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Free Trade: Benefits and drawbacks | Essay

  • Lauren Heffernan

Free Trade in the Modern World

Free trade serves as a the trade which occurs when left to its own resources without any restriction placed upon it by the government. Trade barriers though are often used to protect domestic manufacturers from the more competitive international market segments. These redirect and lessen trade flows rather than create them.

Benefits of Free Trade

Countries which operate widely can experience lots of benefits and these are felt by both the companies and consumers. They have got the actual to greatly improve development in their country as there is currently the possibility to concentrate on the goods where they consider they have an edge when compared with other areas. Today not many people have enough time or resources to make their own clothes and develop their own food, these things can be bought with relative simplicity, it includes always made more sense when pondering economically to obtain certain items from the individuals who have the expertise and skills to specialise in their making. There exists then a shared advantage between two countries as they are each better at producing their favoured item and can import those items they can be less skilled at. A company which produces in a country that deals internationally has a more substantial market to utilize. They have significantly more consumers who can buy their goods and services, this also them to expand. With this expansion they have got the new advantage of being in a position to take benefit of economies of range. They can enhance their efficiency in production through this and may finish up with falling costs and higher productivity. As the organization is now contending with others on a global level they need to try to be more efficient with their resources to allow them to lower prices and be more competitive. As the company becomes increasingly more efficient they be capable of product more goods and services therefore broadening their business even more. As the make an effort to compete with a more substantial market, firms may also need to be more innovative, they need to produce new and better ideas to allow them to keep their place in the market secure. [1] Better, faster, cheaper products must be developed as companies fight to carry their market show. We can see this in the recent competition to produce the most recent most high quality laptop at the lowest cost. Free trade encourage ideas and knowledge to go between countries, new organizations can take word of the failures of elderly firms, utilize this knowledge with their advantage therefore become more efficient. [2]

As the domestic firms gain so does the consumer. Firms must become more innovative and also may need to try to lower prices so they can keep their customers happy in the bigger market. As businesses minimize their costs to keep up competitiveness they need to become as effective as they can, this could lead to more effective circulation of goods and much more informative advertising all to the good thing about the consumer. Firms must keep on improving themselves to allow them to match the leaders, either that or create their own market area but either way the consumer benefits. As the countries trade expands to international levels consumers have a larger variety of goods and services to choose from. Along with these advantages there is also less concern with the buyer being taken good thing about my monopolies, they can't charge extravagant prices as there exists less chance they actually hold monopoly over something in the larger international market. And the issue of employment can't be ignored. People who be employed by companies involved in international trade often have better potential customers. In 2008 international trade was seen to have made around one fifth of the full total employment of the world, around 605 million careers. [3] This simple truth is further backed up by the declare that trade obstacles hinder employment. This can be seen when trade barriers are set up, their goal is to safeguard careers at home but they in the end just make local products more expensive for consumers, when this occurs fewer goods are sold and there is the possibility that jobs will be lost. [4] Trade has been named one of the greatest contributors to monetary growth because the mid 20th century because of its enticements for efficiency and decreased prices. [5] Because of this there can be an increase in living criteria experience by all included, real income may surge and with this the economy expands. [6]

Main Obstacles for Free Trade

The government gets the power to limit the movement of goods and services. This is done through something called a tariff which is the most common and is a taxes on imports[7]. Whenever a tariff is put into an brought in good it increases the price tag on this good in comparison with the domestic comparative. The government has the power to provide a subsidy to a particular domestic industry, permitting them to produce goods and sell them at a cheaper price. These constraints both can be found so that imported goods from overseas countries are more costly when compared to goods made at home and are being used to protect the local industry. [8] Domestic market sectors may sometimes need coverage from the increased competition they face when working within a more substantial international market, as when put under pressure these companies may be required to fire employees to spend less or even completely move their production overseas and all this would result in higher unemployment. This form of "protection" is particularly needed in the case of infant industries. In a situation where the authorities wants to help a fresh industry develop it'll place tariffs on possible substitutable brought in goods, this enables the infant industry to increase. This enables a country to grow its own home market and improve its business without them being extinguished due to more competitively prices imported goods. "Protection" has been criticized though as establishments that grow in times without competition it could produce lower quality goods, also subsidies have the energy to lesson financial growth.

