International trade is the share of capital, merchandise as well as services from corner to corner international borders and regions. Trading all the way through the globe provides customers as well as the nations the chances to be uncovered in terms of goods as well as services not accessible in their own nations. It has enormous economic, social and political importance not only for a particular country engaged in international trade but also for the world at large.
Trade for an economy can be either free that is market determined or through intervention from governments.
In the international market place, the term free trade is commonly known as a policy with the help of which governments carry out both imports or exports operation without any restriction. It is characterized by absence of any ‘trade distorting policies’ like taxes or quotas (Dent, 2010).
On the other hand, in order to raise revenue and protect domestic industries of the country can impose some protectionist policies in the form of import substitution and export promotion.
Importing similar goods poses challenges for domestic markets leading to loss in the domestic market share for those sectors. Governments can influence this trade from beginning to end with the help of tariffs along with quotas to manage the proportion of importation as well as their capability to contend with local companies (Graham, 1980). The government can also take certain export promotion measures like organizing trade fairs, giving pre-shipment and post shipment finance, subsidies, creating SEZs etc.
In order to evaluate the topic of this essay of evaluating the function of governments in ensuring a fair as well as ample share of the advantages of international trade, there is requiring critical assessment of untrammeled market commotion in against the government intervention.
Free trade as described in the ‘Theory of Comparative Advantage’ by David Ricardo, (Ricardo, 1857) explores that there is requiring incorporation of economic welfare activities, if the particular nation evidenced a lower opportunity cost.
Also, removal of trade barriers like tariffs, leads to lower price for the imported goods increasing their demand. So, producers will get more incentive to produce. As the scales of production increase, investment and income multiplier effect works to expand the economy. Also, firms exporting goods grows.
However there are several disadvantages of free trade also, like unbalanced development of the economy of only those sectors in which the country has a comparative advantage. Also cut throat competition leads to dumping in which exporters to retain foreign market share sell their products at very cheap rates.
According to Carbaugh, the most prevalent concept that free trade is the best is challenged by the idea of industrial policy, which states that the domestic economy as a whole can be made better off by strategically implementing trade restrictions (Carbaugh, 1980).
According to the views of Protectionists, it can be said that novel or newly established organizations irrespective of the industries must be secluded to provide them chances to enhance their activities as well as compete internationally through measures like export finance, subsidies etc. On the other hand, there are critics that opined that some of these newly established organizations irrespective of the industries do not have opportunity to grow up because of the industry giant.
At the same time regulations followed by the industry also makes sure that exploration of the economy is the best way to maintain the balance in trade activities. Therefore, it is become obvious that while a nation conduits all its capital into a small number of industries, the economy as whole evidence the major due to such dependency.
Developing countries mainly focus on the export of primary goods like agricultural goods, raw materials and fuel. According to economists, for achieving self sustaining growth and to be self reliant, a country should focus on taking advantages on its international trade. But at the same time, dependence on exports of primary goods makes a country unstable because prices of goods in international markets tend to be indecisive. Elasticity of the demand for primary products are usually low, so changes in price of these products do not bring out expected amount of changes in the quantity demanded. So, government regulation in primary markets of developing countries may not be of much help (Carbaugh, 1980).
But in certain cases, government regulation may be preferred to free trade. Carbaugh cited a classic example of industrial policy actions in Japan, during its early years of development, when the Japanese government protected and provided generous subsidy to launch and sustain what have now become its key industries namely, telecommunications equipments, semiconductors, pharmaceuticals and software.
Without government regulation, the private sectors, or more specific way, the growers as well as small and medium size organization will face major issue in terms of production. These particular scenarios arise in Senegal, while it engaged in free trade with EU. Senegal in 1990 produced about 73,000 tons of tomatoes. In free trade with EU, in 1996, its production came down to 20,000 because of availability of cheaper tomatoes from EU. Here, government could have regulated by increasing import duties.
Because of the questionable benefits from both aspects, the free trade policy still considered as the most debatable aspect. However, from the above analysis it can be said that poorer nations in against their trading partners, undergo major issues mainly because of the ‘unfairness’ as well as ‘expensive’ nature of a free trade agreement. Free trade is not fair trade (Fridell, 2010). By engaging in free trade, nations will enforce their private sector to involve in race with public sectors of stronger economies. The regulation is certainly equal but the capacities of the countries are not.
The above mentioned case example of Senegal related Free Trade comes to explores how nations that do not have an equivalent aggressive advantage are predictable to engage in recreation alongside a stronger player and, in the process, fail miserably. But this debate is never ending. Economist Milton Friedman is against the concept that globalization would marginalize developing and poorer countries. Instead, he stresses on the fact that a third world country will also benefit from free trade. Increased world free trade will spread technology and knowledge from the so called ‘rich’ countries worldwide, so that it will be beneficial for these new entrants as well as their natives (Friedman, 1980). Thus, the desirable trade policy for an economy is an optimum mix of free trade (for weaker sectors) and government regulation (for sectors which have comparative advantage).
Carbaugh, R. (1980). International economics. Cambridge, Mass.: Winthrop Publishers.
Dent, C. (2010). Freer Trade, More Regulation? Commercial Regulatory Provisions in Asia-Pacific Free Trade Agreements. Competition & Change, 14(1), 48-79. doi:10.1179/102452910x12587274068114
Fridell, G. (2010). Fair Trade, Free Trade and the State. New Political Economy, 15(3), 457-470. doi:10.1080/13563460903288213
Friedman, M., & Friedman, R. (1980). Free to choose. New York: Harcourt Brace Jovanovich.
Goldman, R., Rubin, S., & Graham, T. (1984). Environment and Trade: The Relation of International Trade and Environmental Policy. The American Journal Of International Law, 78(2), 513. doi:10.2307/2202305
Lumina, C. (2010). Free trade or just trade? The World Trade Organisation, human rights and development (Part 1). Law, Democracy & Development, 12(2). doi:10.4314/ldd.v12i2.52892
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