International Trade
International Trade
Introduction
International economics suggests that free trade ensures gains to the country compared the autarkic situation. In this paper we are going to discuss some aspects of trade. We then discuss the pros and cons of free trade.
If the US government removes import tariff on a particular product the producers will face more competition from the international market. As cheaper imports flow in to domestic market the firm in the domestic country will lose some of it market power. With higher supply of the product in the domestic market the price will come down . Thus the US firm will face some loss in revenue. Producer surplus will be reduced.
Obstacles to Trade
If a firm of US has a production in another country it has some advantages as well as disadvantages. Suppose I have a firm which has production in another country. The production will be subjected to the regulation existing in the other country. I will be able to use the local resources but managerial control of the production unit will become difficult. Moreover there are some resources which are cheaper and easily available in my country but I am unable to utilize these resources as production is in another country. The shipment of the resources to the production unit may not be viable. There can be restriction on such exports. Thus it is a better option to import the resources and other inputs from other countries where it is cheaper and to produce in my own country so it will be easier for me to manage the production.
Free Trade or Restricted Trade?
Liberalist thinkers are in favor of free trade. But there is also a large section of economists who express their contentions against free trade. Looking at the effect of free trade on the global economy in the last five decades we find more reasons to support free trade than to oppose it. Let us present the arguments in favor of our standpoint.
Free trade has a number of long term benefits for the growth and development of any economy and the world economy as a whole. The benefits are discussed as follows:
Free trade leads to increased efficiency in production as a country tends to specialize in the production of the good in which it is comparatively more efficient. A country exports the good that uses its relatively abundant resource . Thus trade fosters efficiency in resource use.
It has been observed that trade leads to reduction in unemployment for the trading countries. The international mobility of labor allows skill to move from a relatively abundant region to a region where that skill is scarce. This mobility has benefited both job seekers and employers.
A comparison of growth trends of closed and open economies or the growth trend of an economy in its closed and open phases reveals that free trade accelerates the pace of growth of an economy. The reason for this acceleration is greater capital inflow, technology and knowledge transfers, a wider market for the indigenous industries and also better access to cheaper inputs for the producers.
Trade also enhances total welfare in the economy. The increased competition in the domestic market brings down the prices. Thus it benefits the consumers. The higher job creation increases income of the people. Trade also leads to expansion of business activities. Thus different sections of the economy are benefited from trade.
However we cannot remain blind to some of the ill effects of free trade. Often it has been argued that free trade leads to over exploitation of natural resources of the economies leading to their depletion. Trade is also believed to have negative impact on income inequality. It has been observed that income inequality has increased due to trade. The increased market power and monopolization by the multinationals often wipes out the small businesses aggravating inequality.
In spite of some of the ill effects free trade is the way this globe can prosper. There should be concerted effort on the part of the governments of the nations to make sure that there is no over exploitation of resources and that more egalitarian distribution of the resources is fostered.
References
Chacoliades, M. (1990). International Economics. McGraw Hill.
Sodersten, B., & Reed, G. (1994). International Economics. U.K.: Pulgrave-Macmillan.
