Introduction
The European Communities is the trading bloc, which was created shortly after the World War II in an attempt to prevent the balkanization of the finance system on the continent. It was primarily based on the principle of super nationalism and free trade. In this paper, our task is to discuss the advantages and disadvantages of region free trade agreements within the context of EC. Prior to analyzing positive and negative sides, we should point out that these organizations were founded through a series of international conventions that covered three spheres: coal and mining industry, economy, and atomic energy. In particular, we may mark out the treaties of Rome and Paris that laid the foundations of these bodies (Cole, 1993, p 65). At the very beginning, they were ratified by Belgium, Denmark, West Germany, France, Greece, and Ireland (Keesing Research Reports, 1975, p 66). Later these multilateral agreements were signed by the United Kingdom, Portugal, Spain and many others. As regards the reasons for the establishment of this organization, we may say that they are both economic and political. As we have stated earlier, it was a direct response to the events of the World War II. To some extent, these conventions were supposed to eliminate possibility of military conflict on the territory of Western Europe. The integration of economy was meant to avert the controversies that could arouse among the countries. It was believed that region-free markets could improve the collaboration among the members of this community. Nonetheless, many scholars argue that the underlying cause for the creation of the European communities was the need to strengthen the position of European markets in the world. After the war, it became quite apparent that that the palm of supremacy was taken by the United States, and in the near future, it could dominate the world trading system. Thus, there was no alternative but to boost the growth of the European trade that should compete with the new superpower (Adams, 1995, p 123). It stands to reason this was not officially declared, such announcement would hardly be very diplomatic, yet it seems this objective was one of the cornerstones of the European Communities (Barber, 1993, p 233). Traditionally, it is stated that this international body was founded for solving economic problems but it seems that that political aspect must not be overlooked or rejected. At that moment in history, there was a growing necessity for consolidation of Western countries and to some degree the EC was a response to this necessity (Mohamed 1999, p 63). Therefore, it is quite possible for us to argue that the advent of the European Communities was motivated by both economic and political factors.
The theories of free trade
In this regard, we should also illustrate the basic principles of the European Communities, namely, super nationalism or the erasure of state boundaries and free trade. There are various approaches and theories of free trade, but its essence was first developed by Adam Smith and later by David Ricardo. Both of them adhered to the principle to comparative advantage. In turn, their model is called the theory of comparative advantage. According to it, each member of the bloc has to specialize only in those spheres of production in which it can achieve the best price quality ratio (Cairncross, 1996, p 77). The integration of market makes the demand and supply chain much shorter. We should not forget that the principle of comparative advantage has significant drawbacks because, in a free trade market, local economies are at constant risk of being replaced by external competitors, which may have larger capacity for production. As a result, it can collapse the whole industry in the country. The opponents of the free-trade markets and the European Communities mostly allude to this threat while arguing against market integration (Irwin, 2003, p 111). There are some other interpretations of free trade system, for instance, we may discuss Heckscher-Ohlin theory. To some extent, it is analogous to Ricardian model but Heckscher and Ohlin attach primary importance to the geographic position of a country and the natural resources. The scholars argue that there are several production factors: capital, labor and land. In contrast, David Ricardo focused mostly on labor forces. They believe that a member of any trading bloc must use its cheapest and most abundant production factors. Consequently, such country must manufacture and import only those commodities that are most cost-effective (Beamish, 2003, p 86). Both these models rely on the principle of comparative advantage.
There are opposing views on the concept of international finance, for instance the New Trade Theory, which was formulated by Paul Krugman. He does not fully accept the principle of comparative advantage. The author is firmly convinced that regional governments should render assistance to infant industry until it is sufficiently developed to withstand the competition of foreign companies. This is not protectionism, this measure is a temporary policy and we should not presume that the national enterprises will always be sheltered from external and sometimes harmful influence (Krugman et al, 2005, p 123). It is very difficult to determine, which of these theories became dominant for the European Communities, because the governments had to rotate them. But in the majority of cases, the preference is given to the ideas, expressed by Adam Smith and David Ricardo or the theory of comparative advantage, which is not always the most appropriate pattern.
