Part A – Free Trade (Pros & Cons)
Free trade is defined as the lowering of all trade barriers, whether through tariffs, quotas or
other regulations, in order to facilitate import and export between two or more countries.
Countries around the world sought free trade agreements between them in the latter half of
the 20th century as it offered countless advantages by engaging in trade.
Facilitating trade with various countries attracts foreign firms that operate more efficiently
into the domestic market, increasing consumer surplus. The UK, for example, experienced
around 50% in the price reduction of clothing and footwear after signing the free trade
agreement on textiles and clothing (ATC). This also places further pressure on domestic
producers in order to improve efficiency, increasing their productivity over the longer term to
keep global competitiveness. Increased trade also grants consumers access to goods that
domestic producers do not offer, providing them with more choices.
Countries with comparative advantage can profit from engaging in foreign trade by utilising
their price advantage over others producers in foreign markets. This has greatly benefited
developing countries such as China, India and Vietnam, where the percentage of total
population in extreme poverty decreased from around 50% in 1990 to 8.6% in 2016.
Companies will also face more demand for their products by participating in foreign markets,
increasing their profit. They can therefore direct profits on research and development in
order to improve supply; they can utilise economies of scale in order to further enhance
productive efficiency.
Also, globalisation from foreign trade enables the exchange of information and technology,
which further enables development in domestic soil.
Signing a free trade agreement may cause a country’s economy to overly rely upon foreign
supply. This is a disadvantage as supply shocks overseas, while it would impact the
economy, would not be controlled by domestic governmental policies. As foreign trade
incentivizes country specialisation, the GDP of a country will increasingly rely upon a single
industry. This will reduce economic stability, as a seasonal reduced demand in a single
industry may greatly affect the whole country’s economy. Therefore, countries may seek to
implement protectionist measures to keep domestic firms in various sectors afloat with a
goal to keep the economy diverse, while sacrificing some degree of efficiency.
Inequalities inside nations have exponentially increased partly due to international trade, as
labour from low-skilled workers in developed countries were made obsolete, and the merits
of partaking in international trade is not equally shared amongst the nation but is rather kept
by the rich.
Foreign trade also necessitates transportation across the globe. This promotes the
consumption of fossil fuels, a demerit good, which imposes negative externalities through
environmental damage.
Part B – Winners and Losers of the Lowering of Trade Barriers
Knowing that foreign trade is a positive-sum game, meaning that both countries involved
must be advantaged in order for it to happen, it is easy to overlook that trade globalisation
has, in fact, created losers. In terms of the whole economy, the facilitation of trade ha
increased prosperity to not only developing countries with the creation of countless jobs and
foreign investment but also to developed countries by lowering the price level of goods and
services. However, not only did they create job losses in the developed world, they caused a
myriad of other problems which will be discussed later on in the essay. However, with all
factors considered, the facilitation of global trade has offered a net gain in society – trade
barriers must be kept low in order to maximise overall economic welfare.
First, the proposition that the globalisation of trade has greatly benefited exporters who
possess comparative advantage over producers overseas is unanimously agreed. Being
able to produce goods cheaper than other suppliers around the globe, they are able to
undercut other suppliers and therefore take their own pie in foreign markets. Having access
to a larger group of consumers will aid further firm growth and help them to gain further
productive efficiency through economies of scale. This creates a virtuous cycle, in which
more productive efficiency leads to lower market prices, ultimately selling even more
products. The achievement of firm growth advantages domestic producers through
increased profits, increasing their economic well-being. This proved its effectiveness in
nations such as South Korea and Germany, where exporting various manufactured goods
led to remarkable economic growth.
Second, domestic consumers are undoubtedly winners of global trade, as, in the end, goods
become more affordable while improving in quality; this equates to the increase in consumer
surplus. Laissez-faire competition between domestic and foreign suppliers will both lower
prices down and increase the quality of products. In reality, the UK joining the EU’s Free
Trade Agreement during 1993 to 2013 prompted the quality of its imports increasing by 26%
and the quality-adjusted prices falling by 19%. The reduction in quality-adjusted prices
directly signify consumer surplus, as more of their wants and desires are fulfilled while
paying less. In addition, additional incentives for foreign suppliers to participate in a certain
market equates to a larger variety of goods and services available for consumers to buy.
One of the examples of this is the Korean car market of today, where imported cars from
Germany, the US and Japan greatly diversified the choices available to Korean consumers –
now, they account for around 20% of all cars sold in Korea today. The impacts of imported
cars are especially more prominent in the extreme high-end sector, where domestic
producers have long neglected the demand for such goods that foreign firms can now
satisfy.
Finally, Another significant winner of global trade are providers of unskilled labour in the
developing world. Globalisation of trade is evaluated to have greatly alleviated inequality in
between nations and therefore have significantly reduced global hunger, where 1.5 billion
people in less developed countries, such as China and India escaped absolute poverty.
Recent research supports this argument – one finding concluded that the removal of trade
barriers may reduce national income disparity by 50%. Foreign injection provided by
international firms through the building of infrastructure greatly increased the productivity of
poor countries, again made possible by lowering of trade barriers between nations; tariffs, for example, would introduce significant costs in the transfer of goods and services between
nations, making investments in poorer countries economically unviable.
However, some have undoubtedly been the losers of globalisation – most prominently
unskilled workers in developed nations. The jobs originally held by unskilled workers in
developed countries were essentially transferred to countries with cheaper labour, therefore
labour substitutable by uneducated workers in developing countries can be lost. Statistics
show that the rise of China as a manufacturing powerhouse resulted in the loss of 3.2 million
total jobs in the US, in which 2.4 million jobs were in manufacturing. Workers can also lose
through having to conform to pay cuts by their employers who are naturally incentivized to
cut labour expenses – this is especially true in the US, where there is little job security.
Alternatively, this can also negatively impact SMEs that are simply not big enough to take
advantage of foreign trade. The inherent lack of productive efficiency due to their small size
further reduces their competitiveness, therefore the introduction of additional competition in
the market can hinder the profitability of the firm. The lack of trade barriers can drive them
out of business, costing the economy both in the form of reduced total output and increased
unemployment. Finding new jobs for the unemployed may be challenging as this is a
macroeconomic trend – similar workplaces would be facing similar difficulties. Left untreated,
rising unemployment opens possibilities for the increase in relative poverty and the
polarisation of the society, although some may argue that it can be addressed by
interventionist policies.
Throughout the long term, foreign trade has evidently exacerbated inequality inside
economies. The merit of engaging in global trade is only directed towards the selected few –
while ordinary workers can be provided with small wage increases, most were rather left out
from most of its benefits. For example, in the US, the CEO earned only around 20 times
more than the average worker, while the average income for CEOs of America’s top 350
companies in 2018 jumped to 312 times more than that of ordinary workers.
However, one must remember that this does not justify the erection of trade barriers, as,
after all, income inequality can be alleviated through appropriate government policies. While
Norway, for example, obtains economic prosperity through the export of oil and natural gas,
its wealth derived from that is redistributed with suitable government policies; therefore, the
Gini coefficient of Norway is 0.25, the second lowest in the OECD.
To conclude, while both winners and losers from the globalisation of trade coexist in the
developed world, we can reasonably conclude that its benefits outweigh the costs. In the
expense of some jobs in the developed world, globalisation reduced world hunger, while
increasing the economic prosperity of both rich and poor countries. The inequality introduced
by globalisation can be offset by redistributive policies, again which can benefit from
increased economic productivity stemming from foreign trade.
Written by Adam Kim
