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Free Trade: An Ambiguous Phenomenon Essay

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Updated: May 3rd, 2022

Introduction

Even though there have been attempts at emphasizing the line between politics and economics (this was one of the main points of liberalism), it is obvious that the two fields are closely interrelated and, consequently, are capable of shaping and reshaping each other1. Free trade (FT) is an example of a phenomenon that exists on the border of politics and economics. To be more precise, while economic reasons for FT creation do exist, its political causes are equally important. Apart from that, the phenomenon has an impact on the economic development of the countries involved, but similarly, it affects their political aspect of their existence as well. Finally, the nature of FT itself could be described as ambiguous, as the phenomenon belongs to the fields of both economics and politics. This paper is devoted to the description and analysis of this ambiguity on the levels named.

Definition of FT

FT presupposes elimination of “quantitative restrictions” on mutual trade between the partners that sign an FT agreement (Bento 3). Therefore, FT, which is the result of FT agreement, presupposes creating an area where the trade between the partners cannot be hindered by any barriers (those may include taxes, quotas or tariffs) or border restrictions2. On the other hand, parties that are not included in the agreement can still be subjected to different kinds of restrictions. It is not difficult to deduce that third parties could attempt to exploit the differences in tariffs. However, this possibility is eliminated through the introduction of rules of origin3. According to them, only the goods that are produced within the borders of a lower-tariff country can be subjects of the benefits of FT area. For the goods that are partially produced by a country, the rules may vary.

There exist different types of FT agreements. Multi- and bilateral as well as regional FT agreements can be created depending on the political preferences of the member countries. An example of bilateral FTA is the US-Chile FTA while the North American Free Trade Agreement (NAFTA) is a regional one4. At the same time, it should be pointed out, that when the members find it more appropriate, an FT agreement may cover only a certain type of merchandise. In such a case, the suppliers of other goods cannot enjoy the mentioned benefits. For example, before the North American Free Trade Agreement (NAFTA), the US and Canada had an FT agreement that covered only cars5.

Similarly, the US-Israel FT agreement of 1985 year covered agriculture goods only, while the US-Morocco FT Implementation Act presupposed the alleviation of tariffs for almost any kind of goods (95% of the goods6 that were exported and imported by the countries). The type of an FT agreement, obviously, defines the scope of its impact, but apart from that, they may be conditioned by the reasons for this agreement existence.

Background and Reasons for FT

The openness to the international flow of goods, capital, and labor has been increasing throughout the past 400 years worldwide7. However, the pace of this process has significantly picked up since the middle of the previous century (roughly, since World War II). This phenomenon is most often described by the phrase “economic integration”. A well-known scheme (proposed by Balassa in 19618) offers the following types of economic integration: “the free trade area, the customs union, the common market, the economic union and complete economic integration9“. Obviously, FT is the first stage of economic integration as opposed to an economic union which presupposes the creation of an economic equivalent of a nation10. Therefore, FT could be considered a natural development and consequence of the globalization process.

It should be pointed out that the aims and reasons of “economic integration” can be both economic (for example, ensuring effective resource management, creating bigger markets, or providing competition for monopolist firms) and political (most often the creation and maintenance of political alliances, or the improvement of political relationships). Apart from that, political differences may prevent the alliance from forming which demonstrates the importance of political aspects for FT formation. Besides, FT agreements are promoted, encouraged and facilitated by multinational companies and multilateral organizations like WTO.

In the case of the latter, the advocacy for FT could be explained by the fact that economic integration is considered to be beneficial to the economic welfare of member countries and for the global economy11. Multinational corporations, on the other hand, are an important part of the international system: they are actors that are capable of changing and reshaping the economic and political situation of the countries they operate in12. Given the fact that such companies operate in a number of countries (two at the very least), they are bound to benefit from FT, and their interest in this kind of economic integration becomes understandable.

As a result, so-called trading blocks appear on the world map. These blocks are both economic and political in nature. For example, it is believed that the political component of the Association of Southeast Asian Nations (ASEAN) free trade area appears to be more significant than the economic one. Similarly, the Free Trade Area of the Americas is partially aimed at spreading and maintaining democracy, and trade liberalization is regarded as a natural element of this process13. Therefore, it is obvious that FT is an object of study in the international political economy as it vividly demonstrates the interrelation of politics and economy on the global scope14.

Impact of FT

Economic integration has an impact on both the economic development of FT agreement members and their political relationships. It is obvious that the latter are most often strengthened and promoted; consequently, FT has an impact on globalization as it naturally facilitates this process15. Apart from that, it is obvious that while FT area is the first stage of economic integration, its completion is necessary for the next stages to take place16. Therefore, countries aiming at economic unions are bound to establish FT area at some point. The economic aspect of FT results, however, is quite diverse and should be described more thoroughly.