The most peculiar feature of free trade system and especially the European Communities is almost complete absence of trade barriers; in turn, this enables to reduce the transportation costs, and helps the manufactures to minimize their expenses. Secondly, there is an unrestricted flow of capital from one state to another, which subsequently offers new opportunities to the employees (Miller, 2004, p 123). It has to be admitted that free trade has often come under criticism because it does not give any protection to the regional enterprises from outside influence. With the reference to the EC, we should point out some inconsistency in this organization. It is considered that in accordance with the Ricardian model, the members of any trade bloc must have certain features in common, first and foremost similar political systems, finance structure, geographic vicinity and most importantly, the equal level of economic development (Hill et al, 2000, p 55). It is hardly possible for us to argue that all of these criteria are met because gross national product in the counties that now constitute the European Communities is not even. This is arguably the main source of all debates about this international body, especially if we are speaking about the United Kingdom which is even now very reluctant to comply with the series of these international treaties (Barber, 1993 p 55). Still, one cannot deny that that the existence of such trading bloc as the EC provides many new opportunities.
Advantages and disadvantages
At this moment, it is more prudent for us to take a closer look at the constituent parts of this alliance, namely European Coal and Steal Community (ECSC), Economic Community (EEC) and Atomic Energy Community (EAEC), because these are the key components of this organization, and the success or failure depends upon the functioning of these international bodies. Overall, while assessing the positive or negative sides of any super national market, we should say that this question is always multidimensional or there can be various approaches. It should be taken into consideration that at the moment the members of the European Communities do not possess equal resources and consequently, the expenses covered by the countries are not also equal. Though, at first we analyze the benefits of these agreements.
The most obvious advantage of free trade market, particularly, in the context of the European Communities is ever-increasing competition. Every company, which operates under such conditions, is compelled to improve the quality and quantity of its services, and raise the performance standards otherwise this firm would simply be forced out of the market (Salvatore, 2007, p 211). It goes without saying that citizens of such states Germany, France, England and so forth have a wide range of options while purchasing any good or service. But there is a reverse side of the coin which shows that supranational trading system has significant drawbacks.
The elimination of trade barriers have also resulted in much lower prices, which is definitely a positive side of this agreement. Nevertheless, the absence of trade barriers has certain adverse impacts. The governments are inclined to assume a laisser-faire policy toward the national manufactures. The thing is that very often they do not have the same capacity as foreign enterprises, and gradually, they have to close down or at least reduce the volume of their production (Symes, 1995, p 45). It is possible to draw numerous examples but the most striking one is the case of French automobile industry that suffered a severe blow from German giants such Mercedes, Audi, BMW, etc. Another case is the disappearance of the British coal industry that was declared to be sub economic and many factories were closed down, which lead to layoffs (Anderson, et al 2003, p 142). This events took place in eighties during the transition period but they clearly illustrate that free trade environment may have rather detrimental impacts on the national economies, practically destroying the entire industry. It does not necessarily mean that protectionism is the solution to this problem but the governments must not transform into a mere onlookers of events, because such attitude casts doubts on their efficiency. These cases illustrate the theory of comparative advantage, the regional governments simply decided to step aside but at that moment it was necessary to render some assistance to the local manufactures that were not able to withstand this battle with foreign firms (Krugman et al 2005, p 98).
Certainly, there is a quota or restriction on import. The government has to control the amount of goods brought into the country, but in the overwhelming majority of cases, these attempts are clearly insufficient. According to the European Economic Community, protectionism is strictly prohibited and the state is practically unable to interfere into market, but it seems that sometimes this intervention may be appropriate, because the country may lose own manufactures. In fact, this situation can be observed in Spain or Greece, which heavily rely on import. It is very difficult to predict the after-effects of this policy in the long run. This evidence exemplifies the principle of comparative advantage; still this rule is not always applicable especially to the states that are not highly industrialized. As a matter of fact, they may be completely dependent on the outside suppliers and this dependence can easily grow into bondage (MacDonald, 2000, p 41).
