To What Extent Can Free Trade Be Viewed as Beneficial to Economic Development Essay
To What Extent Can Free Trade Be Viewed as Beneficial to Economic Development
Trade is one of the oldest types of economic activities known to mankind. Through decades of refining and developing, the traditional method of trading goods has evolved into exchanges of products and services. In the 18th century a British economist, Adam Smith, defined the first principle of unrestricted trade or ‘free trade’. Free trade states the possibility of exchanging goods or services without government interference, tariffs or taxes. Free trade raises competition and increases efficiency all over the world. Countries open up their borders by free trade agreements and establishing open trade routes.
It expands national borders and increases the movement of goods and cultures, creating greater good variety. One of the greatest benefits of Free trade is that it leads to specialization. Specialization is the method of producing the goods that you are good at. For example India’s warm climate has the opportunity to grow fruit where as Canada’s environment is better at specializing in the industrial markets. Correspondingly, through free trade efficiency is generated. For example, it prevents Canada from building greenhouses and losing time and money growing fruits that are not as tasty.
When productions are efficient, goods can be sold at their cheapest possible amount. In addition, efficiency raises competitiveness. Foreign trade leads to the possibility of cheap goods as each specializing country provides the cheapest goods. In order for companies to stay beneficial they will have to be extremely competitive. This can be done for example by investing in new technology to make production even more efficient. Less developed countries will be forced to keep up and development has to speed up in order to compete.
However, foreign free trade makes it possible for less Developed Countries to get those technologies they were not able to produce themselves. Moreover, through the competitiveness, monopolies will not be as likely to occur. Companies have to be cautious about raising their prices and lowering production. For all these reasons free trade does benefit the economy. Quoting Harvard economics professor N. Gregory Mankiw, “Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards. (Mankiw)
One example of rapid economic growth because of trade is china. China went for being a third world country to the second largest economy in the world in only a short period. This would not have been possible had it not been for free trade and consequently all the trade that the world has developed with China. (United States census bureau) However, there are some arguments that oppose free trade. When our economy experiences a recession, as it has in recent years, free trade is criticized. Some economist argue that trade is responsible for recent weakness in labor market.
In 2001, not long after the North American Free Trade Agreement (NAFTA) was signed, 2. 4 million jobs were lost in the domestic economy between March 2001 and October 2003 (BLS 2003). Several Firms and companies use the opportunity outsource and offshore as free trade makes this possible. Monthly wages in less economic developed countries are much lower then in the western world, the taxes and regulations are also much lighter or even non-existent. Therefor free trade helps the poorer countries by creating jobs but an enormous amount of domestic jobs has been lost.
In his 2006 book “Take This Job and Ship It,” Sen. Byron Dorgan (D-ND) decries, “… in this new global economy, no one is more profoundly affected than American workers… in the last five years, we’ve lost over 3 million U. S. jobs that have been outsourced to other countries, and millions more are poised to leave. “(USLP) Free trade also impacts state sovereignty. Nowadays world organizations like WTO, IMF and World Bank are vital in controlling the economy as it has become so gigantic. States or countries will not be able to keep all their own laws because changes need to be made to regulate universally.
Money that local people spent in the supermarket probably does not stay in the community. Many states or countries encourage free trade and recognize the importance of overseas markets to domestic growth. California boasted $1. 7 billion of exports in 1999 and supported those exports with $13. 5 million of subsidies annually. (Cornell University) Some are concerned, however, that the trade agreements do not take important public feedback in to account and that may damage domestic legislation. Another argument against free trade is that the risen competition is not thical for countries. The free trade territory is very competitive.
Prices are supposed to be at their cheapest possible rate because the costumer has the opportunity to get their products from somewhere else in the world. Poor countries have to keep up their efficiency and countries that do not specialize are in trouble. On Balance the conclusion seems clear, it is fair to say that free trade does not benefit everyone. However, it does help the economy to grow. Throughout history it has proven to “boom” the economy. After the Second World War Europe was in ruins.
The U. S. A. and Britain agreed to start cutting down on tariffs in 1944 as part of the famous Bretton Woods agreements, (World Socialist Movement). As a result of this, world trade grew by 8. 7% between 1963–72. (Sklar) Without these free trade agreements it would not have been possible for the economy to recover. On the other hand not all countries benefit from free trade. Countries that have a weak economy may not be able to compete with great economies such as china and the US. This can create exploitation. Thus, free trade is in a way selfish as it is very competitive.
Big profitable companies gain more profit as they benefit from the advantages of free trade by outsourcing and offshoring. Smaller domestic companies however may be affected badly when they cannot keep up. On the other hand, free trade and competition is vital to keeping the economy thriving. Without free trade the consumers would not have access to so many products as economies of scale have the power to increase prices without free trade. When the costs of essential goods rise the economy can’t benefit, as people will not have money for luxury goods. Free trade is vital to economic development.