Effect of Free Trade Area - Example

Topic: Effect of free trade area Name: Lecturer: Course name: Course code: Date With the current generation, the world is extreme as of free trade, though a number of economists believe that free trade is the most favorable trade course of action as far as living standards globally is concerned. Many countries impose trade restriction with intent of protecting their own domestic industries while other provides protectionism on the grounds of political pressure. Conversely, other state would prefer independent, mutual and local trade liberalization so as to improve their export capacity as well as inspiring their economic growth. (Nora Lustig, 1992) Free trade areas are provision amid two or more countries which they agree to remove tariffs and nontariff restriction on trade amongst themselves so as to facilitate free movement of goods and service among the member state while each country impose tariffs on other non member countries. Some exemplars of free trade area are the Europeans union, North America free trade area, southern common market and many more. In current years, European Union strengthens their free trade agreement by creating a single monetary system to be used by all member state while trading between them as well as intensifying their connection to 25 states as compared to previous 15 states. The United States extended its agreement by effecting the U.S –Central America republic free trade area and the U.S- Australia free trade area with additional western hemisphere nations (Masahiro Kawai, 2011) Free trade area is considered as vital for creating economic integration and development. Factors such as Economies union Free trade area would lead to uniting of two or more country’s economy such that they have single common legal tender with cohesive monetary policy. An exemplar of economic integration is the European Union. Economic union would lead to strong economy with a better balance of payment and terms of trade among the member state and hence leading to improved living standards of is citizens. Free trade area would provide safety to local exporters from exploitation by the foreign corporation that obtain favored treatment under additional free trade areas, the advantage is that the young and growing companies will be encouraged and hence would grow and recognized globally while a country bilateral trade among other countries. For instance, there was a misunderstanding between followers of U.S- Chile free trade area. They disagreed on the ground that the U.S companies were less privileged as compared to the Canadian companies whose sell to other countries face no Chilean tariffs under the Canadian- Chile free trade area agreement. Free trade area would lead to increased and improved production efficiency due to competition brought about by free trade.the net effect would lead to economies of scale in which companies will benefit from low cost of production and hence increased returns inform of profit. This is because many companies would want to take advantage of preferential trade area and wide market for their product in the market. (Masahiro Kawai, 2011) Free trade area as a driver for liberalization Free trade area will lead to trade liberalization which lead to free economy between the member states and thus improve on the efficiency of production and the living standards due to increased competition between suppliers who had some economy challenge in the home country. Emergence of trade specialization is another advantage of free trade area and will lead to deviation of the conventional comparative advantage gains. This is because specialization will lead to production of goods that meets the latest technology and which has passed every stages of its specialization in order to curb competition from the company that produces the same product in the market. In European market, evident of intra-industries business is envisaged and this leads to enhancement throughout de factor improved level of wealth. Companies in this country were forced to specialize in their production and manufacture of their product which in the eelier years the company did not practice this mode of production or even further focusing on a market subdivision to take full advantage of.This is due to the effect of free trade area and thus it will lead to improved economy of the country due to enhanced mode of production and its efficiency. (Juan Carlos Espinosa Rescala, 1993) Consequence of trade diversion A trade coalition formed by free trade area harmony leads to trade enlargement by way of trade creation and trade diversion. This emerged from transaction triumph at the expenditure of a third nation, s dealer hence making this country less aggressive due to tariff restriction to non member states leading to decline in the overall economic effectiveness of the state because the advantage of trade agreement is clearly defined by trade creation in which fewer industrious dealings in the associate agreement and additional industrious enlarges. This depends on the comparative significance of each state as trading associates in the liberalized economy, the magnitude and extent of trading as well as the scope to which extinction of trade restrictions will lead to growth of industries and extent of right of entry into the free economy. if all this factors are upheld, then the benefit of free trade area will equally be enjoyed by both associate nation hence leading to improved overall economy as well as the balance of payment and terms of trade with other non member states who are trading with the country in a global economy. Creation of job opportunity Free trade area would facilitate job opportunity because there will be an improved economy due to increased competition in the market that leads to product specialization as well as more market opportunities into the country. This hence will lead to improved living standards among the citizens of the country making the per capita income to increase. Improved per capita income will make the general economy of the country favorable hence attracting investors into the country to trade and at the end of the day the country will have a strong currency in the stock market due to improved balance of payment and terms of trade with other countries. Realistic drawback