There are also other types of barriers. A certificate is one for example this is something that is given to a firm, giving them agreement to bring specific goods into a country. As only certain companies receive licenses this reduces the quantity of a good that can be imported therefore curbs competition at the expense of the buyer as prices can certainly be brought up in a less competitive environment. A quota is unquestionably another barrier utilized by the government in this framework. That is a constraint on the bodily amount of goods that are allowed to be brought into the country. Also found within the same bracket as the permit and quota is the Local Content Requirement. That is a stipulation made by the government which means that a specific ratio of goods sold must be produced domestically. It's rather a restraint on the total amount or its value.

As you can see in the diagram above, where there is a tariff put on an brought in good, domestic companies benefit at the expense of local consumers and overseas producers. The green triangles signify the efficiency lost as that is consumer surplus forgotten after the tariff. The yellow rectangle is the earnings gained by the federal government due to the tariff. [9] Many obstacles end up boosting the price of some items in relation to others meaning they are usually "pro-producer and anti-consumer". With higher prices, it can be seen in the short-run, that less imported products are bought, home firms will gain a larger profit from this. As much of these obstacles are taxes related the federal government will also experience an improvement in earnings. This appears to be the perfect end result but if you go through the long-run situation it isn't as positive. In the future, businesses become lax with their efficiency as they haven't any real competition, they have got higher prices and worse quality goods that is the perfect environment for new substitutes to build up. As more substitutes are helped bring into the market, the old firms experience a damage in sales. Also, the government may have to fork out money for better general public services, as the populace would have less throw-away income due to higher prices. [10]

How these Road blocks are being used in the EU

The initiation of Western european economic integration was designed to create a Single Western Market by 1993. The euro was unveiled in 1999, it was thought that single currency would assist with trade integration by abolishing the ambiguity associated with exchange rates and there would be improved transparency and competition between countries. There were many barriers between countries which has impeded trade. Along with tariffs and such as stated before, gleam significant use of technical barriers. Nonetheless it seems most countries recognize their utilization as the cost of them outweighs the price of being left outside of the euro. Tech barriers create obstacles to trade by crating laws that restricts on the sale of goods, they do that by requiring the product to acquire certain characteristic or even to have been through a specific creation process, for example a certain deal size for foods. Technical barrier have become more and more apparent and are one of the primary worries confronted by the planet Trade Group. This establishment has been seeking to ensure that ". . . technical regulations and expectations, including product packaging, marking and labelling requirements [. . . ] do not create pointless road blocks to international trade. " But despite having this fear of a far more obstacle-ridden trading system it still appears to be apparent that complex barriers are in use throughout the European union and cause significant costs to the member countries. [11]

The goal of the European Union now could be to start new markets and have better trading systems around the world. To do this they have a number of policies whose main function is to reduce and even eliminate barriers to trade between member state governments and those countries beyond your EU. To get this done there must be trust and transparency between countries as it consists of negotiations centered on removing certain "protections". The Union does understand that not absolutely all barriers can be removed, as intellectual property in progressive output must be preserved. So are there no disputes between countries the European union monitors all Protectionism taking place on the globe, they do this to be able to prevent disputes which could lead to trade constraints. The European union publishes a report every year, this report includes information on the trade and investment barriers used over summer and winter. It represents the progress they may have achieved in taking down barriers between your six strategic associates which include China, India, Japan, Brazil, Russia and the US. [12]

Example of the Trade Dispute between your European union and another Nation

An exemplory case of a trade dispute between your European union and another Region is that of the banana trade dispute. It has been one of the longest operating observed in the trading system since World Warfare II. The primary issue of contention in this example was the preference the European union was seen to be displaying towards the transfer of African, Caribbean and Pacific bananas over those from Latin America.

The conflict started in the early 1990s when the European union wished to start off utilizing a new import regimen and it was thought that this would discriminate against Central American countries. Five main countries were included, these were Columbia, Costa Rica, Guatemala, Nicaragua and Venezuala. These countries attempted to obtain a consultation with the European union however when this failed they started out informal negotiations to find a solution. They argued that the new program would violate 20% maximum tariff on bananas decided after by the European union in 1961. To settle this dispute a -panel was come up with, they viewed all the evidence and ultimately made a decision that the new regime would violate a few GATT procedures and may not be justified. The European union then returned to the attracting board and two years later returned with a new and improved program. Exactly the same Latin American countries requested another panel assessment and once again they came to the conclusion that it had not been to be allowed.

