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Effect of Free Trade on Economy

  • Liang Yu Cong

Table of contents (jump to)

1.0 Introduction

2.0 Free trade does add wealth to the economy

2.1 Analysis

2.1.1 Advantages

2.1.2 Disadvantages

2.2 Evaluation

3.0 Conclusion

4.0 Recommendation

4.1 Greater Competitiveness

4.1.1 Cannot ignore trade protection policy

4.1.2 Adverse Working Conditions

5.0 Appendix

6.0 Reference

1.0 Introduction

This report aimed to discuss the effect of free trade for the country’s economy, so free trade is a system in which goods, capital, and work flow freely between nations, without barriers which could delay the trade process. Actually, many nations have free trade agreements, and some international organization promotes free trade between their members. Because of free trade provide lower prices for goods and services by promoting. However, there are a number of quarrels both for and against this practice, from a variety of economists, politicians, industries, and social scientists. According to Tom Chmielewski (2014), a lot of economists approve NAFTA has caused some general enhancement in US jobs, but with bad effects. Free trade can cause disorder in parts of a national economy, for instance long-established industrial slices already in a weak position to global competition. Besides that according to Edward Alden, a researcher at CFR, wages have not kept pace with output of work, and income unfairness, and these phenomena indicate that trends speeded to some range of free trade. Due to this information, this report will research the relationship between free trade and economy, and find out the economic impact of the free trade.

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2.0 Free trade does add wealth to the economy

Free trade promotes innovation and competition. Free trade is a kind of really fair trade because it offers customers the most choices and the best chances to improve the standard of living. Free trade fosters competition, spurring companies to introduce and develop better products and to take more of their goods and services to market, keeping costs low and quality high in order to retain or increase their market share. By fostering opportunities for the country businesses, free trade rewards risk taking by increasing gross revenue, profit margins, and market share. The companies can opt to build on those profits by spreading out their operations, putting down new market sectors, and creating better paying occupations. Free trade, reinforced by the dominion of law, removes such incentives for corruption by spurring economic growth, increasing the number of better paying jobs, and finally increasing the level of prosperity. Free trade policies can also attract Higher Foreign Investments, free markets encourage more investment in the land. Foreign directed investment goes to where capital is needed, improving productivity and driving increase in many nations. However, for the economic, nowadays the most important feature is economic globalization. Economic globalization can be determined as the procedure by which markets and output in different nations are becoming increasingly interdependent due to the Dynamics of trade in goods and services and flows of capital and technology. The acceleration of free trade can bring down the tariffs and eliminate discriminatory treatment in international trade. Developing countries open up many types of free economic zones in ports and traffic areas in order to build up the economy and promote its exports. For example Shanghai free trade zone, NAFTA.

2.1 Analysis

From a worldwide perspective, free trade certainly increases the overall amount of wealth in the economy. By getting rid of barriers to trade, governments encourage members of the economy system to specify in performing whatever they perform best and then trading to fulfill their desires and demands. When trade is efficient, a firm can concentrate its production ability completely on the country in which it holds a relative advantage. Free trade can put manufacturing nations such as the United States at a disadvantage relative to less developed countries. Businesses in the United States are heavily limited by health, confinement, and environmental rules. This often makes production in less developed nations less expensive than production in the US.

There is no doubt that everything has two positions. For these problems, I have done some research to obtain a figure of advantages and disadvantages:

2.1.1 Advantages

1. Internal influences:

a. Customer Satisfaction

Because free trade leads to a global marketplaces, customers benefit from the competition and diversity brought to the marketplaces. When other countries produce some goods cheaper, the customers will want to choose the others products.

Another advantages to customers is increased improvements. For a free trade expands, at the same time, the competition also expands. In order to keep competitive, companies must find a lot of ways to create the relative benefit. So this contributes to increased improvement that improves products.

b. Regional economic growth and employment

Due to free trade may cause employees in any special area that make them feel strangeness, but works in the exporting and importing sides will be improved by them. When productivity increases in importing and exporting, salaries also incline to rise.

c. Foreign Exchange Gains and Decreased Poverty

When a country purchases some products from another country use money, they basically send the exporting country non-interest-bearing IOUs in exchange for real items. So the exporting country must utilize the money within the state that imported the products. For instance, the United States purchases steel from China use US dollar at the current market value. In addition, after they purchase items that China will also utilize the US dollar to purchase computer systems from the United States at the future market value. In a word, States that open their trade environment to permit free trade have the chance to enter the worldwide securities industry, which will increase income for the country. In the 1990s, developing countries that lifted trade restrictions tended to raise three times faster than countries that restricted trade.

2. External influences:

During the international direction of value principle, free trade can excite international competition and boost the development. Free trade also has promoted the international division of labor and the development of trade. And increasing the international market is one of the advantages. Besides that it makes some countries which have the advantage of investment environments easy to grip foreign capital.

