Free trade is the primary force driving economic development - Essay Example

?Free trade is the primary force driving economic development Table of Contents Introduction 3 2.Evolution of Free Trade Policy and Its Mechanism 33.Factors Influencing Free Trade Policies 5 4.Role of Free Trade Policies in Economic Development 6 5.Evidences of the Multiple Free Trade Policies 8 6.Limitations of Free Trade Policies 10 7.Barriers of Free Trade Policies 12 8.Conclusion 13 Reference 15 1. Introduction Trade liberalisation has become a focal point of many economic forums across the globe. Globalisation has made it easier for countries to look beyond their own borders for economic growth. Countries have recognised the fact that economic growth is a collective effort and all the countries need to work together on this front. Although many developed countries are still practising protectionism, they have realised the importance of free trade in economic development. Several bilateral agreements and multilateral agreements have been signed by many countries to allow flow of goods amongst the member countries. In most of the cases countries that have participated in free trade agreements have experienced rise in living standards, growth in income. This growth curve experience by several countries due to free trade agreements is clear indication of the importance of free trade agreement in economic development. Multilateral agreements drafted under World trade organisation (WTO) and General Agreement on Tariffs and Trade (GATT) are aimed at influencing nations to opt for trade liberalisation. There are many bilateral agreements which have been formulated between nations geographically located near to each other. Trade liberalisation is a well negotiated procedure where each party, agrees to make some concession in opening up their markets for foreign goods. Free trade has a huge impact on improving the quality and infrastructure of the host as well as the foreign country. Due to free trade, industry standards are raised high in order to compete with global scenario (Buckley & Boulle, 2008, p. 185-189). 2. Evolution of Free Trade Policy and Its Mechanism The international trade, especially during world war two suffered a huge loss. Most countries were involved in conflicts arising mainly due to trade disputes. These trade disputes were mainly caused by the discriminations and trade restrictions implied by the several countries to protect their markets from foreign players. It was in 1948 in Havana that a conference was held on trade and employment under the flagship of United Nations. The formation of International trade organisation (ITO) was a landmark in the attempt by international community to form an agency overlooking international trade issues. ITO was dissolved later as it did not get the green signal from the US congress. The US congress on the other hand opted for an ad-hoc agreement like General agreement on Tariffs and Trade (GATT). In 1947 at Geneva GATT was agreed on and signed by 23 countries. GATT was legally effective from 1948. GATT thereby is an agency which overlooks the rules and international laws governing international trade. All the trade disputes amongst the signatory parties are resolved by GATT. The most effective clause in GATT is the MFN clause, under which all participating nations are forced to treat all signatory nations as equal in all trade policies. GATT emphasises on influencing signatory countries to reduce their tariffs and abolish any concessions given to a specific country. Though GATT gave more stability than ITO, it was often tainted by complaints from developing countries. Developing countries often complained about the policies formulated in GATT. The developed countries were often seen to follow protectionism in their trade policies. The formation of United Nations Conference on Trade and Development (UNCTAD) in 1964 was a direct implication of the dissatisfaction amongst the developing countries regarding GATT (Singh & Singh, 2005, p.1-9). One of the greatest outcomes of the Uruguay Round was the formation of World Trade Organisation (WTO). WTO was formed with an intention to form an organisation with more credibility and transparency to settle trade disputes. Although Seattle and Cancun opened up many debates and disagreements amongst the WTO members, it has been successful is settling many trade disputes (Kaiser, Stoll & Wolfrum, 2006, p.1) 3. Factors Influencing Free Trade Policies Historical Factors During Second World War many countries were sceptical regarding opening up their market for foreign industries. The war had left a great impact on the economical conditions of the participating countries. Mostly the developed countries realised the need of lifting the trade barriers. Countries like USA and UK were the front runners of imposing the free trade on developing countries, to expand their market. (OECD, 2006, p.47-48) Economic Factor The strengthening of supply chains across the globe have an important role to play in FTAs. From 2000 onwards most countries have recognised the importance of free trade in generating revenue. Recession which was more prominent in USA and European countries also had a significant impact on the trade relations among several countries. Developed countries were able to understand the importance of developing countries in world trade and economic development. Free trade policies are now drafted in such a way so that the developing countries do not feel exploited (Shoo, 2005). Political Factor and International Relations Economical growth has direct implications on political conditions of the specific country. Each government has the responsibility to oversee the economic development of their country. Governments of most countries are aware of the direct implications of politics and international relations on trade. Diplomatic relations play an important role in formulating a beneficial trade agreement. Most countries prefer having cordial relations with their nearby countries and have trade agreements to strengthen their relationships. Improving trade relations is also a way to stabilise the political relations between two countries. (DFAT, 2011)) Competition and Cooperation Competition between the host industry and foreign industry is a very sensitive matter for most governments. Countries often fear their own small industries will not be able to flourish if foreign players enter the market. At the same time developing countries are also aware that entrance of foreign industry indicates growth in income. Foreign industries are able to generate employment and often set a better infrastructure. The concept of Multinational organisation also creates a sense of cooperation amongst different participating countries (Lo, 2006, p.7-9). 