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Costs and Benefits of Free Trade and Globalization Essay


Introduction

The general economic argument for free trade and globalization centers on the increased material growth brought about by trade to almost every state. In spite of the strength and numerous experimental studies that support this argument, many people are still opposed to free trade and globalization.

Opponents of free trade and globalization posit that economists support it since it helps in price reduction and products diversification while life entails more than these do (Bhagwati 84). This paper will focus on some of these benefits and costs. In addition, it will give recommendations on strategies that can help in enhancing free trade and globalization.

Benefits of free trade and globalization

One of the benefits of free trade and globalization to participating countries is that it helps producers have access to international market. In most cases, domestic companies produce goods in small quantities due to constraints in the local market. Free trade and globalization gives these companies an opportunity to diversify their markets thus reaching a wider customer base.

Hence, it helps in increasing their production and profitability. Furthermore, free trade and globalization promotes specialization (Bhagwati 91-97). Companies focus on areas that they are best conversant with thus manufacturing quality products. This not only helps in increasing their sales volume, but also enhances production efficiency, in an organization.

On the other hand, specialization has led to production of quality goods and services, which meets consumer needs effectively. Therefore, free trade and globalization has not only benefited businesses organizations but has also been of significant benefit to consumers. In the US for instance, consumers benefit from lower prices and wide varieties of products in the marketplace (Bhagwati 98).

Nations participating in free trade benefit from shared technological expertise. Developing countries are the ones that substantially benefit from this. Free trade and globalization helps developing countries import sophisticated production machineries from developed nations. Besides, they acquire experts from these countries who train them on how to use the equipments (Bhagwati 101-112).

Previous centrally structured economies, which failed to reap from the numerous benefits of free trade and globalization due to their politically endorsed separation from market economies, currently desire to reap these benefits by reintegrating with the global marketing structure.

Free trade and globalization enlightens, enriches, and civilizes (Bhagwati 112). Free trade and globalization expose people to different cultures. This in return helps in enlightening artists and educators.

By interacting with others, educators and artists gain insight on how they can creatively articulate their knowledge to meet varied needs of their people. In an environment where only a small group of intellectuals has leisure and wealth, educators and artists address only the intellectuals’ needs.

Art forms are unpopular to the intellectuals and knowledge that does not serve their interests does not flourish. However, “since free trade and globalization create a widespread wealth, it paves room for the increase in opportunities and tastes that influence and support education and art” (Bhagwati 113-117).

Opposing views

The growth of free trade and globalization has triggered mixed reactions among the Americans. Data collected about trade and globalization paints a contradictory and sometimes mixed picture. Some Americans express their cynicism that free trade and globalization benefits most Americans, while others support it (Grisworld 65).

Since 1920s, Americans have expressed fears about foreign investment from countries such as Japan fueled by free trade and globalization. One of the reasons why some Americans are opposed to free trade and globalization is because it is hard to discern the benefits accrued from embracing it. However, they easily discern the costs of adopting free trade such as closure of steel factory in North Carolina.

Benefits associated with free trade and globalization, in most cases, is hidden from view in spite of them being substantial and real. For instance, Americans do not see the numerous job vacancies created by many small businesses that crop up to cater for foreign-owned companies or American exporters (Grisworld 71-77).

Moreover, they do not discern the vast amount of money they save due to reduced prices caused by free trade and globalization.

According to critics of free trade and globalization, the move leads to global cultural homogeneity. According to them, embracing free trade and globalization would lead to numerous cities adopting similar cultures. That is, due to free trade and globalization, Paris France would resemble Texas making the two cities unexciting (Grisworld 81).

This in return would discourage people from travelling since they would not be guaranteed of witnessing new things in the cities they visit. The opponents assert that, to embrace cultural diversity, states ought to discourage free trade and globalization.

Costs of free trade and globalization

Just like free trade and globalization has numerous benefits, it also has numerous costs. Countries that promote free trade, subject their domestic industries to stiff competition. Normally, products obtained from foreign companies are offered at lower prices waging competition to domestic markets.