For example, In 2004 China began to reduce tariffs for more than 500 kinds of products. An agriculture company harvested trade reached $ 1,020,000, increasing 38%. Its growth is higher than 2003. Vegetable exported $ 450,000, an increase of 31.8%, fruits $ 230,000, an increase of 25.4%, aquatic $ 180,000, an increase of 59.1%. Since the adoption of free trade, corporate profits and employee income growth.

2.1.2 Disadvantages

1. Economic Dependence

Free trade increases the economic dependence on other countries for some necessary products such as food, clothes, raw materials, etc. So dependence shows harmful, mostly during wartime.

2. International Monopolies:

Free trade may lead to international monopolies. It promotes the formation of transnational corporations. These corporations tend to gain a monopoly situation and therefore harm the interest of the citizenry.

3. Harmful to Less Developed Countries:

a. Competition under free trade sometimes is unfair. Because the fewer developed countries are very difficult to get advances on the developing countries.

b. Under free trade, gains of trade are unfair distributed relying on the level of development of different nations. The relationship of trade are friendly for the developed countries, and unfavorable for the poor countries.

For example: Free trade policy accepted by the British government in India led to the end of Indian cottage and small scale manufactures.

2.2 Evaluation

From the above, it can be seen that free trade is a kind of “more good than harm” economic ways. Free trade is intended to cancel unfair barriers to global business and promote the economy system in developed and developing countries the same and significantly alters the business relationship between nations, many of the changes are beneficial. These advantages can positively stimulate economies.

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3.0 Conclusion

Free trade is all important to a developing economy. It opens up huge markets. Resources flow to where they are the most rich. Productivity is enlarged, and more competition equally to lower prices. In addition, higher savings are a consequence, and the poor and all others have larger income, and thus the economy turns. Investment can be blown up with growing revenues and competition. However, for low income economies such as Vietnam have a huge bonus, higher needs for works equally to higher salaries and employment. In total, it improves the salaries of employees, improves employment and economy, and creates peace.

4.0 Recommendation

Developing countries should pay attention to the impact of free trade:

4.1 Greater Competitiveness

Free trade means that national economies are exposed to higher market competition, which local firms must learn to adjust to.

4.1.1 Cannot ignore trade protection policy Developing countries cannot give up economic intervention due to trade liberalization. Moderate free protection policy can let developing countries obtain better effects in some infant industry

4.1.2 Adverse Working Conditions

For weak countries try to cut costs to get a price advantage, many workers in these countries have low wages, deficient working conditions and even forced labor and use child labor and insulting them.

5.0 Appendix

Figure 1: The major world trading powers

C:UsersAdministratorDesktopQQ截图20140415041052.pngSource: http://europa.eu/pol/pdf/flipbook/en/trade_en.pdf. (2013)

According to the picture that shows the growth of other economic powerhouses, such as China, India and Japan, through the competition that they set the price and improve the quality of goods. Besides that, they want to get energy and raw materials. From the research, these countries are creating a new group of wealthy consumers and their economies are more open than past. The picture that shows the percent of global exports, goods and services. In addition, free trade does add wealth to economy.

Figure 2: The EU’s biggest trade partners: goods

Source: http://europa.eu/pol/pdf/flipbook/en/trade_en.pdf (2013)

The figure above depicts trade and investment flow spread new ideas and innovation, Benefits for the trade include lower prices and greater choice for consumers, as imported food, consumer goods and components for products manufactured in Europe become cheaper.

(1590 words)

6.0 Reference

Anon. (2014). Free trade. [ONLINE] Available at: http://www.investopedia.com/terms/f/free-trade.asp. [Accessed 18 April 2014]

Eliah Sekirin. (2014). The effects of free trade on developing nations. [ONLINE] Available at: http://www.ehow.com/list_6733682_effects-trade-developing-nations.html. [Accessed 18 April 2014]

James Highland. (2014). The explanation of free trade advantages. [ONLINE] Available at: http://smallbusiness.chorn.com/explanation-trade-advantages-3843.html. [Accessed 18 April 2014]

Julie hare. (2011). Free trade in ideas will generate wealth for all. [ONLINE] Available at: australian.com.au/higher-education/free-trade-in-ideas-will-generate-wealth-for-all/story-e6frgcjx-1226062159428" rel="nofollow">http://www.theaustralian.com.au/higher-education/free-trade-in-ideas-will-generate-wealth-for-all/story-e6frgcjx-1226062159428. [Accessed 18 April 2014]

Lori Ann Larocco. (2012). In an increasing globalized economy, free trade is more important than ever. [ONLINE] Available at: http:// www.forbes.com/sites/realspin/2012/11/15/in-an-increasingly-globalized-economy-free-trade-is-more-important-than-ever/. [Accessed 18 April 2014]

Tom Chmielewski. (2014). Negative Effects of Free Trade. [ONLINE] Available at: http://smallbusiness.chorn.com/nagative-effects-trade-5221.html. [Accessed 18 April 2014]

W.RAYMOND MILLS. (2010). Does trade create wealth for a nation. [ONLINE] Available at: http://economyincrisis.org/content/managing-foreign-trade-does-trade-create-wealth-nation. [Accessed 18 April 2014]

Level 1 Asia Pacific University 1


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