The issue that has been presented in the question is that the growth in the bilateral trade and regional integration of the agreements has been a growing feature of the world trade. The world trade refers to the trade that takes place among the different countries over the globe. Therefore, world trade facilitates the exchange of ideas as well as currency over the political boundaries of countries and nations. The world trade has become the most potential and the newest feature of the world trade. It must be noted here that there have been over 200 bilateral and regional trade agreements have been in force in the recent times. Furthermore, the regional trade agreements have resulted in the increase in the world trade. However, there have been certain negative effects of the rapid growth in the bilateral trade agreements and the regional trade agreements (Lang and Heasman 2015).
This particular study aims to reflect the significance of global trade or global business in the present economy. The complicated changes that have been occurring in the global economy and the impact that they have on a range of enterprises like the conglomerates and the small-scale enterprises. Furthermore, this study also aims to provide an overview into the effect that the different factors of business have on the decision-making process in the globally and the internationally active firms (Lang and Heasman 2015).
Global business and how it is influenced
Global business has been a phenomenon that has been rapidly growing since the time of World War II. This had been facilitated by the growth in the rate of the economic activities especially in relation to the operations of the international trade and the foreign direct investment. It must be noted here that these figures had continued to grow throughout the time except when the world economy had been hit by a financial crisis.
Figure 1: Growth in world trade volume (Actual and Trend) over the decades (In billions of dollars)
(Source: Uri Dadush 2018)
As is evident from the above figure, the volume of global trade has increased considerably over the years, showing a stable positive trend. The volume however, dropped to some extent during the period of 2007-2009, much of which can be attributed to the Global Financial Crisis, which started with a sub-prime mortgage crisis in the economy of the USA and percolated to all other major economies, thereby giving rise to an acute recession and commercial stagnation. However, the effects seem to wither out fast as the trade volume can be seen to rise by the end of 2009 and has been showing positive traits in the current period.
However, it is a rigorous task to keep track of the international flow of capital, financial information and human resources but the experts are of the opinion there has been a certain increase or improvement in these components that have essentially contributed to the rapid pace of globalization. Moreover, the growth in the global business has also been facilitated by the increase in the bilateral trade agreements and the regional trade agreements. It must also be noted here that the studies of the European based agreements have identified the evidences that indicate the fact that these agreements certainly increase trade (Lee and Cho 2017).
Furthermore, the experts have found out the fact that the bilateral agreements that were signed between the European Union and 15 Central and Eastern European countries had resulted in the creation of trade for the partners. To be precise, the establishment of the agreement between the entities further influenced the importance of trade in the selected region. Furthermore, the study of the trade agreements between the developing countries had reflected the mixed effects of trade creation between the different countries and nations on a global basis (Lee and Cho 2017).
Regional trade agreements and bilateral trade agreements
Before understanding, the impact of changes in the business economy over the conglomerates and the small-scale enterprises the terms like regional integration agreements and bilateral trade agreements should be understood.
A free trade agreement refers to the agreement that has been established or signed between the countries that agree to remove the barriers to trade that are in the nature of tariffs and import quotas. It must be noted here that the free trade agreements that are signed between the countries are recognized by the World Trade Organization in GATT Article 24 and Article of the General Agreement on Trade in Services and have been essentially exempted from the most favored nation rule. Furthermore, the term regional trade agreements are a term that has been coined by the World Trade Organization for referring to the free trade agreements and other trade agreements that are preferential in nature, collectively (Cavusgil caes et al., 2014).
Researchers have developed a method for the purpose of categorizing the different types of regional agreements between the parties on the basis of the factors like the stage of development, degree of integration and other related criteria. Therefore, the different categories have been listed down as follows:
- Free trade agreements that facilitate the exclusion of tariffs and the trade related quotas from the group (Peng 2016)
- Custom unions that help in the establishment of the common tariffs in relation to the countries that fall outside the group (Peng 2016)
- Common markets that facilitate the lifting of the much-imposed restrictions in regards to the movement of the essential factors of manufacture or production within the boundaries of the region (Lasserre 2017)
- Economic unions which facilitates the adoption of the common macroeconomic policies (Lasserre 2017)
Certain examples of the free trade agreements include the Association of the South East Asian Nations (ASEAN) Free Trade Area (AFTA) that had been established in the year of 1992 and the North American Free Trade Agreement (NAFTA) that had come into effect in the year of 1994. Moreover, the agreement between the countries of Japan and Singapore is also mention worthy. This is because this was one of the first regional trade agreements that had been executed by Japan and also fall under the broad category of free trade agreement (Cavusgil caes et al., 2014). The Free Trade Agreements, as has been discussed above can be seen to have immense impacts on the trade volumes of the member countries and over the years, which can be seen from the following figure:
Figure 2: Contribution of the free trade agreements in the Global GDP
(Source: Pwc.com 2018)
As is evident from the above figure, the free trade agreements like those of NAFTA, EU, ASEAN and others have considerable impacts on the global GDP in terms of their robust contributions to the same. This contribution comes in the form of increase in the GDP of the member trading countries within these agreements, which are mainly accrued due to the increase in the trade volumes and comparative advantages which the member countries enjoy.
