Economic development is an essential goal that all the countries across the globe strive to achieve by adopting all the possible measures that aid in achieving this goal. To effectively maintain a continuous economic development in a country, government bodies adopt legal strategies that ensure a continuous flow of trading activities that in turn generate revenues not only for the involved businesses but also for the government as well. Free trade is one of the trading measures that most countries have enacted in an effort to promote free and frequent flow of trading products and services hence leading to improved and efficient economic activities.
This paper therefore addresses some of the ways that free trade has contributed to the development of the world economy either positively or negatively. The paper addresses some of the application of free trade regulations including how the involved countries have economized on the use of free trade regulations in an effort to establish a strong economic development of their countries. The discussion also focuses on the role of free trade in regional development as well as boosts the global trading relationship that as a result contributes to the global economic advancement as a whole.
Free trade refers to the government measures that allow free movement of goods and services in and out of a country without following any strict trade barriers and regulations such payment of import and export taxes among other legal business tariffs and procedures. The practice of free trade allows the participating countries and businesses to gain a mutual gain resulting from the trading activities as granted by the law of comparative advantage. This means that all the participating businesses has unlimited business opportunities as they enjoy uninterrupted business activities in various international countries.
The policy of free trade is characterized by their distinctive pricing whereby the prices of the involved products and services is set by the equilibrium of the demand and supply curves as compared to other forms of trade where the prices for the goods and services are set according to particular pricing strategies such as the cost of production (Smith, 2006). As a result of these controversial trading processes involved in the free trade policy, its practice has indicated both positive and negative impacts towards the economic growth of particular countries. This is because; the movement of goods and services in some countries as well as the unpredictable pricing strategy that is used in the free trade policy has controversial impacts to different countries where it is practiced.
The main contribution of free trade towards economic development is that it enables foreign companies and parastatals to invest in international market with minimum or no international trade regulations that limit their investment capacity. The foreign investors are saved from the hustle of paying the export and import taxes and quotas, trade tariffs among other international expenses that most companies have to pay in order to start a business in a foreign country. In addition, the companies get to enjoy the benefit of purchasing products using variety forms of currency as there is free flow of foreign currency in and out of the country under the free trade policy. This way, foreign investors have boosted economic development not only in their new international market segments but also in their home countries as they are able to send their profits and returns to their mother countries. A perfect example of the countries that have improved their economies as a result of foreign investment promoted by free trade regulations is China which gains over 50 billion dollars from foreign investments and this is used to fund other economic development projects across the country. The competitive levels brought by free trading access also leads to lowering prices of commodities hence making them accessible to the locals who may have low incomes.
As the businesses have an easy access to starting new businesses in various market segments through the free trade comparative advantage, the level of unemployment is reduced at a remarkable state. More job opportunities are created as the trading activities intensify and more businesses are opened in various parts of the world. Also, small businesses have been boosted through the practice of free trade policy (Pugel, 2007). For instance, the small manufacturing companies can export their products to other countries without any trade regulation or having to pay quotas and tariffs. Small businesses serves as the most effective sector that offers over 75 percent of employment opportunities and boosting the sales of products and services they produce through free trade, then it is possible to have a productive society with a minimum number of unemployment which is the key contributor of poverty. China for instance was able to reduce the poverty level from 31 percent in 1978 to 5.5 percent currently as a result of liberalization which promotes free trade in the country.
Some of the critics have however argued that free trade is likely to result to an economic diversion. This occurs whereby trading barriers are enacted in business operations are enacted to the businesses producing their products at a low cost as compared to a free trade access granted to those businesses producing similar products at a high cost. This could lead to a negative impact on the economic development of the regions which are not members of the free trade agreements especially if they are doing business with countries under free trade association. As a way of bringing equality in trading, negotiation on prices and tariffs are necessary and this is why regions are encouraged to enact negotiable tariffs to benefits both producers when it comes to exercising free trade operation as seen in the case of Doha Round. In addition, the failure of one country participating in the free trade agreement leads to the whole region being dragged down together especially in times of economic recession for one country. This is one of the cases that affect the members of the European Union any time one of the participating members suffer from any form of economic instability.
Free trade also promotes regional developments hence the strong economies continue to grow stronger while the poor regions are left out of the economic development. This is because, only the countries who have signed the free trade agreement are the only ones who benefits from the tax free trading activities (Pugel, 2007). Some countries under this agreement have also received criticism that they only focus on urban economic development while the rural regions are left out of the benefits. For instance, china is one of the most economically developed countries as a result of liberalization allowing free trade initiatives yet there is a high poverty line recorded in their rural areas that mostly depend on agriculture to economically sustain themselves.
Free trade encourages foreign investors to penetrate the new markets and establish their businesses as a result of the favorable trade regulations and the tariffs exemptions. This is a threat to small and underperforming domestic industries who have limited access to the market due to the competition brought by the foreign businesses. This is a case that affected the local industries in Spain in 2009, whereby the market was flooded with foreign companies as a result of market competition, a situation that led to killing off of the local industries hence resulting to overdependence in foreign products and services. In addition, free trade encourages labor outsourcing hence the locals do not benefit from the employment opportunities or they are paid low remunerations by the foreign businesses (Muckerjee, 2004). This is a case that is experienced in developing countries whereby the desperate labor force end up being underpaid by the foreign investors whereas their outsourced employees are given top priorities in top level job positions and benefit from high salaries and benefits.
The agreements signed as a way of developing economic empowerment through free trade has proved to be beneficial in some countries’ economic development while critics argue that, the agreement can only be beneficial if the involved countries are at the same level of economic development. For instance, signing of North America Free Trade Agreement (NAFTA) and the European Union free trading exercises within the region have raised concerns from critics that it may not benefit all the participants equally. Regardless of the drawbacks, free trade agreement promotes economic development of the involved countries to some extent and hence it is beneficial to economic development.
References
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Pugel, T. (2007). International Economics, 13th edition. New York: McGraw-Hill Irwin.
Rodrik, D. (2001), The Global Governance of Trade As If Development Really Mattered, October 2001, United Nations Development Programme.
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