Do you know how does trade makes everyone better off? And, is it possible with barriers to entry? What would happen when there are barriers on both commodities and markets? What is relation between open markets and free trade? How does free trade system affect economic life? Let’s see the impacts of free trade system in detail.
Really, these questions are enough to make a loud noise in your thought factory. No doubt, unless you know the importance of open markets and free trade, you cannot explore the casual link of above questions.
Understanding concepts of open markets and free trade system
Simply, market is a common place where buyers and sellers meet to exchange commodities by the means of money.
But, recently, online market is getting too much popularity. And, beyond doubt, it might prove game changer in the near future. It may be local, national, or global market.
Moreover, on the basis of sold commodity, markets can be divided into various categories.
Difference between open and closed markets
Economically, entry and extent of market matters a lot. Like, larger the market, better the participants. Technically, in the larger size, forces of market act better to benefit everyone.
Certainly, regulatory frameworkof respective nations is the major deciding factor whether it is closed or open market.
For concept clarity, Open free market manifests lesser regulatory barriers to entryfor new entrants. Whereas, closed market is subject of excessive regulatory burden, and barriers to entry.
Describing the meaning of free trade system
“Free trade system means absence of tariffs barriers between consumers and producers in the international market”
For example, suppose, US exports some sports products to Brazil at $100 per unit. And, if in Brazil, the product is available at the same rate for consumers, then, we could say that destination nation hasn’t imposed any tariffs, duties or any other taxes on the goods of US.
Specially, it only happens when both nations are agreed for free trade of goods, services and other factors with no or minimum barriers.
Relationship between open markets and free trade
So far, you might have learned what is open markets and free trade policy in the form of definition. Now, let’s go deeper to know the difference between open markets and free trade policy.
In simple terms, Open market is a product of regulatory framework of respective nation. Here, nation in question decides to reduce barriers to entry in market. In other words, anyone can produce, as well as sell any product without prior permission of authority.
For simple understanding, it is the process of liberalizing country’s economy to invite more players to participate.
“In such system, only market forces decides the prices of commodities, and no one is price maker”.
On the other hand, free trade is a policy decision taken by two or more nations. It is all about to reduce the tariffs barriers between consumers and producers.
Are open markets and free trade system intertwined?
In this way, both are intertwined. One reduces the barrier between producers and consumers to make product cost effective. Whereas, other helps to make perfect competitive market to make everyone price taker.
Importance of free trade system
Whenever people went for protective measures, we found themselves into deep trouble. On the contrary, whenever they advocated the cause of the Free Trade, we witnessed recovery and boom in their markets.Then, isn’t it highlight the importance of free trade system in realising human aspirations?
Understanding importance of free trade system
Free trade system is a broad trading network of many trading nations for restriction free flow of goods and services across world. Here, motive is clear, to increase market participants, create competitive market, and generate surplus for consumers and producers.
Correctly, “Our past experiences suggest that nothing would be achieved by barriers and restrictions but depression, recession and backwardness. So, free trade is the only option to push ahead in the course of progress”
Relations between comparative advantage and free trade system
Such system offers choices for producers and nations to make production of any goods or services in which they have lesser opportunity cost and more comparative advantage.
In other words, free trade system gives opportunity of production of commodity in which producers have comparative advantage, in terms of production cost.
Explaining the comparative advantage effect
It is an economic principle which empower firm to produce a commodity with lesser “opportunity cost”. Simply, nations with cheaper factors of production have greater comparative advantage over others.
Comparative advantage principle is widely used in the decision making of production of goods and services.
Role and importance of comparative advantage in free trade system
Whenever there are differences in factors of production (FOP) of prices of any commodity or service among two or more trading nations, it is used to said that nations with lesser (FOP) have greater advantage compare to peers.
As such, the prices of factors of production aren’t same across the global economy owing to inequality in the pace of development.
Surplus labour force in the developing as well as under developed countries results in lower wages whereas opposite is true in the developed world.
This is the reason why certain countries hold favourable comparative advantage in some products, and not in others… This is beautiful aspect of free trade system.
Mass production and economies of scale
Economies of scale’ notion reveals the secret behind the cheap affordable prices of a commodity with large-scale or mass production. In simple words, more the production lesser the price.
Then, as per this principle, it is in the interest of competing players to produce goods and services in which they have lesser “opportunity cost” and more “consumers and producers surplus”.
Free trade system and consumer welfare
Yes, free trade mechanism will definitely help to save more money, resources with greater level of satisfaction for “participants of market”.
