Recently, there has been a lot of discussion in both the US and in other countri
ID: 1118967 • Letter: R
Question
Recently, there has been a lot of discussion in both the US and in other countries about whether free trade is good or bad for a country’s economy. Outline, in a thoroughly researched paper, the arguments for and against international trade. Discuss why different interest groups might come to different conclusions as to why it is beneficial or not as well as some barriers that might arise to free trade. Should these barriers exist or is free trade always and everywhere a good thing? Be sure to defend your answer.
Explanation / Answer
There are several arguments in favour and against free trade.
Arguments for free trade
The benefits of free trade as argued by Adam Smith and other neo classical economists are both production and consumption gains. Consumption gains are accrued by the consumers of the domestic market even if a product is not produced at the home market. In the provision of free trade, the resources and products can move across different countries without any barriers. Therefore, goods and resources can be exchanged between two countries. The most important benefit of free trade is increasing competition in the home market. As the domestic producers have to compete with international firms or brands, they are compelled to improve the quality of the local product in order to hold the market share.
Price remains at the competitive level due to free trade. Moreover, it also facilitates innovation in product and services and induces firms to bring efficiency. Transfer of technology from developed countries to the emerging or developing countries is easier through free trade.
In the absence of any trade barriers, consumers get the opportunity to consume products produced in other countries and get wider range of choices. Free trade also helps in equalisation of factor prices in production. Wage rate of a developing country increases due to mobilisation of resources. Protectionism policy restricts a country to avail all these benefits. Free trade also helps to draw foreign capital inflows and investment in the domestic capital scarce country to invest in infrastructure development.
Arguments against free trade
The first argument against the free trade is that brain drain. Some analysts think that perfect mobilisation of resources induces brain drain. Business enterprise offering higher wage in other countries induces skilled to shift in other nations. Therefore, there is drainage of human capital, which is useful in production and R&D.
The protectionists argue that free trade destroys the small industries as they have little ability to compete with the large foreign companies having increasing returns to scale. There are also chances of theft of intellectual property rights. It is also argued that multinational companies outsource jobs for higher profits without improving the working condition for the workers. Sustainable development is also hampered due to free trade. In the face of competition, firms engage in quick depletion of natural resources in order to increase production.
Reasons for different conclusions
Conclusions for and against the free trade is different due to different view points over political, economic and social issues. Those who want to maximise total economic welfare, supports the free trade as both consumption and production can be achieved. On the other hand, some arguments are in favour of small industries and subsistence sectors and those protectionists argue against the free trade. Due to theses reasons government adopts several tariff and non tariff barriers such as import quota, export licenses, local content requirement, and trade restrictions.
Should these barriers exist?
Trade barriers on some good is benefical for the economy. A low rate of tariff on import good per unit of product helps to boost domestic competition and supports the domestic small industries. However, a higher trade tariff reduces national welfare by reducing aggregate demand. A small import tariff rate increases tax revenue in comparison to free trade. It also restricts the brain drain by raising national average wage rate.
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