Free Trade: Removing Barriers to Encourage Trade - Essay Sample

Introduction

Free trade is also referred to as trade liberalization, and it entails the removal of trade barriers between trading countries to encourage trade. It entails the reduction of tariffs, elimination or reducing quotas, and any other non-tariff barriers so as to encourage free trade. Non-tariff barriers include any factors that make trade expensive or difficult. It includes issues like laws or regulations that provide an unfair advantage to domestic products.

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Trade liberalization has many advantages to the country and its economy. First, free trade allows a country to earn a comparative advantage. A country is able to specialize in producing goods and services that they have a comparative advantage (can produce at the lowest opportunity cost) to enable the country to trade the excess goods and services produced for a net economic gain (Dix-Carneiro and Kovak, 2017). Secondly is the lowering of the prices of products and services, for example, the removal of food tariffs in the West leads to a decline in food prices globally, hence a benefit for food-importing countries. Free trade also increases competition between firms and economies to cut costs and increase efficiency. Increased competition also spurs specialization, which leads to efficiency due to economies of scale.

However, there is a cost associated with implementing free trade, such as the infant industry argument, where the local industry may face fierce competition and may even close down. Also, there are environmental costs due to overexploitation of the environment for increased production. The country may also face structural unemployment since as some industries grow, others decline. Free trade also leads to inward investment, which leads to improved distribution of equity in an economy. For example, the former Soviet trade liberalization attracted foreign multinationals who produce and sell their products closer to their economy hence improving the economies' capital inflow through the improved distribution of equity in terms of increased technology, management, and knowledge.

Does Free Trade Agreement Necessarily Lead to Efficiency Gains

At the introductory phase of free trade, the aspect of efficiency may not be attained in the economy since the economy may face the cost of trade liberalization, and infant industries may face extreme competition, which may destabilize them. However, with time as the trade matures, the economy shall move towards specialization to enjoy the benefits of economies of scale. As the economy matures and is fully specialized, the country will be able to concentrate on the production of goods and services that they have a comparative advantage. Through the comparative advantage, the economy shall be able to produce in large quantities goods and services at the lowest opportunity cost for domestic sale and export (Dix-Carneiro and Kovak, 2017). The sale of the goods and services shall lead to high net gains to the economy, which will be used to buy what the economy does not produce but a lower price than it could use to produce. Thus free trade agreement leads to both production and consumption efficiency that ultimately leads to efficiency gains but not at the introductory phase of the concept.

Impact of Positive US Economic Data Such as Motor Vehicle Sales Raise and Fall In Unemployment on the Dollar

A positive report on the US economy, such as an increase in motor vehicle sales raise than expected, and a decline in unemployment is an indicator both short time positive growth as well as future positive growth of the economy. This positive information has a possible impact on widening the growth differentials of the dollar (Engel, 2016). Trough the widening growth differential of the dollar, the dollar value increases. As the dollar becomes strong, it affects all other currencies as they depreciate against the dollar. An increase in motor vehicle sales triggers increases oil consumption, which improves the improved economic activities since the US economy is highly influenced by oil prices, which is dictated by the market demand and supply. Fall in unemployment is an indicator of an expected increase in production in the economy; hence the two are indicators of future growth in the economy; hence the dollar value improves.

Impact of Negative Japanese Economic Data Such as Decline in Real Household Spending by 3.7% As Well as Fall in Machinery Orders on Yen and the Dollar

When the US reports positive economic data while Japan reports negative economic data, the two economies will experience a very widening differential in their currencies (Engel, 2016). As the US economy is influenced by Oil and Gas, an increase in motor vehicle sales is a positive indicator as oil demand shall increase hence improving the dollar value. Reduced unemployment translated to increased production; hence the dollar value appreciates. When the dollar value appreciates, the other world's currencies, including the yen's value depreciates. The Japanese economy is influenced by the production of machinery, and a decline in production is a negative indicator that leads to a contraction in the value of the yen. When the real household spending fell by 3.7% as well as the machinery orders decline in the Japanese economy, it leads to a contraction in the value of the yen. Now when the US reports positive economic data while Japan reports negative economic data, the dollar value appreciates, and the Yen value depreciates.

The Caused ‘Globalization to Be In Trouble.’

The main cause of globalization to be in trouble is the hyper globalists' ambitious decision to set the current economic path towards a direction where the domestic economies are in the service of global economies. The problem started in the 1990s when economic policymakers opted towards global trading, leading to the creation of the World Trade Organization, which promotes international trade and less protects domestic economies from international competition (Rodrik, 2019). According to Rodrik, the reason behind the 'globalization to be in trouble' is the failure of the Bretton Woods system that controlled exchange rates, lack of capital control by the domestic economies, and the lack of trade protection among domestic economies and promoting global trade. I firmly support Rodriks position, and we should decrease the support for globalization for it decreases capital control in some economies leading to capital outflow; hence unemployment rates increase.

The Rationale to Rodrik's Policy Recommendations

1. On Social Dumping

There is a need to allow countries or individual economies to respond to social dumping so as to protect their domestic industries. Social dumping entails some countries that violate workers' rights to produce at a lower cost than what an importing country would produce at so as to sell at a gain. By a country discouraging social-damping, it protects its local domestic industry as well as the labor standards too at both domestic and international levels. Through the protection of the economies industry and workers' rights, the industry profitability will be realized ad well as unemployment shall reduce.

2. On Globalization Restrictions

Globalization should ensure that there is no winner or loser, and all parties in global business should gain a benefit. With the current model of globalization, there are winners and losers, and the losers suffer a higher cost than the cost incurred in reducing the globalization barriers; hence the removal of trade barriers does not offer complete compensation to the losing party in international trade thus making no economic sense. I agree with Rodrik's recommendations that freeing up cross-border labor mobility would assist in globalization as it is the area where barriers are far greater yet the area where all economic cases that depend on globalization highly rely upon.

References

Dix-Carneiro, R., & Kovak, B. K. (2017). Trade liberalization and regional dynamics. American Economic Review, 107(10), 2908-46.

Engel, C. (2016). Exchange rates, interest rates, and the risk premium. American Economic Review, 106(2), 436-74.

Rodrik, D. (2019). Globalization's wrong turn: And how it hurt america. Foreign Affairs, 98(4), 26-33