The Benefits of Free Trade. Ryan Cannon. Macroeconomics

Transcription

1 Free Trade 1 The Benefits of Free Trade Ryan Cannon Macroeconomics The Benefits of Free Trade Introduction:

2 Free Trade 2 Free trade is a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports) or quotas. A number of barriers to trade are struck down in a free trade agreement. Taxes, tariffs, and import quotas are all eliminated, as are subsidies, tax breaks, and other forms of support to domestic producers. Restrictions on the flow of currency are also lifted, as are regulations, which could be considered a barrier to free trade. Put simply, free trade enables foreign companies to trade just as efficiently, easily, and effectively as domestic producers. Body: According to the law of comparative advantage, the policy permits trading partners mutual gains from trade of goods and services. Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of scare resources. Free trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from those that would emerge under deregulation. These governed prices are the result of government intervention in the market through price adjustments or supply restrictions, including protectionist policies. Free Trade has many good benefits to people and to the economy. The good benefits that people can receive are jobs and good prices on everyday necessity products that cannot be produced in the United States. Jobs may not be opened to availably to the States but other countries are able to create new jobs for the unemployed and makes the prices of the good go down for cheap labor. The economy is helped a lot by the fact that

3 Free Trade 3 the prices have dropped and that little government management is used to make the goods available to the citizens of the United States There are three important reasons voluntary exchange is good not only for the contracting parties but the world as a whole, but trade improves global efficiency in resource allocation. A glass of water may be of little value to someone living near the river but is priceless to a person crossing the Sahara. Trade delivers goods and services to those who value them most. Trading allows partners to gain from specializing in the producing those goods and services they do best. Economists call that the law of comparative advantage. When producers create goods they are comparatively skilled at, such as Germans producing beer and the French producing wine, those goods increase in abundance and quality. Trading with foreign countries allows consumers to benefit from more efficient production methods. For example, without large markets for goods and services, large production runs would not be economical. Large production runs, in turn, are instrumental to reducing product costs. Lower production costs lead to cheaper goods and services, which raises real living standards. Therefore, benefits of trade liberalization for many poor countries, especially those in Africa, are likely to be severely limited. So it is worthwhile to again restate the case for free trade and to back it with evidence countries open to trade tend to be more prosperous than protectionist countries (Tupy). Poor countries experience a gain from the free trade because it helps them with the catch-up effect. The poor countries economy will grow at a much faster rate than a rich country would. Trade for goods with a poor

4 Free Trade 4 country will in turn give them new jobs and make their economy stronger and able to become prosperous with the continuous trading. The selective application of free trade agreements to some countries and tariffs on others can sometimes lead to economic inefficiency through the process of trade diversion (Froning). It is economically efficient to produce a good in the country that can make it for the lowest cost, but this does not always take place if a high cost producer has a free trade agreement while the low cost producer faces a high tariff. Applying free trade to the high cost producer (and not the low cost producer as well) can lead to trade diversion and a net economic loss. This is why many economists place such high importance on negotiations for global tariff reductions. In 1776 Adam Smith stated, "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage" (Tupy). Adam Smith s statement means that trading with other countries will in fact make the nation grow more and bring in more goods for the people on the new colonies to consume. Countries that specialize in creating commodities where they have the comparative advantage will increase their production, instead of focusing on products or industries in which other countries have the comparative advantage by increasing production, countries increase their efficiency. Countries that are specializing better allocate their resources and purchase cheaper resources from other countries. Free trade leads to a global market, consumers benefit from the competition and

5 Free Trade 5 variety brought to the market. When other countries produce some items cheaper, the consumer purchases products for less. Another benefit to consumers is increased innovations. As free trade expands, competition also expands. To stay competitive, companies must seek ways to create the comparative advantage. This leads to increased innovation that improves products. Trade with other countries that just the exchanging of goods and services. Trading with foreign countries allows other nations to start new jobs and gives people an incentive to get jobs and find work. Many of the jobs that people get in foreign countries are manufacturing jobs and gathering raw materials for shipping to other countries. Although free trade may cause jobs in one particular industry to wind up overseas, jobs in the exporting and importing sides will increase. When productivity increases in importing and exporting, wages also tend to rise. As the U.S. has lowered its trade restrictions, the gross domestic product has risen. Since consumers can purchase quality products for cheaper, they have more expendable income. When a country purchases a product from another country with money, they essentially send the exporting country non-interest IOUs in exchange for real goods. The exporting country, though, must use the money within the country that imported the products. Countries that open their trade barriers to allow free trade have the chance to enter the global market, which will increase income for the country. Developing countries that lifted trade restrictions tended to grow three times faster than countries that restricted trade. The idea behind free trade is that it will lower prices for goods and services by promoting competition. Domestic producers will not longer be able to rely on

6 Free Trade 6 government subsidies and other forms of assistance, including quotas, which essentially force citizens to buy from domestic producers, while foreign companies can make inroads on new markets when barriers to trade are lifted. In addition to reducing prices, free trade is also supposed to encourage innovation, since competition between companies sparks a need to come up with innovative products and solutions to capture market share. Conclusion: Free trade with other countries proves to be a vital way for a countries economy to stay stable and to grow. Trade allows allocations with others to increase production and competition with other companies. Jobs in the countries that are in high poverty greatly benefit the most from trading with well-developed countries. The employment rate shows that a developing country is growing from all the jobs that trade creates. Trading also increases the incentives of citizens to get a job and become part of the work force to make the economy grow. Free trade affects everything and everyone in a society when it comes to a country s economic growth. References

7 Free Trade 7 Mike, B. (2011, October 12). In pictures: What are the benefits of free trade?. Retrieved from Froning, D. (2000, August 25). The benefits of free trade: A guide for policymakers. Retrieved from Tupy, M. (2006, January 01). Free trade benefits all. Retrieved from