A Discussion for Free Trade Introduction: Free trade is a policy that refers to a government does not interfere with international trade by applying tariffs, subsidies, quotas or other ways. It is a system that capital, labor and other resources flow freely between nations without barriers which could hinder the trade process, and also do goods, services. For a long time, free trade plays an important role during the process of the development of world economy, especially along with the rapid development of globalization and marketization (Winters, 2004).
However, free trade does not mean that countries completely give up management of import and export trade and tariff system, but according to the foreign trade agreements, make the products in the market at home and abroad in equal status and have the same competitive chances. In tariff system, countries don’t use protective duties, but still can collect revenue tariff in order to increase financial income. However, theorists and practitioners such as economists, politicians, industries, and social scientists hold divergent opinions about free trade.
Proponents believe that free trade optimizes the efficiency of resource allocation, and then promotes national interest, increases social welfare. Opponents think free trade impairs domestic competition structure, and then reduces national interest, increases economic risk. So, the choices between free trade and protectionism are exist all the time during international trade. Now, a series of economic recession problems triggered by the 2008 finance crisis aggravate the debates. Free trade, good or bad, who are the winners and who are losers?
In this essay, we will talk about the advantages and disadvantages of free trade, analyze the benefits and balance during the process of free trade. 1. The advantages of free trade The development of free trade theory was on the basis of theory of comparative advantage (Costinot, 2009). Because of resources endowment, countries or regions should be dedicated to produce goods with low costs and high efficiency to exchange goods that they are unable to produce with lower costs and higher efficiency.
According theory of comparative advantage, trading partners could get mutual gains from trade of goods and services. The theory of free trade mainly clarifies these views: Countries participate in the international division of labor, through the function that market mechanism expand, free trade can make all resources get the best configuration and realize the economic efficiency maximization. Free trade can expand the welfare of the whole society to the best, while protecting trade policies may only make benefits for a few interest groups.
Specifically, the implementation of free trade policy can affect participant in economic and social development. First of all, free trade can accelerate a country’s industry to select the superior and eliminate the inferior, so as to screen out companies that have significant comparative advantages of the industry, and promote the upgrading of the whole industry. Secondly, free trade make a country’s enterprises must compete with firms from the world, which will vigorously enhance their competitive ability.
Again, in the long run, free trade also brings other levels of communication including science and technology, culture and thought and so on. We can distinguish advantages brought by free trade through dividing into static interest and dynamic interest. Static interests include two aspects: (1) Countries can get goods that they can’t produce or have high costs through international exchange, so that consumers’ satisfaction achieves higher level. (2) Countries can get optimal resource allocation through international division of labor and comparative advantage.
Dynamic interest refers to: Through effective international division of labor and exchange, a country can get scale effect, competition effect and learning effect, so as to promote employment, improve income, and promote industry upgrading and economic growth. 2. The disadvantages of free trade Opponents of free trade mainly argue that it hurts domestic producers by opening up competition to companies. Free trade has also raised concerns about product safety among some consumer advocates, because some countries keep lower production standard, which may bring about safety problems.
Now, during the research area, according to the trade models and theory, we summarize the following probable damages result from free trade. First, countries produce goods that take use of their cost advantages, and give up products that need higher costs. In the long run, the results will inevitably lead to some countries’ national economic sectors are incomplete. If the department or the industry just is the lifeblood of the country, it will endanger the national security. A country’s disadvantage industry will be severely damaged, even destroy an economic departments and an industry if select completely free trade.
Second, countries are specializing in the production of goods, which occupy resources that are rich and cheap in their countries, and produce less or not produce goods that occupy their scarce and expensive resources. According to this kind of trade theory to the international division of labor, the results will cause some resources exhaustion, soil fertility damage, deterioration of the environment, which may seriously affect sustainable development of the country and even the world. Third, countries involved in international trade need to implement free currency exchange system so as to adapt to free trade.
And a convertible currency system needs to improve the financial system which accompany with marketization of interest rate and exchange rate. If a country’s financial system is very fragile, unconditional free trade is likely to cause financial crisis, and even cause serious economic crisis. Finally, environmental activists often think free trade destroys the environment. For example, free trade increases production and transportation, and the production and transportation will produce waste, and will take up scarce land and space to deal with (Goldsmith, 1996).
As the theory “Race to the Bottom Argument” describes: Free trade let firms settle in various countries easily, due to the different environmental management standards are different, enterprises will have more motivation to move to countries that need lower administrative standard. 3. Conclusion As a coin has two sides, advantages and disadvantages are undivided parts of free trade. Leaving aside the advantages that free trade bring about, countries involve international trade are an inevitable trend, or they will be increasingly marginalized, and finally fall behind. So, according to the arge amounts of opportunities free trade provides, countries should grasp and take use of the chances, take the initiative to adjust industrial structure, lower production cost, enhance interests of the state, improve social welfare, and promote employment level (Scott, 2005). In free trade agreements, lots of barriers to trade are struck down. Taxes, tariffs, quotas and subsidies are all eliminated. Also, restrictions on the flow of currency are also lifted, which could be considered as great barrier to free trade. In short, free trade enables foreign companies to trade just as efficiently, easily, and effectively as domestic ones.
For companies, even the competitive pressure, they should have the courage to change, learn and communicate, and make great efforts to improve core competitive power. Of course, either countries or enterprises, must keep awareness of unexpected development. Facing the challenges along with free trade, one should avoid the disadvantages and have rapid responsibility. For example, countries have to find a proper balance between maintaining national interests and emphasizing free trade. On the one hand, fight against narrow practices that some countries blindly grab their own interests regardless of other country’s legitimate interests.
And all countries must try to avoid trade friction by taking ultra nationalism as an excuse. On the other hand, everyone should reflect the too ideal world market and free trade dreams, then sets up realistic and rational national interests. Generally, we should not simply distinguish free trade into good or bad, all we need do is to face it bravely, and take use of the advantages, form our own core competitive power. Mean while, keep awareness of unexpected development in mind, and overcome the disadvantages. In addition, everyone must learn to defend legal rights when violated, and to be the final winner.
Reference [1] Winters, L. , A. ,(2004), Trade Liberalization and Economic Performance: an Overview, http://siteresources. worldbank. org/INTRES/Resources/trade_lib. pdf. [2] Costinot, A. ,(2009), On the origins of comparative advantage, Journal of International Economics, vol. 77, no. 2, pp. 255-264, [3] Goldsmith, E. ,Mander, J. , House, R. , (1996), The Case against the Global Economy: and for a Turn toward the Local, Sierra Club Books: San Francisco. [4] Scott, B. ,(2005), The National Interest in International Relations Theory, Palgrave Macmillan: New York.