At times, domestic companies are forced out of the market “since it becomes hard for them to produce and sell their products at prices lower than those of foreign products” (Urata 20-27).

This in return leads to numerous people in the affected country loosing jobs, which is one of the arguments given by individuals opposed to free trade and globalization in America. Free trade and globalization discourages the survival of young industries, and to safeguard them, governments impose measures to protect young industries from competition.

In spite of the huge benefits of free trade and globalization, it leads to increased health risks. Free trade leads to an increase in number of international travels and transfer of goods such as agricultural products from one region to another. This, in return, helps in spread of viruses and pathogens.

Free trade and globalization have established a favorable platform for spread of diseases, which were once only prevalent in specific regions (Urata 29-32). For instance, spread of foot and mouth disease in European Union member states was intensified by free trade in meat among the member states. Had the member states not embraced free trade, they could be in a position to contain the disease, in a single country.

Free trade and globalization affects microeconomics negatively. Individuals transfer capital and resources from this level of the economy to other countries seeking to enjoy from lower costs imposed on raw materials and labor in such these countries (Urata 33-34). Besides, free trade affects macro economy. Markets become volatile due to increase in foreign investment.

Besides, it makes it possible for investors to inject into and withdraw capital from varied markets with ease. In case of financial market downturn, countries engaging in free trade suffer severely. Normally, countries engaging in free trade depend on each other financially.

Consequently, financial crisis emanating from one nation affects all the other countries. This was witnessed in Asia in 1998 where most Asian countries suffered financially due to the economic crisis in the region.

Opposing view

In spite of the above-mentioned costs of free trade and globalization, discouraging it may be detrimental to not only a country but also the citizens. Discouraging free trade and globalization encourages local industries to continue manufacturing less efficiently, thus making it hard for the respective country to witness increased economic growth.

A country suffers from economic stagnation (Milner and Kubota 107-114). Discouraging free trade deprives a country of the massive economic benefits associated with international specialization.

Contrary to the argument that free trade and globalization has contributed to unemployment, in the United States, it evident that, most of the Americans are currently employed in service-sector industries, which are emerging to serve either American exporters or foreign-owned companies.

These jobs pay well compared to the past manufacturing jobs (Milner and Kubota 115). Moreover, free trade has helped most of the America companies increase their production volumes. Currently, the country produces more planes, chemicals, and appliances that it produced in the past decade.

Recommendations

We are living in a world that is in the process of adapting to global free trade. It is hard to reverse this process without incurring unbelievable costs to future growth. The challenge is now to come up with a viable plan, which will help nations reap from the benefits of free trade and globalization, while at the same time cushion them from costs associated with the same.

The major hindrance to free trade and globalization among nations is fear that their local industries may suffer from completion waged by foreign products (Milner and Kubota 116-128). Hence, some countries shy away from participating in free trade to safeguard their local industries. Besides, some states impose stiff tariffs making it hard for other countries to enter into trade agreements with them.

The best way to establish free trade with other countries is to first identify the countries of interest. They have to have readily available market for the country’s products to ensure that the country benefits from the free trade (Milner and Kubota 130-135). Furthermore, the identified countries should be producing goods or services, which are required by the country wishing to engage in free trade and globalization.

Identifying the most appropriate countries, the country needs to meet them to come up with an agreement on how they will carryout trade among themselves. One of the matters that the countries ought to discuss is the types of and amount of tariffs and import quotas to impose.

The quotas and tariffs have to be put in a way that they do not discourage investors from engaging in the free trade (Milner and Kubota 137-140). For instance, the involved states ought to impose tariffs that will ensure products are sold at fair prices thus not affecting local industries.

Apart from imposing tariffs and import quotas, nations wishing to engage in free trade and globalization ought to establish fair trading rules to ensure that no country takes advantage of others.

Besides, to ensure that investors reap from the free trade, a country needs to educate its public about the benefits of participating in free trade and globalization, and help its people in identifying the available opportunities presented by the countries it intends to trade with (Milner and Kubota 141-143).

Conclusion

Free trade and globalization comes with numerous benefits and costs to trading nations. By engaging in free trade, nations reap from the increase in customer base, which allows local industries to specialize in one area, thus enhancing efficiency in production. In addition, countries benefits from technological spillovers.