In 1996, five years following the start of the dispute, a fresh complaint was filed against the European union. Ecuador, Guatemala, Honduras, Mexico and the united states were all unhappy with the EU's follow-through after the panal information. They argued that the EU'S transfer program was still discriminatory towards Latin American bananas, this is to be handled within the planet Trade Organization's trade dispute system. The Latin American countries once again gained the dispute as the WTO made a decision that the routine was inconsistent using their rules.

The EU lost based on the guideline of non-discriminatory administration of insurance quotes, and it was also discovered that the most favoured country rule had been cracked by the EU's licensing strategies. The US and Ecuador were then given permission by the entire world Trade Business to impose sanctions on the imports they received to their countries from the EU. Finally in 2001 the three countries at the heart of the dispute resolved on an agreement. Beneath the condition that the EU altered its current transfer plan to a tariff-only system, Ecuador and the US would remove their sanctions. This might imply that there would no more be a country-specific tariff quota share. The EU began negotiating with all countries from which they imported bananas, to attain agreements on the new system. During 2005 the European union proposed lots of new tariffs all which were ultimately declined as they would not sustain the existing market for banana suppliers in Latin America. As time continued Latin American lost self-confidence in their contract with the European union and made this concern clear, new complaints were submitted in 2007. In middle 2008, several Minister achieved in Geneva discuss various agricultural concern, they also tried to reach a conclusive agreement on the banana dispute but no such package was reached. [13]

Finally in '09 2009, nearly two decades after the beginning of the dispute, the four countries come to a conclusive contract. This took place when reps from the European union, US, former EU colonies and the Latin America met once more in Geneva. The EU agreed to reduce its tariffs on bananas from Latin American from 176 per lot to 114 a ton in 2017, and in return the Latin American countries would drop their case. The WTO Director-General Pascal Lamy identified this as the finish of "one of the very most technically complicated, politically very sensitive and commercially significant legal disputes ever taken to the WTO. " Previous colonies of the EU would stand to reduce money in this situation, around $40 million each year because a part of the European union banana imports would be via Latin America alternatively than them. However they would still remain receiving fundamentally tariff-free gain access to and also would get a repayment of 200 million. [14]


The advantages to trade can obviously be observed in the present day market. Due to international trade countries can take advantage of the availability of a larger consumer market, economies of level and the existence of competition which stimulates the decreasing of prices and increased creation. This brings about increased employment for everyone countries involved. Though some countries make an effort to protect themselves and their baby industries through tariffs and subsidies it is clear that the benefits of international trade considerably surpass the risks.


  • www. wto. org
  • www. economicshelp. org
  • www. hsc. csu. edu. au
  • www. traditions. org
  • www. infoplease. com
  • www. econlib. org
  • www. investopedia. com
  • www2. warwick. ac. uk
  • ec. europa. eu
  • www. wto. org
  • online. wsj. com
  • welkerswikinomics. com
  • www. wiod. org

[1] http://www. economicshelp. org/trade/benefits_free_trade/

[2] http://www. heritage. org/research/reports/2000/08/the-benefits-of-free-trade-a-guide-for-policymakers

[3] http://www. wiod. org/conferences/brussels/IPTS_background. pdf

[4] http://www. wto. org/english/thewto_e/whatis_e/10ben_e/10b07_e. htm

[5] http://www. economicshelp. org/trade/benefits_free_trade/

[6] http://www. hsc. csu. edu. au/economics/global_economy/tut7/Tutorial7. html

[7] http://www. infoplease. com/cig/economics/barriers-international-trade. html

[8] http://www. econlib. org/library/Topics/HighSchool/BarrierstoTrade. html

[9] http://welkerswikinomics. com/blog/2007/10/17/ib-graphing-and-understanding-the-economic-impacts-of-protectionism/

[10] http://www. investopedia. com/articles/economics/08/tariff-trade-barrier-basics. asp

[11]http://www2. warwick. ac. uk/fac/soc/economics/research/centres/eri/bulletin/2008-09-3/chen-novy/

[12] http://ec. europa. eu/trade/insurance plan/accessing-markets/

[13] http://www. wto. org/english/news_e/pres09_e/pr591_e. htm

[14] http://online. wsj. com/articles/SB126089161812692163

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