Bilateral trade agreements refer to the agreements that are in the nature of exchange between two nations or trading groups that present each other with preference. This means that each of the party of the agreement give each other a trade status that is favored in nature in relation to certain selected goods that have been obtained from the signatories. It must be noted here that the trade link between UK and other non-EU countries has been as a result of the free trade agreements that have been controlled and regulated by the World Trade Organization. Therefore, it can be concluded from the above discussed literature the bilateral trade agreements refer to the nature of agreements that result in the parties of the agreement favoring each other in terms of trade relations. Such trade agreements boost the economy of both the parties by acquiring the desired revenue from the international business or trade. Over the years, the number of bilateral as well as regional trade agreements have increased between different countries and Country Unions, which can be seen from the following figure:
Figure 3: Increase in number of regional trade agreements annually in the world
(Source: Economist.com 2018)
Effectiveness of Trade: Case Study of Taiwan
This fact can be supported by the tiger economy of Taiwan. The economy of Taiwan is one of the model economies that are referred to by the economic experts as inspiration for developing respective economies. It must be noted here that the tiger economy of Taiwan is totally dependent on export fed activities. The major revenue earner for the economy has been the free trade and the bilateral trade agreements that have been carried out with China and other countries (Rugman and Verbeke 2017). The effects of increase in trade activities of the country can be seen with the help of the following statistical evidences:
Figure 4: Increase in the exports of Taiwan over the years
(Source: Tradingeconomics.com 2018)
As is evident from the above figure, the export trend of the country shows a stably increasing trend over the years, barring occasional short-term fluctuations. Much of this increase in trade can be attributed to the trade agreements (mostly bilateral) which the country has been establishing with primarily China, the USA and other countries. Taiwan has been exporting increasingly over the years, primarily to China, which can be shows as follow
Figure 5: Share of Taiwan’s and China’s export activities to one another over the years
(Source: Wilson 2018)
This in turn is seen to have positive impacts of the net trade balance of the country which can be seen as follows:
Figure 6: Trend of Net Trade Balance of Taiwan
(Source: Tradingeconomics.com 2018)
The effects of this increase in the export volume of the country and an increase in the positive trade balance of Taiwan over the years can be seen to have an overall positive impact on the economic growth of the country over the years, with can be seen from the consistent increase in the Gross Domestic Product of the country:
Figure 7: Increase in the GDP of Taiwan over the years
(Source: Tradingeconomics.com 2018)
This in turn indicates towards the benefit of free and bilateral trade agreements of Taiwan which can be seen from its economic growth and commercial prosperity of the same over the years.
Impact of free trade agreements on the economy and the small-scale enterprises as well as conglomerates
It can be stated that the trade liberalization policies are established with the primary aim to the development of open markets and the encouragement of free trade practices so that the entire global economy can move towards the particular process of globalization. However, there has been researches in order to understand the impact of the growth in the free trade agreement aspect of the world trade. these researches have reflected the fact that the agreements had initiated the volume of trade in the early years of introduction but later these resulted in the diversion of trade (Ferraro and Briody 2017).
The particular term diversion of trade refers to the particular situation when there has been no net increase in terms of trade but in which the entire contract of trade shifts away from the country who has been a party of the trade agreement to a country who has not been involved in the trade agreement.
(Ferraro and Briody 2017) have researched the effect of international free trade agreements among over 130 countries over a period of 1962 to 1996. Moreover, the impact of eight regional trade agreements has been discussed. These trade regional agreements are as follows:
- Central American Common Market
- Latin American Integration Association
It had been found out that the different trade agreements had resulted in the increase in trade between the members of the parties of the trade agreements. However, in the case of certain trade agreements it had been found out that the rate of trade had also increased both between members and between non-members of the parties to the free trade agreements. Furthermore, the study of the bilateral trade agreement between US and Canada has reflected the fact that there had been no evidence of trade diversion in spite of the increase in trade between the two countries.