of free trade area Free trade area creates intricacy in trading because some factors such as rule of origin needs to be determined before the product of a third nation enters the market passing through the other associates state thus leading to increased transaction cost. Rule of origin is described as what comprise of manufactured goods that is produced within the free trade area hence a country that is qualified to receive duty-free and extra favored trade treatment. This rule inhibits those countries who are not members of free trade area from inflowing the free trade market through stumpy tariff wall as well as issue of boarder restrictions concerning the commodity security assurance and the hygienic necessities (Juan Carlos Espinosa Rescala, 1993) Other states have a signed contract having a different terms and condition with other states and therefore putting this rules into real life situation in the business would create complication and confusion during trading. Hence business ought to comprehend some diverse approach to settle this issue and creating resolution on this subject as well as building other harmonization agreement. The process of creating free trade agreement pose some challenges such as the decisive factor which should be ascertained in concluding which country would make suitable free trade area associate. Factors such as to what extent should political issues be given concern over the monetary factors need to be critically analyzed. in addition, a challenge on the extent a non- trade concern be incorporated in free trade area and whether there is adequate time and resource to discuss on various issues of free trade at the same time while controlling trade guiding principle in the world trade organization are major setbacks that hinders successful implementation and running of the free trade area in a global economy. Some economist like Krueger and Bhagwati argued against creation of free trade area on the ground that it will discriminate the developing countries because non-member developing countries will import goods from member state of free trade area at higher tariffs and hence making these nations to have a slow economic growth rate accompanied by unfavorable terms of trade and imbalance of payment. (Gazel, 1994) Also they believe that free trade would discourage creation of multilateral trading approach because free trade is only free for only those countries that are party to the agreement and would thus benefit form the terms while other non member state would be discouraged and are restricted by rule of origins implying that the free trade agreement is discriminatory in another way. This will hence act as an inhibiting factor to globalization Krueger argued that where the tariffs threshold is set high, consequence of trade diversion will be envisaged. Economist, trade union and conservationist believed that free trade is not ideal as it will lead to importation of jobs to a country with fewer wages and thus would affect workers as well as discouraging the countries aptitude to safeguards its environment due to the fact that free trade would not restrict relocation of companies to country with less stringent polices of environmental pollution. This is because the foreign companies are having one main motive of making profit without putting concern into the effect of social responsibility and the environmental concerns. (Commission, n.d.) For instance, the united Auto Workers union argued that free trade area of America would facilitate wide security for the company’s right and would weaken the aptitude of the government in the area to regulate their economies at the significance of the civilian and as well strengthen the descending weight on workers returns by way of antagonism for profession vacancy and ventures..all this negative would occur in a situation where there is no compensating security for employees, customers or the surroundings. That is why the united Auto Workers union has diverge the trend of this concession, the step taken as well as the U.S administration and thus worked intimately with various association in the area to contest the formation of free trade area for the Americas. Conclusion on effect of free trade area Free trade is considered vital in ensuring that there is improved economy because it creates trade liberalization. As nation trade freely among member state, there is exchange of technological know how as well as improving on the production efficiency in order to curb competition caused by free entry and exit of industries into the country’s economy. The net effect is that the citizen will benefit from free trade agreement because their living standard will improve and hence they can expound their source of income by doing some venture locally as well as internationally, (Alan Sitkin, 2013) economist reminiscent of Krueger and Bhagwati disputed against establishment of free trade area on the ground that it will differentiate those countries that are on the rise to good economic system because non-member developing countries will import goods from member state of free trade area at superior import tax and consequently making these nations to have a sluggish economic augment rate together with adverse terms of trade and inequity of payment. Some policy need to be implemented in order to reduce the effect of environment pollution as well as effect of job importation to a country that pays low wage because, a corporation will relocate its business to a state that has less stringent rules on this effect and pays more concerns on profit making. This is deemed as harmful exposure and will lead to retarded economic growth because the government will be spending heavily on reducing the effect of environment pollution as well unnecessary cost on instituting the foreign corporation to appreciate the social responsibility on the local citizen. (-, 2011) Reference -, P.M.H., 2011. In Decision at Midnight: Inside the Canada-Us Free-Trade.. p.ppg 159. Alan Sitkin, ‎.B., 2013. In International Business: Challenges and Choices. p.ppg 81. António Teixeira, ‎.M.T.B.-, 2011. In Optical Transmission: The FP7 BONE Project Experience. p.ppg 258. Commission, U.S.I.T., n.d. In U.S.-Morocco Free Trade Agreement: Potential Economywide and. 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