Free trade and globalization exposes people to varied cultures thus enhancing civilization and enlightenment. Some of the costs associated with free trade and globalization include completion waged on local industries making it hard for them to grow.

Moreover, it exposes trading countries to health risks and may lead to financial hardships among the trading countries in case of financial recession. It is hard to discern the numerous benefits associated with free trade and globalization.

This underlines why most people are opposed to it. The best way to promote free trade and globalization is to come up with tariffs and import quotas that favor all stakeholders, as well as impose fair trading rules.

Works Cited

Bhagwati, Jagdish. In Defense of Globalization. Oxford: Oxford University Press, 2005. Print.

Grisworld, Daniel. Mad About Trade: Why Main Street America Should Embrace Globalization. New York: Cato Institute, 2009. Print.

Milner, Helen, and Keiko Kubota. “Why the Move to Free Trade? Democracy and Trade Policy in the Developing Countries.” International Organization 59.1 (2005): 107-143. Print.

Urata, Shujiro. “Globalization and the Growth in Free Trade Agreements.” Asia- Pacific Review 9.1 (2002): 20-34. Print.

Effects of Current Problems of the Euro Zone

Introduction

Just as the world was gradually recovering from financial recession, experienced between 2008 and 2009, the world economy is once more in the verge of meltdown. With numerous European countries blaming Greece for failing to repay its debt, European countries are currently suffering from one of the greatest debt crisis in the history of the universe.

The crisis has plunge global financial market into a big turmoil with developed and developing countries suffering in almost equal measures (Reinhart and Rogoff 1676). Today, growth panorama in developed states has gone down to merely 1.5% while it is estimated that global growth will slow down by approximately one percent point.

In other words, the current problems affecting euro zone are not only affecting the European states but are also affecting other countries worldwide. This paper will look at the effects of the euro zone problems on Greece and the United States. In addition, it will focus on some of the laws that have been implemented to deal with the crisis and the changing environment across the globe due to the crisis.

Current problems of the Euro zone

Sovereign debt crises normally occur due to two reasons. One of the reasons is a lack of sufficient liquid assets to offset liabilities resulting from cash flow problems. The other reason is debt overhang, which occurs when the value of a nation’s assets is inadequate to meet its liabilities. While most of the sovereign debt crisis occur in the form of liquidity problem, the current crisis affecting euro zone comprise of the two forms.

For example, Greece is in debt to the extent that with its current debt burdens and interest rates, it is hard for it to offset its current debts sustainably. Greek insolvency has led to the crisis spreading to other euro partners such as Italy and Spain (Reinhart and Rogoff 1676-1681). On 27 October 2011, European leaders came up with European Financial Stability (EFSF) in a bid to address the crisis.

However, EFSF has not helped in addressing the crisis affecting countries such as Italy and Spain, which jointly have a debt of approximately two and a half trillion pounds. There is fear that if no proper measures are taken, it will be hard for the highly indebted euro zone states to borrow to repay their current debt affordably.

Effects of the euro zone problems on Greece

Greece is blamed for the current crisis locking euro zone. Other countries are accusing Greece of conspiring to default on its debts. One of the major effects the current crisis has on Greece is slowed economic growth. Already individuals who invested in Greece bonds are taking a haircut on their debt. Some fear that the value of their debt may depreciate in future.

Hence, to avoid losing everything, they are opting to take half the value of their initial investment. In a way, this has made it hard for Greece to experience any progress in economic growth as investors are shying away from the country (Featherstone 193-201). Furthermore, the problems led to numerous riots and demonstrations in some Greek cities.

Failure by the government to address the problem made most of the Greeks demand for resignation of their prime minister. The problem led to political fall out in Greece forcing its prime minister to resign. Currently, the country has appointed a ‘technocratic’ prime minister whom it hopes will help Greece restore sanity in its financial deficits (Featherstone 203).