Economic integration in general and FT areas in particular result in increased specialization of the economies as well as economic expansion; apart from that, improvements in different aspects of social welfare have also been attributed to FT 17. In general, as we have already pointed out, the process of economic integration is regarded as a beneficial one, and it is believed that FT deserves promotion on the global level18.

However, FT also has its losers: the parties that do not benefit from the changes brought by the relevant agreements or, possibly, even harmed in the process. One of the obvious challenges that arise in the wake of FT area creation is the increasing competitiveness of markets which is beneficial for consumers, but not for producers19. Similarly, labor markets may experience changes connected to FT as the supply can increase due to the influx of force from another country20. Apart from that, FT agreements tend to have a negative impact on the trade relationships between members and non-members, although WTO suggests ways of avoiding this kind of problem21.

It is obvious that the competing interests of different market actors are going to be affected in different ways by the changes induced by the adoption of an FT agreement. It is only natural for such a phenomenon to have its winners and losers22. However, the beneficial economic and political impact of FT makes it a viable and popular option of international relationships. Indeed, as of 2009, WOT was notified of more than 300 of only bilateral FT agreements23. The process of economic integration, beginning with the introduction of FT, appears to be advantageous and, therefore, unavoidable.

Conclusion

The reasons for FT introduction are both political and economical, and, in turn, this kind o economic integration has an impact on both the economic development of its members and their political relationships. It can be concluded that the political and economic nature of FT makes it near impossible to discuss only one side of the phenomenon. Apart from that, while there do exist losers of FT, the phenomenon is regarded as beneficial, and multi- or bilateral agreements of this kind are a popular way of organizing both political and economic relationships between countries.

Bibliography

Bento, Joao Paulo Cerdeira. Economic Integration, International Trade and the Role of Foreign Direct Investment. Berlin, Germany: Lit, 2009. Web.

Czinkota, Michael R, and Ilkka A Ronkainen. International Marketing. Mason, OH: Thomson/Southwestern, 2007. Web.

Hassanien, Mohamed Ramadan. United States Bilateral Free Trade Agreements. Alphen aan den Rijn, The Netherlands: Kluwer Law International, 2010. Web.

Oatley, Thomas, and W. Kindred Winecoff. Handbook of the International Political Economy Of Monetary Relations. 5th ed. Cheltenham, UK: Edward Elgar Publishing, 2014. Web.

W. Seay, “The Origins of political Economy”. ECON 101:Virginia Commonwealth University. Web.

Waschik, Robert. “The Effects of Free Trade Areas On Non-Members: Modelling Kemp–Vanek Admissibility.” Journal of Policy Modeling 31, no. 5 (May 2009): 648-663. Accessed October 6, 2012. Web.

Footnotes

1 W. Seay, “The Origins of political Economy” (ECON 101:Virginia Commonwealth University), 1. Web.

2 Mohamed Ramadan Hassanien, United States Bilateral Free Trade Agreements (Alphen aan den Rijn, The Netherlands: Kluwer Law International, 2010), 4. Web.

3 Joao Paulo Cerdeira Bento, Economic Integration, International Trade and the Role of Foreign Direct Investment (Berlin, Germany: Lit, 2009), 3. Web.

4 Hassanien, United States Bilateral Free Trade Agreements, 5.

5 Michael R Czinkota and Ilkka A Ronkainen, International Marketing (Mason, OH: Thomson/Southwestern, 2007), 101. Web.

6 Hassanien, United States Bilateral Free Trade Agreements, 8.

7 Thomas Oatley and W. Kindred Winecoff, Handbook Of The International Political Economy Of Monetary Relations, 5th ed. (Cheltenham, UK: Edward Elgar Publishing, 2014), 17. Web.

8 Oatley and Winecoff, Handbook,.248.

9 Bento, Economic Integration, 3.

10 Czinkota and Ronkainen, International Marketing, 101.

11 Hassanien, United States Bilateral Free Trade Agreements, 11.

12 Seay, “The Origins of political Economy”, 5.

13 Czinkota and Ronkainen, International Marketing, 101.

14 Seay, “The Origins of political Economy”, 5.

15 Oatley and Winecoff, Handbook, 17.

16 Bento, Economic Integration, 13.

17 Oatley and Winecoff, Handbook, 17.

18 Hassanien, United States Bilateral Free Trade Agreements, 17.

19 Czinkota and Ronkainen, International Marketing, 105.

20 Czinkota and Ronkainen, International Marketing, 107.

21 Robert Waschik, “The Effects Of Free Trade Areas On Non-Members: Modelling Kemp–Vanek Admissibility”, Journal of Policy Modeling 31, no. 5 (2009): 648-663. Web.

22 Seay, “The Origins of political Economy”, 1.

23 Hassanien, United States Bilateral Free Trade Agreements, 1.

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