4. Role of Free Trade Policies in Economic Development Free Trade Agreements facilitate removal of tariffs and government sanctioned subsidies. Tariffs and subsidies are implied by countries to protect their domestic industry from international players. But FTAs also play an important role in improving the economical conditions of both participating country. Increase in Production FTAs enable countries to manufacture commodities in which they pose comparative advantage. These countries have the infrastructure and expertise in producing certain products. They take advantage of these factors and produce in mass scale. International trade provides these industries the market to sell their quality product. These industries are able to expand their market and increase their revenue generation. For a company it is very important that it must find new markets to thrive and develop. FTAs provide companies the opportunities to grow further and not get restricted in their growth curve. Efficiency in production FTAs also force companies to be efficient in their resource allocation. Companies get the option of utilising their resources according to their cost convenience. FTAs give these industries access to cost effective materials and they are thereby able to produce more efficiently. Each country has certain speciality, some countries are rich in natural resources, some in human resources and some countries have the sheer capital for an establishment. Due to FTAs companies have the liberty of pooling all the resources available in different countries across the globe and utilising it in an optimum way. Benefits reaped by consumers. The consumers are also benefitted by the FTAs. The consumers are provided with more options to choose from. They are no more forced to buy from selective few options. The consumers are also able to demand better quality from the industry. Thus the consumers are able to access better quality and variety in their options. The consumers are no more duped by companies which have their monopoly in certain sectors. Thus, consumers also are satisfied as they get their money’s worth. Improving the industry standard The industry stand is also improved due to international competition. Companies realise the importance of research and development and effective service. The established companies never get complacent due to international competition and are always cautious about producing quality products and providing quality service. Gain in Foreign Exchange Foreign exchange gains are also a very significant in economical developments. With the help of FTAs countries are able to boost their foreign exchange gains. A healthier foreign exchange indicates more power to import quality goods from other countries. When a country sells its goods to a foreign country it earns foreign currency, which can be utilised by the country to buy certain goods or raw material from the foreign country. Generation of Employment With new foreign industries entering the market, employment is automatically generated. This factor plays a direct role in the economical growth of the specific country. The living standard of many developing countries has become better due to operations of multinationals in their country. Employment generation also improves the social structure of a country making it more accessible to global scenario. 5. Evidences of the Multiple Free Trade Policies The significance of trade policies in economical development of countries can be easily explained by the various Multilateral and bilateral trade agreements. Following are few examples elucidating the importance of FTAs in economical growth. NAFTA North American Free trade Agreement (NAFTA) is an agreement which was signed by the governments of USA, CANADA and Mexico. Under this treaty the trade barriers between US, Canada and Mexico were eliminated and restrictions were reduced. NAFTA was implemented on January 01, 1994, and under this treaty all the tariffs were eliminated. This agreement has been focus of lot of controversies. However, the benefits of this treaty have been improvement of cumulative GDP of North America, generation of more jobs and more transparency amongst the countries. And most importantly increase in exports. AFTA ASEAN Free Trade Area (AFTA) is a concessional scheme to promote free trade between participating countries of ASEAN (Association of Southeast Asian Nations). This treaty encourages free trade of local manufactured products. It was signed on January 28, 1992 in Singapore. This treaty originally had only six members, namely Thailand, Singapore, Malaysia, Philippines, Indonesia and Brunei. In 1995 the Vietnamese government signed the ASEAN Free trade agreement they were joined by Laos, Myanmar and Cambodia in 1997 and 1999 respectively. ANZCERTA The Australia – New Zealand Closer Economic Relations Trade Agreement (ANZCERTA) was made effective in 1983. It marked the first bilateral trade agreement signed Australia. Twenty five years since the draft of ANZCERTA was made both countries Australia and New Zealand have come a long way. Both have been immensely benefitted by this FTA. This treaty also has been acknowledged by the WTO as an effective and ideal FTA. . This treaty includes all kind of trans-Tasman goods, agricultural produce and several other services. Australia has also invested in New-Zealand and is considered as one of the major investors in New Zealand. On the other hand, New Zealand also has invested rigorously in Australian market. Research indicates that that Australia has almost 50% of investment in New Zealand as direct investments. Trade blocs Trade blocs created by FTAs cause expansion of trade, through trade improvement and diversion. The countries signing the treaty have the advantage of reduction in tariffs. The suppliers from other countries become less competitive because