Another feature, which we may not overlook, is the free movement of capital across the boundaries. The investors can easily transfer their assets from one country to another, which gives rise to further economic expansion. It has to be admitted that this flexibility significantly boosted the growth of such states as Italy, Spain, and Portugal especially in the post war period. This is by far the major advantage of the European Communities. We need to acknowledge that this main reason why so many states are so intent on becoming the members of this organization. But we may not overlook the possible downsides. First, it should be borne in mind that taxation policies in the countries are different from each other. Investors from the United Kingdom, Germany, or France tend to search for more lenient conditions; consequently they move the capital to Greece, Spain, and Portugal which become the beneficiaries in this case. Economists often describe this process as the flight of capital and they claim that it subsequently gives rise to the unemployment among the advanced countries (Abdelal..2007, p 43). For a considerable period of time, this danger went disregarded but the economic crisis that broke out in 2009 and is still continuing, demonstrates that sometimes free trade market has some rather negative aspects. Many people are protesting against this policy, arguing that large business pursue only profit which deprives them of many privileges they enjoyed earlier.
The third pillar, on which the European Communities are based, is the free movement of labor. Any worker or employee can look for new opportunities that best suit his or her needs and demands. At first glance, one may claim that there is nothing to be anxious about. The overarching thesis that the supporters of this principle advance, is that any person will only profit by it. However, it is worth mentioning that it causes the so-called “brain drain”. Some sociologists and economists believe that this brain drain hinders the development of many national industries, because skilled employees give preference to the UK, France, Germany and so on (Cairncross, 1996, p 134). Now we are mostly speaking about the demographic processes, but they stem directly from the agreements concluded in late fifties and sixties, and only now they have fully manifested themselves to full extent.
In addition to that, we have to take into consideration that the increasing interconnectedness between the members of the European Communities is also rather dubious. First, these ties ensure mutual assistance. In an emergency, the economic interdependence will enable to overcome the crisis. Yet, the question arises whether the interdependence is only a positive phenomenon. The thing is that the free trade market is extremely volatile, thus any fluctuation can resonate in other countries.
Again we need to stress the idea that in according with traditional models of free trade agreements, participants should be at the same level in terms of economic development but we cannot possible presume that the European Communities is an example of such model. Even at this moment, the leading members of this organization such as the United Kingdom, Germany or Italy are much more advanced than Greece, Portugal and Spain (Cole, 1993, p 184). It goes without saying that the situation began to change in early nineties and the new-comers became much more prosperous.
The most interesting detail is that their national industry still remains in relative decline. We have already discussed the principle of comparative advantage, which means that every country should produce goods at the best price-quality ratio. The major problem is that nowadays some members of the EC produce virtually nothing. There is glaring discrepancy between the states and therefore, this agreement did not alleviate the situation. The analysis of positive and negative sides must not be viewed as the protest against the European Communities and integration in general; the main purpose of this work is to uncover the most urgent problems the European community has to resolve at this point. We do not question the effectiveness of free trade but sometimes it turns into a ruthless struggle in which only the strongest can survive. The only possible outcome is the monopolization of industry especially in the long run.
Conclusion
Therefore, we can arrive at the conclusion that free trade economy within the context of the European Communities has its positive and negative sides. As for its most peculiar features, we may single out the absence of trade barriers and unlimited flow of capital and labor. This in turn intensifies the competition among the companies operating in these countries, which is beneficial to the citizens of the states. Moreover, this agreement considerably improves labor constitutions and sets new standards for the manufactures. This trading bloc relies on the theory of comparative advantage that gives practically no protection to national manufactures. As for the drawbacks of this trading bloc, we should mention the policy of non-interference, pursued by the governments; it leads to the bankruptcy of many enterprises, which cannot compete with those companies that have larger resources.
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