Free trade is associated with various issues that have the potential of affecting supply and demand in enterprises. Examining aspects related with free trade is essential in quantifying whether the demand and supply is attainable in future. This paper will analyze the current issues of Free trade and their affect on supply and demand in business. Furthermore, the paper examines the current success and challenges in maintaining free trade policies while achieving balanced supply and demand. The paper also analyzes the future trends, and challenges expected in free trade in order to speculate whether the demand and supply is achievable in the future.
Economists have constantly argued that free trade provides the ultimate trade policy. Besides this informed observation, some scholars consider the idea of free trade as an abstract argument. These scholars understand that country’s major industries should be protected from foreign competition. The difference between economists’ perception and those of some scholars in the ordinary world attracts serious controversies. Motivated by the personal affairs, individuals tend to exploit the benefits of free trade and relative advantage while disregarding its consequences. Common argument claims that individuals should utilize firms that specialize in various activities and pay them with the cash earned from doing activities that they do better (Irwin, 2009). Furthermore, some argument claims that a community that distances itself from specialists is likely to have poor living standards. In this context, some countries supplies products at reduced costs; however, the predicament exists whether the economy should allow its population to purchase cheaper imports or should encourage its people to purchase local products that may be expensive. The idea of free trade is controversial because it is associated with various consequences some of which are constructive while others are highly destructive. This means that analyzing these concerns is necessary in order to describe the feasibility of the idea of free trade.
The concept of Free Trade
The idea of free trade regards to the government policy that target eliminating procedural discrimination in import and restrictions in export market. Free trade promotes international trade by minimizing excise barriers, import quotas and currency restrictions. The concept of free trade follows the theory of Adam Smith that emphasizes the significance of division of labor. This theory claims that division of labor among nations encourages specialization that leads to higher output in the global market (Miller, 2004). The idea of free trade incorporates the concept of “free trade area” that regards to a region with fewer obstacles within unrestricted area. Primarily, the free trade area is the product of the free trade consensus. Free trade has the sole aim of examining and refraining barriers in order to build easy exchange of professional and skilled labor force and division of labor to enhance development. Furthermore, the idea of free trade relates closely to the aspect of globalization. This means that the concept of the free trade remains the most controversial subject of the 20th and 21st centuries in the context of social-economical concerns and moral issues and its effect in future, both in constructive and negative perspectives (Venkataramany & Bhasin, 2008).
Supply and demand
Supply and demand is a vital concept of economics and it acts as the backbone for a market economy. All communities must make economic choices such deciding on what is to be produced, the method of producing such products and services and the persons who will be allowed to access its products. In the conventional economies, the market responds to these concerns through the model of supply and demand. However, in the competitive conditions where no single entity has the authority of setting the price, the market determines the price of the commodities and the price states the amount of production and the individuals who can consume particular products (Hunt, 2012). Consequently, price rewards both the manufacturer and consumer.
Primarily, high prices enhance production, but discourage consumption. Alternatively, low prices discourage production while encouraging consumption. Both rewards drive the price to balance the forces of consumption or demand and production or supply. Besides providing the natural product of economic forces, the supply and demand model provides the ultimate economic outcome (Miller, 2004). This is because society mainly realizes maximum satisfaction at the minimum cost. The model ensures that the market mechanism’s efficiency stabilizes at the point that allows maximum utilization of all resources. This model describes why economists mainly favor market results and rarely wishes to interfere with price. This becomes essential because actions that interferes with the model leads to instabilities in the market. For example, defining minimum wages or restricting trade challenges the spirit of the model and lead to unproductive outcomes (Irwin, 2009).
Effect of free trade on supply and demand
In the free trade scheme, prices are entirely set by the supply and demand forces that are the sole determinant of resource allocation. This is in the contrast with the restricted environment where the allocation of goods and services among the trading nations is dependent on price strategies that may differ extensively (Irwin, 2009). The governed prices are product of government participation in supply control including protectionist procedures. These government interventions have the potential of affecting the cost of commodities. Free market ensures that government regulations or policies do not impose influential effect on supply and demand patterns. It ensures that producers have the chance of selling their products without the interference of the government’s tax or fiscal gifts such as price control and subsidies. The free trade concept emphasizes that leveling the trading field among producers from all countries provides the ideal way of matching global supply to demand and making all individuals involved more prosperous (Hunt, 2012).
