Globalization and free trade are two economic concepts that are notably interchangeable give that they have similarities in terms of structure and execution. The two concepts have key distinct hallmarks. Free trade as a concept entails the non-restriction of imports and exports by governments. The trade, however, is subject protectionist policies. Globalization is a political-economic term that has a number of definitions. A generally accepted definition cites that economic globalization is an increased interdependence observed in global economies as an outcome of international capital flows and spread of technology, and cross-border trade in goods and services (Unger14). It can thus be said that free trade is one of the precursors of globalization in the greater sense. Consequently, this study seeks to investigate globalization and free trade against key economic concepts in order to establish pros and cons.
Globalization and free trade as concepts have a number of advantages and disadvantages. On the advantages part, the two are hailed by many economists as an avenue that has availed variety for consumers. Many consumers are able to choose from a large array of goods and services which match their preferences and financial status. Given the variety of goods and services, consumers also derive benefits from rife price war competitions that lead to the affordability of quality goods and services (Booth and Wellings 78). The price wars are brought forth by the shifts in demand and supply curves within the markets. If a country for instance imports rice from Pakistan in large quantities supply will be high in the market. This will ultimately force local millers to meet the Pakistan competition by reducing prices in order to retain the market share. The reduced prices ensure that the local consumers get to enjoy goods at affordable prices. .Another advantage manifests itself in the increased foreign exchange which enables a country to trade effectively with other others in the global sphere. Through exports, a country gains a large supply of foreign exchange which is essential for the stabilization of local markets.
In free trade, another benefit is observed through the absolute advantage concept. Free trade and globalization allow a country to enhance its production efficiency by focussing its energies on products that have a lower cost per unit as compared to its trading partner. This suffices when a country incurs less cost in terms inputs or through technologies than another country. A clear example is trading between two nations producing oil. Iraq produces 300B trillion barrels annually while Syria produces 134 trillion barrels a year, then Iraq has an absolute advantage over Syria when it comes to oil. Iraq thus has more output in the same amount of period and inputs as compared to Syria. It is thus safe to say through the concept of absolute advantage countries can participate in free trade easily without being short-changed.
Through comparative advantage, free trade and globalization avail benefits to countries. Comparative advantage entails the capability of a nation or country to carry out its production at a lower opportunity cost as compared to others. It focuses on scenarios where countries area is trading in two products. In order for free trade to be a win-win situation, each country is expected to focus its energies on a product that incurs low opportunity cost and leave the other to the trading country (Shaikh 31). This enables international trade to be executed with a general equilibrium mindset in place. It thus suffices that through comparative advantage countries can shift their focus to the production of goods or services that are afford low them low opportunity costs.
Another advantage of the free trade is observed in the domestic markets. The domestic market experiences growth reduced import-input costs. Many countries are able to acquire capital goods that are essential in the development through effective production. Thus, countries do not necessarily participate in the trade to acquire consumer goods. The import-inputs acquired are essential in helping domestic industries boost their effectiveness and overall output. Through free market, the interplay of supply and demand curves may precipitate a situation where the supply of goods is greater than demand hence leading to the shift of equilibrium to lower prices in order to stabilize the market. In such a scenario, consumers enjoy goods that were previously costly at lower prices.
Globalization and free trade also encourage specialization. Countries through trading and international integration may choose to venture in certain economic paths that are profitable and efficient to manage. The pursuance of these paths is essential in establishing a balanced trade between countries. With specialization, countries can perfect production technology, systems, and even mechanisms in order to participate effectively in the international trade (Boudreaux 29). For instance, India has focussed on pharmaceutical lines in comparison to Germany, which has focussed on mechanics. The specialization done by the two brings forth economies of scale which leads to low costs of production which are reflected in the end price. It makes the two countries the preferred trade partners in the aforementioned areas due to price sensitivity and quality.
As for disadvantages, free trade and globalization have a number of cons that affect their viability in a number of markets. The trade can lead to the collapse of local industries owned by indigenous citizens. Due to economy scales afforded by many multinationals, many domestic companies are faced with rife competition making it hard for them to operate within a free-trade economy(Goldstein and Musgrave 38). The indigenous industries in most instances are the key drivers of the economy and thus, ought to be safeguarded through protectionist policies.
Notably, free trade leads to structural unemployment. Due to the low comparative advantages by industries within different countries, some of the nations may experience structural unemployment if they are in direct competition with other multinational firms. The comparative advantages may manifest in terms of the technological endowment in certain firms relative others in less developed countries (Goldstein and Musgrave 41). With competition brought forth by free trade, jobs can become scarce or require extra skills which may create the eventual unemployment of individuals with a mismatch of skills.
Free trade can also be said to magnify inequalities if structured improperly. Globally, different countries are endowed differently and economically. In the course of the free trade, there might exist imbalances of trade which may lead to the development of one nation to the detriment of another. Developed nations, for instance, have already established industries which can produce efficiently and effectively. These nations are further endowed with technological endowments that can see to it that they enjoy economies of scale relative to their less-developed trading partner.
Globalization can also bring forth brain drain. This sees many professionals or laborers their home economies in search of greener pastures in other countries. This is brought forth by inequalities observed in the global sphere. Different countries are endowed differently and thus remunerate and equip their professionals differently. Brain drain leads to the collapse of domestic industries that cannot the market rates set by global firms when it comes to remuneration.
Another disadvantage is observed in the exploitation of weak tax laws provided by countries. Some nations loose out in terms of revenue due to the seamless nature of trade. A country may lose revenue when one firm trades with it while it is headquartered or based in another (Boudreaux 33). Many large multinationals have been known to exploit tax havens such as Switzerland, Cayman Islands, and Luxembourg in order to avoid taxes(Goldstein and Musgrave 41). The exploitation of these weak rules portends the loss of revenues and essential capital inflows for a country. The exploitation further propagates inequality for countries involved.
In conclusion, globalization and free trade are key economic foundations that try to dissect international integration and multilateral trade. The two, however, have observable pros and cons which make them draw support and criticism in equal measure. However, much of these advantages and disadvantages are founded on the concepts of absolute advantage and comparative advantage. The former focuses the economic trade that a nation is good at is the best to specialize in while the latter cites a trade that has a lower opportunity cost ought to be the economic production or trade for a country. The pros and cons are also anchored on the shift in demand and supply curves which may create imbalances in trade as well as price and foreign exchange.
Booth, P., and Richard Wellings. Globalization and Free Trade. Cheltenham: Edward Elgar, 2009. Print.
Boudreaux, Donald J. Globalization. Westport: Greenwood Press, 2008. Print.
Goldstein, Natalie, and Frank W. Musgrave. Globalization and Free Trade. New York: Facts On File, 2007. Print.
Shaikh, Anwar. Globalization and the Myths of Free Trade: History, Theory, and Empirical Evidence. London: Routledge, 2007. Print.
Unger, Roberto M. Free Trade Reimagined: The World Division of Labor and the Method of Economics. Princeton: Princeton UP, 2007. Print.
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