The Theory of Free Trade
Strategic trade theory provides a
framework for understanding how countries use policies to protect their
domestic markets from foreign trade and increase their domestic wealth. These
policies can take different forms, but they usually involve some combination of
export subsidies, import tariffs, and investments in domestic trading
organisations that face global competition.
The key idea behind this theory is that
trade policies can help raise domestic wealth by shifting profits from foreign
to domestic trading organisations. By doing so, countries can capture more of
the gains from international trade and use them to improve their domestic
economies.
Accordingly, the theory emphasises the
importance of trade agreements restricting anti-competitive practices such as
dumping, subsidies, and other forms of unfair competition. Such agreements can
help countries compete on a level playing field rather than using protectionist
trade barriers to limit global free trade.
Overall, strategic trade theory provides
a nuanced understanding of how countries can use trade policies to promote
their economic interests while also promoting global free trade. Countries can
achieve economic growth and prosperity in a globalised world by adopting
policies that encourage fair competition and protect domestic industries.
The Barriers to Free Trade
Trade barriers are an intervention in
markets that operate internationally through countries that may install
anti-competitive practices in a variety of ways to affect trade barriers to
protect their domestic markets; they include:
- Tariffs (taxes) on imports.
- Non-tariff barriers such as import quotas and trade
embargoes.
- Subsidies for domestic trading entities.
- Anti-dumping duties covering imports.
- Regulatory barriers.
- Voluntary export restraints.
The comparative advantage theory states
that if countries have access to resources in different proportions at
differing relative costs, all nations will gain from international trade.
Still, to realise those trade gains, each country needs to use the industries
where domestic production is most efficient to trade for other goods in which
their production is less efficient to satisfy domestic demand.
Increasing International Competition
Market distortion occurs when an event,
often enacted by a governing body, intervenes in market pricing to the extent
that the clearing price for products significantly differs from the market
price that would occur within a perfect competition. An example could be
subsidising farming activities, making farming economically feasible to create
artificially high supply levels and reduce agricultural product prices.
Economists tend to agree that free trade
agreements positively affect international trade, and barriers to free trade
negatively impact trading patterns. However, some foreign governments use trade
barriers as a protectionist measure to protect their domestic economies. The
recent world economic downturn following the COVID pandemic and increased
competition from emerging third-world economies have further compounded these
concerns.
Third-world economies’ reliance on
fossil fuels continues to be a fundamental source of competitiveness, funding,
and improving the trading growth of third-world economies, while increasing the
negative impacts on the environment through global warming.
Preferential and regional trade
agreements, such as customs unions, Free Trade Agreements, and partial scope
agreements, are created to remove barriers to trade between countries. They
offer preferential market access on a reciprocal basis and usually cover
businesses in services, products, and foreign investments. This is achieved
through the removal of tariffs and non-tariff trade barriers.
The Concept of Free Trade
Free Trade Agreements can also include
harmonising standards to encourage regulatory cooperation, customs cooperation,
and trade facilitation. Competition between trading organisations encourages
product and service improvements through innovation. However, this must be
tempered by utilising competition law that is designed to protect consumers,
the environment, and other trading organisations from trading practices that:
- Restricts or weakens competition.
- Damages the environment.
- Limits the impact of increased costs.
- Stagnates innovation.
- Reduces either the quantity or the variety of trade
undertaken.
The ability to trade internationally
allows access to markets that specific countries may not have or are restricted
to, such as petrochemicals from the Middle East. Middle Eastern countries have
limited resources to manufacture cars, but they are among the primary consumers
of the products that they (the Middle Eastern countries) have in abundance.
Free Trade Agreements
The General Agreement on Tariffs and
Trade (GATT) is a legally binding agreement signed on 30 October 1947 in
Geneva, Switzerland. Initially, 23 countries signed it, but within seven years,
it included 117 countries.
The principal aim of the GATT Agreement
was to oversee a reduction of tariffs and other trade barriers with the
elimination of preferences on a reciprocal and mutually advantageous basis to
bolster economic recovery through global trade after WW2.
The GATT is a legal agreement between
countries that functions through a body that has overseen eight more rounds of
multilateral trade negotiations. With the creation of the World Trade
Organisation in 1994, average trade tariffs were reduced from 22% in 1947 to
below 5% after 1994. However, the Doha Development trade negotiation that began
in 2001 is still not completed.
The principles of the GATT Agreement
include the following between signatory countries:
- Equal trading opportunities.
- Reciprocal trade rights and obligations.
- Transparency in trade.
- The commitment to reduce and equalise tariffs.
There are many free trade agreements
globally, for example:
- North American Free Trade Agreement (NAFTA).
- The Central American-Dominican Republic Free Trade
Agreement (CAFTA-DR).
- European Union (EU).
- Asia-Pacific Economic Cooperation (APEC).
Free Trade Sustainability
The latest Free Trade Agreement between
the United Kingdom and New Zealand is a landmark agreement that emphasises
environmental protection. The deal includes commitments to reduce the carbon
footprint, promote sustainability, and address climate change. These
commitments are legally binding and cover many areas, including farming,
fishing, and forestry.
The agreement made between the UK and
New Zealand will have a considerable impact on the farming sector. The two
countries will collaborate to decrease greenhouse gas emissions from
agriculture and encourage sustainable farming methods. This is a significant
development towards lessening agriculture's impact on the environment.
The agreement also includes commitments
to promote biodiversity and reduce pollution. This will be achieved through
measures such as reducing the use of pesticides and fertilisers, protecting
wetlands, and restoring degraded land.
This agreement also significantly
focuses on the fishing industry. The UK and New Zealand have agreed to promote
sustainable fishing practices and reduce overfishing. They have also committed
to combating illegal fishing, a major contributor to overfishing, and
protecting marine biodiversity. This will be achieved by improving monitoring
and enforcement, reducing bycatch, and protecting vulnerable species.
The forestry industry is another area
that will be affected by this agreement. The UK and New Zealand have committed
to reducing illegal deforestation and wildlife trade. Deforestation destroys
habitats, threatens biodiversity, and worsens climate change. The agreement
aims to promote sustainable forestry practices, protect forests, and restore
degraded land.
The Free Trade Agreement between the UK
and New Zealand is a significant step towards promoting environmental
protection and sustainability. The agreement's commitments cover a wide range
of areas and aim to reduce the impact of human activities on the environment.
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