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Can International Trade Ever Really Be Free?

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Introduction

Can International Trade Ever Really Be Free? Countries all over the world are endowed with diversified resources. This specific resource endowment essentially means particular countries will always possess the advantage in the production of unique goods. For example, Brazil is well known for its' coffee production, the Middle East being the greatest oil producer, and South Africa is famous for its' gold production. These countries have the advantage that others do not have, and this is what Adam Smith's theory of absolute advantage is suggesting (Brooks et al 2004). Nonetheless, when a country has an absolute advantage over another country in production of certain goods, both of them could benefit from trading those goods. This is another theory of Ricardo's comparative advantage as Yeats (1979) states that countries will benefit from each other by specialising, that is, a country can produce certain goods at less foregone opportunity cost than other countries can. In other words, by specialisation, both countries would utilise their resources at the maximum and thus, raising the production level. Furthermore, free trade attracts international competition and hence, it stimulates the domestic firms to innovate and apply up to date technology in order to compete internationally. Consequently, both countries will be mutually beneficial. By trading internationally, poor countries could be helped out of poverty. Despite all of the advantages of free trade, countries consistently constitute trade restrictions to other countries. In general, they are tariff-based policies as well as non-tariffs measured policies which constitute protectionism. The arguments against free trade go as follows: Infant industries will likely to face fierce competition by dominant international firms from overseas and accordingly, having difficulties to start up the business since they are inevitably inefficient during the first run as they have to experience diseconomies of scale and the infant industry argument had been accepted as a valid exception to the case of free trade (Baldwin, 1969). ...read more.

Middle

Therefore, infant industries need protection until they are internationally competitive enough at least domestically competitive. Furthermore, In terms of unemployment, structural employment will likely to occur in short term as incompetent and inefficient firms are shutting down due to lack of occupational mobility, that is, lack of required skills to be eligible for employment at other industries. Regarding trade dependence, the increased specialisation practises mean countries are becoming more dependent on other countries and hence, less self-sufficient to stand on their own and as a result, they have to trade in order to have the goods they need (Dunkley, 2004). There is a possibility of trade diversion, for example country A has a free trade agreement with country B, and exporters from other countries could potentially export goods that are intended to be sold on country A to country B in order to get away around tariffs and other possible trade restrictions in country A (Viner, 1950). Dumping, a form of unfair trade practices or predatory pricing by selling imported goods under their cost of production and thus, domestic markets become less competitive and potentially will be out of business (Viner, 1966). Once, they are eliminated from the competition, foreign market will raise prices at a level that a monopoly would have. The excessive amount of goods to be dumped result from the increased productivity by specialisation. Consequently, having a free trade agreement will even make it more difficult to deal with dumping practices. Protectionism, various protection methods have been exercised by the government. They could be classified into 2 categories. Firstly the tariff based policy, by increasing tariffs, imported goods will be less competitive than domestic products and therefore, domestic markets could dominate the market and the second is non tariff based barriers. The most common non tariff barriers that are imposed by the government are as follows: Import quotas, the most frequently used quantitative trade restriction method, it is a limitation on the quantity of particular goods that can be imported to a country over a period of time. ...read more.

Conclusion

The limitation could be in the number of physical units or either the value of imported goods. Importers are required to acquire import licenses with a limit attached to them. The available quota on those licenses are distributed in different ways including the" first come- first served "basis and having importers bid up prices for quota by auctions. If limit were to be exceeded, they will either be penalised or even having the excessive goods confiscated. The government earns revenue from the penalty and selling those licences (Mikic, 1998) Voluntary Export Restraints (VER), which is essentially a quota requested from an exporting country either the government or the exporters themselves. Only if the exporting country intends to sell their goods to the protected importing country, it will propose a VER.( Kerr & Gaisford, 2007) In contrast to Voluntary Export Restraints, the Voluntary Import Expansions (VIE), a policy on increasing available quota on imports of certain goods by corresponding countries. It is considered to be discriminative as the objective is relieving the protectionist pressures in the export markets (Irwin, 1994). Irwin raises the arguement that as VIEs are administered by the government along with contributions from dominant firms, it is likely this will result in cartels and unfair trade conducts as firms gain profit from the increased sale of imported goods. The government could also support the domestic firms by providing export subsidies in form of direct or indirect payments to them. This will allow them to sell goods under the domestic market price in the export markets. Hence, the government are supporting the domestic firms financially by minimising the selling price and assisting them in infrastructure and other potential costs (Mikic, 1998) To conclude, even though the free trade concept is thought to be favourable, it imposed a number of problematic issues raised by protectionism and government trade policies towards others. As Dunkley(2004)suggests that self-reliance is doable, it is believed that most countries will definitely enjoy prosperity and wealth by being globally competitive and rely on themselves without having to trade at all if possible. ...read more.

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