Free trade is the removal of barriers, tariffs, taxes and quotas and any other restrictions by the government on international trade to easily exchange certain commodities (Narlikar 22). Mostly, free trade is considered as a noble idea by many countries because of the removal of barriers, making exportation easy and less expensive.
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This makes a country to focus more of its resources efficiently and achieve extra real income. Some countries consider this a threat because of product differentiation; they claim that there are countries with an advantage of high technology, which they use in producing quality and cheap products; therefore, going into free trade with them would mean losing market for their products.
This is because they do not understand the benefits of free trade with product differentiation, however, once they realize that much of international trade is based on product differentiation, the countries will have more winners than losers; this is because they would experience the benefits of free trade.
Benefits of Free Trade with product differentiation
Product differentiation increases export opportunities; this is because countries specialize in producing goods that they can produce efficiently. For those goods which cannot produce efficiently, they import them (Narlikar 45).
Producing the same goods but of different quality, price and customer preferences does not mean that those with high prices, or low quality will lack market; this is because each of these goods come with other advantages which the others do not have, and this makes the goods equally competitive.
Product differentiation would also be beneficial to consumers, through product differentiation, the consumer has many products to choose from, therefore, he or she is free of what he or she wants according to the ability to buy.
Also, because of competition between products of the same quality in the market, the sellers of these products will opt to sell at lower prices: these would be favorable to consumers allowing them to buy more.
According to the estimates from members of International Economics, American consumers would save about 1.2% of their country’s GNP; Japanese consumers would save about 5% of their country’s GNP, while the Korean consumers save close to 4% of Korean GNP (Cleaver 78).
Product differentiation also increases competition in local markets; this weakens anti-competitive practices that intimidate domestic producers. This shows free trading of goods despite the difference in product quality and preferences benefits the buyer more than if there were no trade at all between countries.
Stable employment and higher wages
In the United States, jobs associated with exports have risen four times faster compared to the overall jobs created by the private-industry (Narlikar 66). The American now owes this to exports. According to statistics, production and non-production workers in America’s exporting firms collect an average of 14% higher pay compared to non-exporting firms (Cleaver 79).
A company which has no market for its products at home because of its quality preference and price can still get market for the same products abroad. This would reduce wastage and increase employment opportunities. Additionally, these companies will have a high tendency of having a more stable employment trends; this ensures that citizens have not only more stable employment, but also higher paying employment.
Increase in Factor of Production
Countries which engage in free trade despite their difference in the qualities, prices and preferences of their products have access to new managing and production technologies; the technologies promote higher production at the industry level. In the long-run, countries learn how to manage industries effectively and produce products more cheaply from each other.
For instance, American automobile firms learnt from Japan how to make cars more cheaply, and at the moment, Tokyo’s financial institutions are learning how to manage banks as well as pension funds from the United States (Cleaver 109). These are long run gains, which a country in free trade stand to gain.
Developing countries have always complained that developed countries want them to remove trade barriers for them to exploit them and cause imbalance in their countries, which is meant to create market for goods from the developed and industrialized countries (Narlikar 107).
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These countries complain without thinking of the benefits awaiting them in the future, if they open up to trade with the developed and industrialized countries. These benefits include raising their productivity, quality of goods they produce and income to the levels already attained by developed and industrialized countries (Cleaver 103). These countries would have a chance to imitate their quality ways of production, and improve their innovation skills.
Some protesters might still believe that international trade favor those with high technology and advantages of producing quality and cheap products; particularly, free trade has serious repercussions on people in import-competing industries. However, countries which have ventured in free trade yarn to join more Free Trade Agreements or institutions from populous, largest, smallest as well as, those whose economy is the weakest.
This is because they believe that their future is in putting down the barriers to trade and product differentiation will help them increase trade with the other counties. Without product differentiation, there would be no international trade because everyone would be satisfied with what they produce.
Cleaver, Tony. Understanding the World Economy. London: Routledge, 2007. Print.
Narlikar, Amrita. The World Trade Organization – A very Short Introduction. Oxford: Oxford University Press, 2005. Print.