Effects of the euro zone problems on the United States

Little attention has been paid to the effects of current euro zone crisis on trade. Developed and developing countries are experiencing the effects of the euro zone crisis with respect to exports. For instance, since the crisis started, export companies in the United States have lost most of the European market. The crisis led to undervaluation of the euro currency compared to the dollar.

Consequently, it has led to products manufactured in European countries going to a lower cost compared to those manufactured in the United States (Reinhart and Rogoff 1682-1687). This has adversely affected companies in the United States since European industries have continued occupying their market in the region. Since 2010, there has been a shift from euro-denominated financial assets to dollar-denominated.

Moreover, the euro exchange rate to the dollar has declined by twelve percent. This has led to an increase in export competitive for European countries. In 2000, the European Union and the U.S. were at par with respect to exports, while by 2010, exports from euro member states were higher by 50% (Reinhart and Rogoff 1688).

On the other hand, the United Sates has benefited from euro zone crisis. Continued undervaluation of the euro currency has led to investors opting to use the U.S. dollar as the reserve currency. Currently, French and German banks are exposed to more than $900 billion in the euro zone countries’ debt.

Euro zone crisis slows the process of worldwide currency diversification away from dollar (Reinhart and Rogoff 1689). In return, it has helped the United States service its debts from earnings acquired from overseas lending.

Changing conditions

In dealing with the current fiscal challenges, euro zone countries have imposed numerous financial austerities on periphery countries as the condition for assistance. However, this has not helped in dealing with short-term problems. Rather than mitigating the financial problems, the austerities have ended up intensifying the problem.

The condition has led to countries like Greece, Italy, and Spain bearing the burden of dealing with the crisis leaving countries like Germany and France enjoying a free ride in the problem (Featherstone 204). This scenario is evidenced by pressure imposed on Greece and Italy to establish a regime capable of solving the crisis.

As the crisis continue to be a challenge in the euro zone, member states have started seeing the need for taking collective responsibility in solving the problem. States are now accepting to share the cost in dealing with the crisis.

Imposing fiscal austerity on periphery countries has proved unproductive in addressing short-term challenges in the region. To achieve a long-term solution to the crisis, core countries have accepted to finance some of the debt incurred by Greece (Featherstone 207). Furthermore, the states have agreed to finance banks in the country.

Policies for dealing with sovereign debt crisis

Sovereign debt crises are common in emerging market economies. In 2002, the international monetary fund (IMF) proposed the establishment of a Sovereign Debt Restructuring Mechanism (SDRM) to facilitate in addressing the problem of sovereign debt crisis. Numerous SDRMs were created using statutory powers to realize a debt restructuring entrenched within IMF program.

However, the policy did not work leading to the establishment of a policy that aims at improving market mechanism to address definite facets of the crisis resolution course. This approach is referred to as market-based approach (Reinhart and Rogoff 1689-1693). The pursuit of this approach, however, does not exclude IMF from the process of resolving sovereign debt crisis.

In fact, since the beginning of Latin American debt crisis in 1980s, actions, and policies from official sectors have significantly influenced sovereign debtors’ incentives during debt restructuring. One fundamental way in which IMF controls debt-streamlining process is by its policy dubbed lending-into-arrears. As a way of mitigating sovereign debt crisis, the policy prohibits lending to states that had failed to service their past debts.

Policies developed to address euro zone problem

As a way of dealing with the current sovereign debt crisis in Europe, member states have come up with a bailout policy dubbed European Financial Stability Facility (EFSF). The policy aims at addressing the solvency crisis affecting Greece and the liquidity crisis affecting other heavily indebted euro zone countries.

Some of the features in the policy include a deliberate write down of all Greek debts in custody of the private institutions. The policy aims at averting possibility of a default, which would have adverse effects on the zone’s sensitive financial market (Featherstone 208-215). The policy paves room for additional financial assistance to Greece on condition that its government implements financial austerity measures.

There are other two policies aimed at expanding the size of the EFSF to about one trillion pound, by using existing funds contributed by richer euro zone countries. The policies aim at establishing a buffer to cater for any contingencies, should the bankruptcy affect other countries in the euro zone.

On 9 December 2011, EU leaders agreed to contribute up to two hundred billion pounds to be used by IMF in assisting the indebted euro zone countries.

