shifts some resources into rice production. PRODUCTION POSIBITLY FRONTIER WITH AN INDIFFERENT CURVE Australia A B From the figure above is a combination of an indifference curve and the production possibly frontier. An indifferent curve measures the preference and utility. The interaction between two countries preferences and production would lead to combination of goods produced and consumed. A B The above figure shows a production possibility frontier and an indifferent curve for china as assumed. Authentic combination of goods produced and consumed relies mostly on the industrious aptitude and its nation first choice. These implies that difference in terms of goods consumption and production would emerge between the two countries World A From the figure above, Addition of two autarkic consumption A and B between Australia and china would lead to a lower quantity of each good produced or consumed than the world’s production possibility frontier. This would mean that by trading, the relative capacity of commodities accessible for spending is superior to the amount existing under autarky Under a free trade agreement, the main determinant of resource distribution is the equilibrium of supply and demand which gives rise to price of a commodity. The difference between free trade and other trade agreement is that, distribution of goods and service between trading partners is resolute by pricing policy which may perhaps be different as of those that would appear under deregulation. David Ricardo develops a strategy of analyzing the benefit of free trade area by using the theory of comparative advantage and examining the effect of tariff or import quota. Free trade would bring in new competition to the country as well as new technology and thus the price of commodities for consumers and producers would be reduced in the market. This would lead to a shift in the factor of production to a higher resourceful level .service trade freedom ought to lead to getting rid of barriers that makes the cost of trading high on exporters , wear down antagonism and its effect on employment and earnings in both sectors. Free trade area would bring net economic advantage for Australia and china by way of enhanced production and improved investment inflows, an increase in average gross domestic product of both countries would improve. This would mean that industrialization between Australia and china would significantly improve. Another simple method of understanding the benefit of free trade area is analyzing the advantages of tariffs and quotas restriction developed by David Ricardo. The diagram below explains it. Quotas are imposition of certain quantity of product to be imported while tariffs are restriction inform of qualitative value. The government would restrict importation of a certain product up to a specified value. advantage of tariffs price demand supply consumer surplus P. E p tarriff tax P.wolrd producer surplus Q revenue Q C QS1 QS2 QE quantity qnty of import with tariff qnty of import without tariff The figure above shows the consequence of imposing import tariff on imaginary products. p.world is the price of the commodity before tariffs was set. p. tariff is the new price that was caused to increase due to tariff imposition. Due to higher price, the domestic products increases from QS1 to QS2.this will lead to a decline in domestic consumption show by the arrow c. the net effect on the societal wellbeing would be consumers are made shoddier due to turn down in consumer surplus and making producers inferior. Another effect would be creation of incremental revenue to the government shown above as tax revenue. From the above analysis, loss to consumers is high in contrast to the producers and the government. This is will lead to a societal loss marked as Q from the figure above. Therefore, to ensure a societal gain prevails, the government should ensure that a free trade area exists. From the country’s point view is that, effect of tariff makes producers inferior and consumers superior. But the total loss to producers is greater as compared to advantages the consumer’s will receive. In general imposition of trade barriers creates net loss to the general public. This is due to the fact that, losses from trade barriers are greater than the gains from trade restraint. The experiential learning illustrates that the magnitude of the winning from liberated trade are superior to victims although trade liberalization produces winners and losers. Therefore the society would benefit from free trade In conclusion, discriminatory relevance of trade liberalization to a number of nations and tariffs can lead to economic inadequacy through the progression of diversion. It is economically resourceful to produce a product in a country that has its cost at a lower value. If a high cost manufacturer has a superior free trade conformity and stumpy charge manufacturer faces tariff then it will not be economically efficient to produce a product in a country with low cost. Applying trade liberalization to a high cost produce and not on the low cost manufacturer would lead to trade diversion and economic defeat. Consequently it is important to have a consultation for worldwide reduction in tariffs which can be achieved through trade liberalization. Reference 1. Capling, A., 2001. In Australia and the Global Trade System: From Havana to Seattle -. p.ppg 245. 2. Centre for International Economics, C.f.I.E.(., 1998. In Costs and Benefits of a Free Trade Area Between Forum Island. 3. Chow, P.C.Y., 2012. In Trade and Industrial Development in East Asia: Catching Up Or. p.ppg 349. 4. Gary P. Sampson, S.W., 2003. In Regionalism, Multilateralism, and Economic Integration: The Recent. p.ppg 223. 5. Jovanović, M.N., 2011. In International Handbook on the Economics of Integration: Factor. p.ppg 282. 6. Kakali Mukhopadhyay, P.J.T., 2010. In Economic and Environmental Impact of Free Trade Agreement In East. p.ppg 28. 7. M. Kawai, G.W., 2011. In Asia's Free Trade Agreements: How Is Business Responding? 8. Saori N. Katada, M.S., 2008. In Cross Regional Trade Agreements: Understanding Permeated. p.ppg 133. 9. Tran Van Hoa, C.H., 2008. In Regional Trade Agreements in Asia. p.ppg 145. Read More