they do not have the option of waiver in export and import duty. Many countries have entered such localised trade blocs to strengthen their relations with their neighbours and to improve the economical growth of the specific geographical area. 6. Limitations of Free Trade Policies The above sections have focused on the mechanism and role of free trade policies in the process of overall economic development using multiple evidences. The free trade policies have always been acting as a tool that leads to facilitate the economic development by encouraging trade and commerce. However, there are also certain limitations of free trade policies that become disadvantages for economies and for certain industries. Some of the major limitations and disadvantages of free trade policies are discussion below. Intensified competition Free trade policies and agreements offer better opportunities to the mutational firms by expanding their market in the overseas boundaries. However, it also led to intensify the level of competition as the foreign companies enters within a new market. As a result the small scale and medium scale domestic business organisation face a steep competition from the foreign players. Hope and Maeleng have defined the free trade policy as a “competition enhancing device” (Hope and Maeleng, p.61). Short Term unemployment When foreign companies enter into new geographical area, the economy faces a short term structural unemployment as gap between the foreign companies and local potential labour force (Harris, 2003, p.118). Local small and cottage Industries affected Generally, the giant firms have the capability to set new business units in the multiple countries and hence, they have better capabilities like technical expertise, necessary capital, efficient management system etc. With the help of such resources, the giant multinational companies gain an upper hand position in the market and as a result many domestic small industries and cottage often abolished. In this case, the underdeveloped counties suffers a lot as they have “unfavourable balance of payments” (Naveen and Somashekher, 2004, p.435). Environmental concerns Free trade leads to intensify the industrialisation and which also affect the environment negatively. Many foreign companies neglect the environmental issues in the host courtiers, and as a result, the environmental issues like pollution, carbon emission etc are have become a major concern for the host countries. 7. Barriers of Free Trade Policies There are several barriers in Free Trade Policies. Following are few - Protectionism Most countries have their reservation regarding the impact of FTA on their home industries. They want to shield their industry from outside competition. Most countries like to have control over the industries as they can monitor the economical growth more conveniently. Many countries want to prevent foreign industries to dump their cheap products in their home market. Restriction in free trade also protects the country from import of harmful and defective goods. Subsidies Countries often offer subsidy to their home industry, which again creates difficulty for the foreign industries as they are forced to sell their products in low cost to gain profit. Trust Factor Another important barrier is the trust factor. Developing countries often have problems with their treaties with developed countries. Developed countries often exploit the third world countries by not following the same measures as expected by their counterparts in the treaty Socio culture Often the socio culture differences between the countries across the globe also cause difficulties, in free trade. Several countries have very conservative culture and require specific approach from the foreign industries. Government policies/ Legal frame work Many governments have very strict legal frame work and formalities to make it difficult for the foreign industries to enter their markets. These foreign players are subjected to stricter trade and licence policies to deter them from entering the market. 8. Conclusion This paper has attempted to present an overall discussion on the role of free trade policies in the development of economic. In the process of globalisation, the free trade policies have played very crucial role in encouraging the international trade and business. In order to meet the primary objective, this paper has presented a number sections focusing on the vital areas of free trade policies. Free trade policy was become a popular tools for the major economies like U.S. and U.K. during the Second World War. In fact, the leading economies realised the importance of inter-dependence for the domestic economic benefits. However, there are certain factors that influence the nature and feature of free trade agreement among and/or between economies. On the other hand, due to the initiatives for free trade policies, the associated economies have been benefited in a number of ways like increasing production, better employment, technological expertise, higher income, matured and standardise competition etc. It has helps many economies in achieving a higher rate of GDP growth rate in real terms. The major and popular free trade agreement like NFTA, AFTA, ANZCERTA etc are major historical evidences of economic development led by free trade policies. On the other hand, free trade policies are responsible for certain limitations and disadvantages like unhealthy competitions, abolishment of major cottage and small scale industries, short-term unemployment etc. However, considering the benefits of free trade policies these limitations are negligible which can be overcome by proper necessary steps taken by the host countries. There are also certain barriers threatening the failure of free trade policies. These barriers like subsidies, protectionism, Socio-culture etc generally vary as per country. In the case of determining the free trade policies, the engaged economies must analyse and evaluate the influence of these barrier and frame the policies accordingly. Reference Buckley, R. P., Lo, V. L. and Boulle, L. (2008). Challenges to multilateral trade: the impact of bilateral, preferential and regional agreements. Kluwer Law International. DFAT. (2011). FTAs Advantages and Disadvantages. 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