The Role of Free Trade in Supply and Demand
The idea of free trade is to do away with unfair barriers to international commerce and as a result increase the volume of business in the trading countries (Dunkley, 2004, p. 9). Indeed, free trade is a policy instituted by governments to eliminate discrimination against imports by applying tariffs or using subsidies for exports. The idea of free trade allows trading countries to benefit from the trade of goods and services among themselves (Dunkley, 2004). In a free trade regime, prices are determined by the forces of demand and supply, which are the main determinants of resource allocation. This essay will focus of the current issues of free trade on the world markets. The effect that free trade has on world market will be addressed. In addition, the paper will evaluate the success as well as the drawbacks that come with free trade policies across the countries. Further, the paper will highlight the future trends as well as the changes that nations will face as they embrace liberalization of markets in the face of globalization. Finally, the paper will conclude by analyzing whether demand and supply will be achieved in the nearby future.
Current Issues of Free Trade
The world is becoming more globalized (Dunkley, 2004). However, although this looks good for countries, the current nature of globalization as well as free trade and open markets are receiving a lot of criticism from politicians and economists in equal measure. This is because countries with more economic influence and powerful corporations are dictating terms in the world of commerce (Goldstein, 2011). In nations that have democratic ideals, multinationals are shaping and influencing decision making in the highest echelons of power. In countries with less democratic practices, they are supporting dictatorship and instability. This has lead to low living standard in developing world while fewer people are becoming wealthier. Indeed, although free trade can have long-term benefits to an economy, in the short run, it can be detrimental to a country (Goldstein, 2011). Many industries are folding due to free trade, hence leading to unemployment. The current issue facing many nations is how to help workers who lose their jobs due to free trade and globalization of economies (Goldstein, 2011).
Effects of Free trade on Supply and demand
Supply and demand is a model that helps determine the prices in a given economy. In a market that is competitive, the price of any good or service will change until it reaches a place where the quantity demanded by consumers, at that given price, is equal to the quantity supplied by suppliers, at that price. The supply and demand curve below can be used to show the benefits as well as the disadvantages of free trade when a tax is imposed on a product.
Source: Dunkley, 2004, p. 28
An economic model can be used to show the benefits and drawbacks of free trade. The above graph shows the benefits of free trade to an industry within a given economy. For example, Argentina has used import restrictions on all products from the U.S (Office of the United States Trade Representative, 2012). We Assume that the average prices charged by other players in the same market is given at price, P1. Since there are other countries that are producing the same product at and selling at P0, American industries are under threat as there are others selling at a lower price or have access to the Argentina market. This will be so because Argentina has persistently used import restriction on goods from America. From this graph, it can also be argued that if prices do fall above the intersection of the Supply and Demand lines, then it is possible to achieve equilibrium. This mean it is possible to have equality between the quantity demanded and the quantity availed in the market by the suppliers. Therefore, American companies can produce and sell its products to the same level as manufacturers from Argentina, thus achieving equilibrium. This can be achieved if free trade policies are adhered to and Argentina removes restrictions it has imposed on products from America (Office of the United States Trade Representative, 2012).
When a tax is imposed on the commodity, the following scenario will be observed. Before a tariff is imposed on the product, the price of the good is at P0. However, when a tariff is imposed, the price goes up to p1 (Goldstein, 2011). The higher price causes the production in the home country to increase from Q0 to Q1. Because of the forces of demand and supply, consumption in the home country falls. This has several effects on the economy. First, consumers become worse off since consumer surplus decreases. Producers are better of since their surplus goes up, while government can get more in tax income. However, the combined gain by the government and producers is little compared to the overall loss to the consumers (Goldstein, 2011).
Advantages and disadvantages of free trade
According to Dunkley (2004), globalization and free trade are the main drivers of price stabilization across countries. Free trade refers to the freedom to conduct business across borders (Dunkley, 2004). There are several benefits as well as drawbacks of free trade among the poor and rich nations. The major benefit of free trade is that a variety of goods and services are available on the market at different prices. Indeed, citizens of a country are happy if they can find bargains for products and services that are available because of free trade. People have different needs and wants and if they can get various options of meeting them, then they are advocating for free trade whether they are conscious of it or not.
Free trade is a source of employment for industries, but on the other hand, it crease unemployment to the people (Dunkley, 2004). The liberalization of trade creates a scenario where there are both losers and winners since resources are moved to areas that are more productive. This means employment will be created for countries that are exporting goods and services while people will lose jobs as import competing industries experience a decline in activity in the competitive environment (Dunkley, 2004).
International market do not provide an equal playing filed since developed countries can use their economic power to dump their products into the world markets at relatively low costs (Goldstein, 2011). In addition, free trade is harmful in some cases where low quality products or harmful products find their way into other markets. For instance, the Chinese people suffered a lot due to the importation of opium. In addition, free trade leads to over exploitation of resources. It is because of international trade that much land is under intensive cultivation. This leads to diminishing returns in countries that rely on agriculture. Moreover, free trade leads to pollution of the environment since some companies do not include such costs due to stiff competition from countries with weak laws.
Free trade with comparative advantage and low opportunity costs
The law of comparative advantage refers to the ability of one country to produce a product at a lower marginal cost and opportunity cost compared to another. However, even if one country is more efficient in the production of goods and services than the other, all countries in a free trade will still gain given that they have different relative efficiencies (Goldstein, 2011). Let us consider a hypothetical example of two countries; China and America. These two countries can gain a lot if China and America can be persuaded to produce suits and computers respectively. Indeed, the world’s total production of these good would increase because being relatively better means having the capability to produce goods at a lower opportunity cost than other countries.
Future Trends
As highlighted above, free trade can be detrimental to an economy in the short run. However, in the long term, market flexibility is important because in a world, which is 100% practicing free trade, comparative advantages do change constantly (Dunkley, 2004). In the future, countries, which will continue to adapt to these changes, will continue to experience growth. It is by embracing the theory of comparative advantage and opportunity costs that the world can achieve equilibrium in their operations.
Conclusion
In summary free trade is framework through which governments try to eliminate discrimination through tariffs and subsidies. The main advantage of free trade is that a variety of goods can be availed to the market at different prices for the consumers to choose. This helps consumers to bargain for the products on the market. Despite the benefits of free trade, it has several drawbacks. It can result in unemployment (Dunkley, 2004). Accordingly, if countries are persuaded to embrace comparative advantages in their production, more goods, and services will be available on the market. Indeed, countries that will embrace comparative advantages will continue to experience growth.
References
Dunkley, G. (2004). Free Trade: Myths, Realities and Alternatives. London: Zed Books.
Goldstein, N. (2011). Globalization and Free Trade. New York: Cengage Learning
Mankiw, G. N. (1998). Study Guide, Principles of Microeconomics. New York: Elsevier.
Office of the United States Trade Representative. (2012). United States Requests WTO Panel in Case Against Argentina’s Widespread use of Import Restrictions. Retrieved from http://www.ustr.gov/about-us/press-office/press-releases/2012/december/us-requests-wto-panel-argentina-ir
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