Generally, the results that have been deduced from the evaluation of the agreements have revealed the similar results. However, in the case of the ASEAN agreement the result that has been obtained has been different. This means that the ASEAN Free Trade Area (AFTA) is an agreement that had been signed by the South East Nations for supporting the local manufacturing in all ASEAN countries. The ASEAN agreement had been one of the rare types of free trade agreements that where it had been reported that the agreement had both been associated with positive, intra-group and extra-group impact. The impacts of ASEAN can be seen from the following empirical evidences:
Figure 8: Impacts of ASEAN on the member countries as well as on the total trade volumes
(Source: Kurniawan 2018)
As is evident from the above figure, with the implementation and operation of the ASEAN contract, the Intra-ASEAN as well as the Extra-ASEAN trade volumes have increased over the years, which in turn has increased the total trade volume considerably. However, a considerable dip can be observed in 2008-2010, in all these statistics, which in turn can be attributed to the Global Financial Crisis and the acute global recessionary and stagnation scenario. The concerned trade agreement is also seen to be affecting the economy of the member countries positively, in the aspects of their global competitive ranking as can be seem from the following figure:
Figure 9: Global Competitiveness Ranks of ASEAN countries (2014)
(Source: Kurniawan 2018)
Therefore, it can be evidently concluded that the potential impact of a regional trade agreement can be estimated by the essential factors like the impact of the circumstance that covers the introduction of the agreement. Moreover, the membership composition also impacts the economic outcome of the free trade agreements (Hollifield, Martin and Orrenius 2014).
However, the advantages of bilateral free trade agreements can be listed down as follows:
- The free trade agreements become a helpful tool in facilitating the merge of the product markets of the countries that are involved in the free trade agreements
- The much-needed requirement of the improvement of the trade and inflow of the necessary factor or inputs is also facilitated by the bilateral free trade agreements
- Free trade agreements also facilitate the maintenance and widening of the access to the market
- The integration of the economy with an increased rate of foreign direct investment in the economy is also facilitated by the free trade or the regional trade agreements
Next, the impact of regional trade agreement and the bilateral trade agreement on the small and large-scale enterprises have been discussed. This can be reflected from the fact that these free trade agreements are responsible for shaping the business links between the companies located in the different countries. It must be noted here that the small business owners should be aware of the effect that these trade agreements will have upon their local businesses (Arudchelvan and Wignaraja 2016).
It had been since 1992 that the trade agreements over the count of 200 have been implemented by the United States. The small businesses not only in US but all over the globe has benefitted the small-scale business owners. This is because the free trade agreements have resulted in the reduction of the trade barriers that usually exist between two countries. However, it must be note here that barriers to trade still exist. The high foreign duties that mandatorily have to be paid by the small business firms restrict them from participating in the export activities. Moreover, the large-scale companies or the conglomerates do not face such problems as these business firms have already created their reputation in the foreign countries thus ensuring a secure future and competitive access. The small-scale business does not carry the necessary firms to obtain the complete benefits of the implementation of the free trade agreements.
The small-scale business owners can be favored by the decreasing or removing the particular tariffs small companies can result in the facilitation of products that are much more price competitive in nature and should enable them to participate in the export processes facilitated by the free trade agreements. in addition to this, the need for import license also prevent the small-scale companies to carry out the operations in relation to export. However, a particular advantage that is experienced by the small-scale business owners is that the business being a small in size is more prone to change and the reaction time taken by the business house to respond to the market changes is less in comparison to large business houses or conglomerates. Thus, it can be evidently concluded that the free trade agreements like the regional trade agreement and the bilateral or preferential trade agreements have provided the much-needed support to both the small scale and large-scale organizations by allowing them secure access to the foreign markets (Arudchelvan and Wignaraja 2016).
Economic effects of the free trade agreements
The economic effects of the free trade (bilateral and regional) agreements can be listed down as follows:
- The effect in relation to trade creation – this means that the creation of trade between the parties of the free trade agreement is facilitated by the removing the trade barriers (Ferraro and Briody 2017)
- The effect in relation to trade diversion – the establishment of the free trade agreement results in the particular process of trade diversion which results in the shifting of the imports from the countries that are efficient but not a member of the agreement to the member who might be less efficient (Ferraro and Briody 2017)
- The terms in relation to the trade effect – the parties who actively participate in the agreement result in the execution of improved terms of trade due to a higher degree of influence over the nonmembers as a large volume of trade is carried out between the members (Ferraro and Briody 2017)
- The removal of the trade barriers result in the obvious expansion of the market as the firms now can choose the best locations for manufacture and distribution of the products (Lasserre 2017)
- The facility of free trade also results in the efficient production by facilitating market integration (Lasserre 2017)
The conclusion that can be derived from the above discussed literature is that the countries initiating the establishment of the free trade agreements is likely to increase the trade. However, the extent of any changes is dependent on the nature of the agreement that has been signed by the parties of the agreement. Moreover, the bilateral trade agreements result in the increase in the flow of trade among the countries that have been partners in relation to the trade agreements that they have been a part of.
Here it must be noted that the implementation or the initiation of the free trade agreements on the basis of the single factor that it will result in the increase of trade between partners is likely to hamper the rationale behind the establishment of the free trade agreement. This is because the initiation of a free trade agreement cannot be cited as the only reason for the increase in trade between the partners. Moreover, free trade agreements will also result in the controlling of the negative impacts of the global financial crisis.
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