Advantages and Disadvantages of Free International Trade

Advantages and Disadvantages of Free International Trade    Title of Coursework (please provide whole question) 2(a) Explain why free international trade can be good for countries’ economies, and examine the attempts to reduce trade barriers in the past decade. (maximum 1,000 words) 2 (b) What negative effects might free international trade have upon countries’ economies, and why might counties adopt protectionist policies? (maximum 1,000 words)    Question 2a, Explain why free international trade can be good for countries’ economies, and examine the attempts to reduce trade barriers in the past decade. Trade is a major engine of growth, both in developed and developing countries. Correspondingly, the opening of markets to allow for free trade internationally has been cited as a key factor boosting trade and economic growth globally over the years (OECD, 1999; 2003). There are a number of theories that highlight the reasons why countries should engage in international trade, and which cons equently enhance support for the argument for free trade. These include Adam Smith’s theory of absolute advantage, the theory of comparative advantage by David Ricardo, and other more recent theories (Mankiw, 2010). The theory of comparative advantage which is one of the most popular theories advocating free trade, posits that nations should specialise in the production of goods for which they have relative/comparative advantage, and exchange them for products from other countries with relative advantage in other products (Reuvid and Sherlock, 2011). Although this theory has some flaws, one of them being that it ignores limits in international demand that may exist for the specialised outputs of some countries (Reuvid and Sherlock, 2011), it nevertheless provides a strong argument for the promotion of free trade. Beyond theoretical reasons, statistics lend further support to the benefits of engaging in international trade. Sachs and Warner (1995), in a study to determine whet her nations open to trade are more prosperous, over a period from 1970 to 1989, reported that for developed countries, the rate of growth for open economies was 2.3% per year, and compared with 0.7% for closed economies. In developing countries, the gains were even higher, with a growth rate of 4.5% for open countries, as against 0.7% for closed countries. The OECD (2003) highlights other potential benefits of removing barriers to trade. They state that removing all tariffs on merchandise trade, and reducing the costs of trade by 1% of global trade value will boost overall welfare globally by over $170 billion a year, and this could add the equivalent of up to 2% to the current GDP of some regions. Other advantages of promoting free international trade through the removal of barriers are as follows: It gives customers greater choice by making available a wider variety of products, and also access to potentially cheaper and/or better quality goods. Removing price distortions encourag es the use of resources in a way that maximises the advantages offered by a country’s strengths/resources. In developing countries, these improvements in resource allocation and increased revenue from exports contribute to the national income and increase the resources available for further investments in development. It also enhances a country’s productivity and wealth (Love and Lattimore, 2009; Reuvid and Sherlock, 2011; The Economist, 2013b). These benefits have led to considerable attempts to reduce trade barriers, some of which shall be discussed subsequently.