In case of non- functionality of comparative advantage and economies of scale, everyone would be loser and economic regression may begin thereafter…
Efficient allocation of resources
Natural resources are intensively used to maintain the comparative advantage in a particular goods and services. So, lesser wastage and loss of resources results in the production activities of free trade system.
Does free trade system expand markets?
Yes, it does. It is another importance of free trade system. Market expansion is achieved by increasing the base of market participants in market so that more demand is generated. In this way, market expands more.
Multilateral agreements for free trade is essential to make a broad trading network of many trading nations. Because, more the participants, better the benefits.
Describing Disadvantages of free trade system
Recently, in India, we noticed that the groups of farmers were out on the street to demonstrate against the government’s decision to import Agri commodities. In the similar way, Germany saw intense demonstrations against the free trade deal with US and Canada. This is the bare truth of ‘free trade disadvantages’ for market participants.
Are there any disadvantages of free trade?
In the similar tune, US President Trump argued that Chinese export is responsible for the job losses in US, and blamed for Chinese export driven growth strategy for trade imbalance.
The ongoing US-China Trade war and protectionist policies of respective nations has once again ignited the dormant debate on ‘free trade disadvantages’.
Now, it is essential to know whether the ‘free trade system’ is flawless or need certain efforts for further improvement.
Numbers of disadvantages of free trade
So, let’s take a look at the free trade disadvantages and its short, as well as long term impacts on market participants, employment, environment, and on overall global politics.
Does free trade impacts jobs and employments?
This is the most common argument of opponents against the free trade system.
As per theirs point of view, nowadays, production in China is widely considered cost effective due to low, wages, cheap resources and so on. Therefore, China has become the ‘factory of world.’ And, the market share of China has grown considerably.
In such situations, people are losing jobs in the other nations due to increased demand for Chinese products. Loss of job is a serious thing as it impacts saving, personal capital, and standards of living.
Export driven growth strategy is somehow responsible to place free trade system in the negative zone.
Does free trade affect food security?
It is the least noticed but most important negative impacts of free trade system.
It is commonly noticed that export oriented and import-competing agro- industries divert theirs land resources for cash or plantation crops ignoring food crops. Everything is done to make product competitive to be market leader.
Shockingly, it has often been proved by the land use policies of respective nations of free trade regions (FTA)
Piracy of technology or dispute over Intellectual Property Rights
Since many decades, it has been a bone of contention between inventors and potential beneficiaries. Strangely, majority of patent rights related to biotic resources are with developed countries.
But, the pool of such resources are abound in developing countries. Isn’t it mad rush for resources? Then, conflict is unavoidable. It is happening because inventors always stress to recoup their investment pumped in research. Whereas, potential beneficiaries argue about the unaffordable prices.
Regional block politics and failure of multilateral negotiations — fallout of free trade negotiations, isn’t it?It is results of favour and disfavour policies.
Even though, the Uruguay round was a milestone in term of consensus over the barrier reduction, the later development raises many doubts over the result oriented negotiation.
It is true that regional economic blocs are engine of growth and appreciable incentive for integration.
But, at the same time, these are acting alternatives for the stagnated negotiations of the WTO.
Economic inequality and regional disparity due to favourable market access
Open market embodies the democratic principle that is freedom to trade.
As a result, migration of everything begins to capture favourable condition.
Many staunch aspirants are pumping their investment in areas from where they could reap profit in return, ignoring unprofitable one.
Logically, consequent repercussions are regional disparity and economic inequalities.
Why need for agricultural subsidies?..
Why are the negotiations of WTO not solving the bottlenecks? To preserve the interests of unskilled labours of import-competing industries, high income countries are offering large amount of subsidies for them. This is the best example of free trade disadvantages for farmers.
Environmental degradation and loss of cultural identity
It is happening due to loss of identical products in search for global market access. Cost effective production with lower opportunity cost is prerequisite to scale more in competitive market. Is there anyone to compromise profit for negative externality? Definitely no one. So, the scapegoat is bystander.
Last words on free trade system explained,
So far, I have explained about relationship between open economy and free trade policy. It helps to clarify how open economy and market facilitates the free flow of goods, services and capital across political boundaries without restrictions.
Also, this article emphasis on the role and importance of free trade in the various sectors of economy and economic lives of people involved.
And, finally, this article highlights the Important disadvantages of free trade including job losses, economic inequalities, environmental degradation and so on.
Close and open ended questions
Opportunity cost and comparative advantage