Free Trade Essay

Free Trade Essay
Free trade refers to the absence of artificial barriers often times produced by
governments that give domestic producers a comparative advantage. A decrease
in tariff quotas may lead to domestic producers becoming more competitive by
fostering the concept of comparative advantage. This works via operating at
ones lowest opportunity cost. In Australias case, this would move into the
production of minerals. Hence specialisation of production would also lead to
economies of scale as a result of more production and increase in sales that
reduce per unit production costs.
Currently in 2014 the composition of global trade consists of 55% manufacturing,
19% services, 15% minerals, 9% agriculture and 2% in other goods.
Manufacturing has decreased substantially from 1995 going from 62% to 55%
with minerals growing from 7% to 15%.
A range of international organisations play different roles in the global economy.
The WTO plays the key role of overseeing global trade relations and encouraging
free trade. Its role is supplemented by a range of regional trade agreements such
as in Europe and North America. Other international that play key roles in
ensuring global financial stability (IMF), global economic stability (G8),
development and poverty (WB & UN). Overall, the role of these organisations is
to foster stability, growth and equity and national economies become
increasingly integrated. International trade has been an important feature of the
global economy. Global trade rules have strengthened through multilateral,
regional and bilateral trade agreements. This has facilitated the rapid growth of
Trade Flows globally.
ChAFTA will unlock significant opportunities for Australia. China is Australias
largest export market for both goods and services, accounting for nearly a third
of total exports, and a growing source of foreign investment.
An advantage of free trade would be an increase in efficiency, an efficient
allocation of resources that will increase the resources will increase the supply
curve to the right. This will result in an increase in aggregate supply and have a
flow on as the result of a decrease in production costs leading to a decrease in
price as indicated in the graph from OP1 to OP2.
In addition an increase in aggregate supply will increase economic growth and

employment in the long run. Lower production costs will increase international
competitiveness and thus lead to an increase in export sales by Australia. An

increase in exports will lead to further injections into Australias economy
increasing GDP growth.
Furthermore an increase in export sales and Ceteris Paribus imports will lead to a
trade surplus and a decrease in CAD which will promote Australias external
stability. Alternatively, increase in export growth that facilitates aggregate
demand will increase pressure for prices to increase demand pull inflation and
which could lead to inflationary pressures.
As a result of free trade Australian consumers and businesses will have greater
access to lower import and domestic prices, a greater choice of goods and
services and new technology. The benefits of free trade in Australia include a
higher rate of economic growth, improvements in income per capita and living
standards.
The redistribution affect occurs as a result of a decrease in tariffs. Whereby
domestic consumers once purchased a quantity of goods at a higher price find
that as a result of the removal of tariffs their prices have decreased and demand
has increased from 80 to 100 units as shown below with the price going from $15
to $10. This once disadvantageous position of a higher price and a limited
quantity as a result of the removal of artificial barriers is now distributed to the
consumer in the form of a lower price and a greater quantity produced as
indicated by the shaded triangle.
APEC was established in 1989 and has become an important regional forum for
promoting economic integration. This involved removal of barriers in order to
allow for the free flowing of goods, services and investment between the
member countries. This has been achieved through reforms by member
countries to reduce tariffs, streamlining of customs in order to promote foreign
investment in the region. The annual APEC leaders meeting provides meetings
to facilitate trade and business in the region. In the APEC trade ministers
meeting in China in May 2014, ministers agreed to take steps towards of APECs
goal of establishing a Free trade Area of the Asia Pacific. This included the
sharing of information on trade agreements and future trade negotiations. APEC
trade ministers also supported the early implementation of the WTO Agreement
on Trade Facilitation reached in Bali in December 2013.
The WTO plays the central role in global trade relations. The WTO was
established in 1995 to promote free trade agreements and settle trade disputes
between member nations. It was the first international organisation with the
power to enforce global trade rules. The WTO has almost global membership
with 160 countries in 2014.
While its long run aim is to foster free global trade, in the medium term it aims to
achieve progress in gradual liberalisation though the Doha round of trade talks.
The Doha Round aimed to abolish $700 million worth of tariffs and subsidies on
goods and services by 2005.The Doha Round plans to tackle sensitive areas of
global trade such as agriculture. However this is likely to make negotiations
harder as high protectionist economies including EU and Japan will likely resist
cuts to subsidies.
It has been estimated by the WB that the successful conclusion of the Doha
Round will increase global economic activity by $2.8 trillion by 2015. Developing
nations are likely to benefit as the WTO agreement will grant them flexibility in
the implementation of trade commitments which will allow them to produce
cheaper generic medicines through overriding pharmaceutical patents. The Doha
Round agreements also have provisions for environmental standards which will
allow nations to restrict the flow of goods and services from nations that use
environmentally damaging production techniques.
Economists have questioned the effectiveness of the WTOs ability to resolve
disputes. The US has openly defied the WTO rules including increasing subsidies
to farmers. This may threaten the long term goal of the WTO to achieve free
global trade. It also raises the question about the degree to which international
organisations primarily server the interests of the most power nations in the
global economy.
The role of regional trade agreements such as the EU, NAFTA and APEC forum in
the global economy is being debated. Some believe they are in effect stepping
stones towards free trade while others believe they distort and worsen global
inequality by excluding outside nations through the creation of protectionist
blocs. The EU especially has heavy agricultural subsidies limit the ability for
developing countries to compete in the European market.
The IMF is one of the most important international organisations in the global
economy. The IMFs role is to promote the stability of international financial
markets. The IMF has a key role in providing assistance to nations that
experience short term financial problems such as debt serving problems or major
currency volatility. Though the IMF has been successful in stabilising economies it
has been criticised for the policies that it requires economies to implement that
may actually worsen the impact of the financial crisis.
In conclusion free trade has many benefits for participating nations. Consumers
in those nations are offered an increased variety of goods and services at lower
prices while. Producers are able to produce at their lowest opportunity cost and
thus increase their exports due to increased demand which in turn will lead to an
increase in GDP and lower unemployment due to increased demand for labour.
Although free trade may threaten infant industries and the agricultural sector as
they sometimes are not able to compete with competitors from other countries
and attain similar economies of scale thus requiring the introduction of tariffs
and trade barriers which discourage free trade.

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Free Trade Essay

In addition an increase in aggregate supply will increase economic growth and

competitiveness and thus lead to an increase in export sales by Australia. An

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