Affected laws

Since 2008, the euro zone has suffered from immense fiscal crisis. The constant fiscal crisis has tested the constitutional basis under which the euro zone was founded in varied ways. In an attempt to rescue the situation, member states have adopted various measures that have resulted in unexpected outcomes.

For instance, in trying to solve the fiscal crisis, European Central Bank (ECB) has assumed responsibilities and used powers that are beyond what Maastricht treaty allowed it. ECB has violated the guidelines stipulated under the treaty by engaging in issues that involve political value judgment rather than expert knowledge (Reinhart and Rogoff 1695).

Moreover, on 12 February 2012, Greece altered its austerity laws to allow for further assistance from the European Union, International Monetary Fund, and European Central Bank. Those opposed to the amendment were barred from their parties.

Implemented laws

To ensure that other states do not fall victims of the sovereign debt crisis, countries under the euro zone have embarked on altering their existing fiscal control mechanisms. They do this by amending their national constitutions using German constitutional as their template.

For instance, they have come up with a law that requires all European banks to have 9% capitalization to cushion them from financial hardships, which may arise due to Greek default (Reinhart and Rogoff 1698). Since Greece is the country that has seriously suffered insolvency, most of the implemented laws come from the country.

The country has severally altered its austerity policies to help it gain financial assistance from other euro zone states. On 9 March 2012, Greek government voted for revival of a collective action clause, which led to private holders of government bonds agreeing to support a debt restructuring deal (Featherstone 216-217).

As a way of averting insolvency, Italy has implemented laws aimed at freezing public institutions salaries up to 2014. Besides, it has come up with strong measures to curb tax evasion and increased the retirement age to sixty-seven years.

Changing environment

The current sovereign debt crisis in the euro zone has led to the political impasse in most of the member states. The effort by wealthier countries to rescue those in debt has led to taxpayers complaining. Consequently, leaders in the euro zone have organized numerous meetings to look for the appropriate measures to take. Most of the meetings have not born fruits with leaders disagreeing on whether to allow Greece exit from euro zone.

In addition, the crisis is affecting the voting process in European countries (Reinhart and Rogoff 1701-1703). For instance, French opted to vote a revolutionary leader in the hope that he will help the country in solving the financial crisis facing their country. Besides, the Italians called for Berlusconi to step aside to pave the way for leaders, who are capable of rescuing the country from financial hardships.

Sovereign debt crisis in the euro zone has led to western states reviewing their lending and borrowing modes. For instance, Americans are pressuring their government to come up with appropriate measures to assist the country offset its current debt.

The crisis has led to the issue of debts being at the centre stage in American politics. Americans are eager to know how the current presidential hopefuls will help the country repay its debt (Reinhart and Rogoff 1705-1706).

Conclusion

Sovereign debt crises facing euro zone are making it hard for countries to recover from financial recession, encountered in 2008-2009. The crisis has triggered turmoil in global financial market leading economic growth rate going down. One of the countries that are experiencing the weight of the crisis is Greece. Investors have avoided investing in Greece since the country is experiencing severe insolvency.

The crisis has also affected the United States, which has experienced appreciable reduction in volume of its global exports. To achieve short-term solutions, states in the euro zone have imposed fiscal austerity on the affected countries.

Some states have even gone to the extent of changing their laws to protect them from falling victims of the crisis. The crisis presents a wake up call to leaders across the globe to identify the appropriate measures of dealing with international lending and borrowing.

Works Cited

Featherstone, Kevin. “The JCMS Annual Lecture: The Greek Sovereign Debt Crisis And EMU: A Failing State in a Skewed Regime.” JCMS: Journal of Common Market Studies 49.2 (2011): 193-217. Print.

Reinhart, Carmen, and Kenneth Rogoff. “From Financial Crash to Debt Crisis.” American Economic Review 101.64 (2011): 1676-1706. Print.

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IvyPanda. 2019. "Costs and Benefits of Free Trade and Globalization." May 15, 2019. https://ivypanda.com/essays/costs-and-benefits-of-free-trade-and-globalization-essay/.

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