Advantages and disadvantages of free trade
The major advantage of the free trade includes creating a market with variety products. This provides consumers with a diverse market that is capable of accomplishing their varied needs. Furthermore, the practice discourages monopoly while increasing consumers’ bargaining power because of availability of numerous alternatives (Miller, 2004). Another advantage includes increasing the production of the country. Free trade ensures that countries are specializing in the production of the products in which they have a comparative advantage. This specialization provides countries with the opportunity of capitalizing on the advantage of the efficiencies created from the economies of scale that leads to increased output. Furthermore, international trade amplifies the size of the company’s market, leading to reduced costs and improved productivity (Irwin, 2009).
Free trade also establishes employment for enterprises and unemployment for the people. This is because trade liberation establishes winners and losers as resources become concentrated in more productive areas of economy. Employment increases in the exporting firms; however, workers are displaced as industries face each other in the competitive environment (Venkataramany & Bhasin, 2008).
Moreover, free trade is likely to enhance economic growth in the developed countries; however, it may affect the economy of the developing countries negatively. Countries that have the capacity of sustaining free trade experience increasing living standards, real income and attractive rates of economic growth. This results from competitive industries, high productivity and effectiveness and production levels. However, developing countries that lack the ability of creating huge industries that can compete globally do not enjoy these benefits (Miller, 2004).
Free trade is not always associated with constructive consequences. The trade has some drawbacks such as encouraging the importation of harmful goods. Foreign trade may lead to introduction of vicious products such as drugs that may have destructive effect on the importing country. The imported product may create healthy hazards to the residents of the country. The case of suffering of the people of China from imported opium highlights the destructive effect of the free trade (Irwin, 2009).
Free trade may also lead to exhaustion of the resources. This is because international trade leads to massive exploitation of the resources. For example, intensive cultivation of land diminishes returns in agricultural countries. Moreover, overburdening of the resources may make a nation poor (Venkataramany & Bhasin, 2008).
Lastly, free trade creates economic dependence and may result to wars. A country may depend entirely on foreign countries, which is detrimental. For example, a country depending on others for her food may suffer severe starvation in times of war. Furthermore, free trade is destructive because one nation may gain at expense of others due to particular fortuitous advantages. Free trade may lead to wars as countries compete with each other in establishing new market and resources for their industries (Miller, 2004).
Current impact of free trade on markets
Free trade policies have established high level of competition in the current open market that encourages progressive innovation leading to better products, well-paying jobs, new market, and increased savings and investment. Free trade has ensured that more goods and services are available in the market and at reduced prices. Free trade has also fostered the idea of spreading freedom and promoted fiscal expansion of global countries (Hunt, 2012). For example, the constructive effect of the free trade in the development of the U.S. economy over the past decade is explicit. The U.S economy has experienced growth of over 23% since 1990. Furthermore, free trade has enhanced global relationships as countries interact with each other in trade activities. The concept has discouraged isolations because it has advocated for the need of pooling resources together. However, free trade has resulted to excessive destruction and pollution of the environment (Irwin, 2009).
Free trade with comparative advantage and low opportunity costs.
Free trade associate directly with the idea of comparative advantage. The current global economy has free trade partnerships developed by the nations with the intention of doing business together. This has provided humans with the opportunity of producing goods efficiently that has increased profits and general access to products. The concept of comparative advantage indicates that there is increased economic welfare of all nations when countries specialize in products that they have a lower opportunity cost. Free trade creates an environment that makes countries specialize in those products that they have a relative advantage (Hunt, 2012).
Free trade has constantly faced serious challenges; however, in various aspects the idea has been a great success. The opening of the global economy in the past decades and the establishment of agencies such as the WTO presents essential effect of free trade. The global economy has experienced attractive growth because of the adoption of the principles of the free trade. Furthermore, the practice has increased people’s living standards by providing effective market control strategies that ensures stability. Frequent political attacks and protectionist forces emerging mainly from high-income countries threaten free trade substantially. These challenges indicate that demand and supply may hardly be achievable in the near future.
Hunt, J. (2012). Fair trade. London: Raintree.
Irwin, D. A. (2009). Free trade under fire. Princeton, N.J: Princeton University Press.
Miller, A. S. (2004). Free Trade: Current issues and prospects. New York: Nova Science Publishers, Inc.
Venkataramany, S., & Bhasin, B. B. (2008). Institutional issues impeding progress of the free trade area of the Americas agreement (FTAA). International Journal of Business Research, 8(1), 1-8.