Recent orders
Effects Of Globalization On People And The Environment
Effects Of Globalization On People And The Environment
Contents
TOC o “1-3” h z u HYPERLINK l “_Toc377307803” Introduction PAGEREF _Toc377307803 h 1
HYPERLINK l “_Toc377307804” Definition of globalization PAGEREF _Toc377307804 h 2
HYPERLINK l “_Toc377307805” Impact of globalization on people PAGEREF _Toc377307805 h 3
HYPERLINK l “_Toc377307806” Impact of globalization on environment PAGEREF _Toc377307806 h 7
HYPERLINK l “_Toc377307807” Conclusion PAGEREF _Toc377307807 h 9
HYPERLINK l “_Toc377307808” References PAGEREF _Toc377307808 h 10
IntroductionOver the past few decades, the growing integration of societies and economies all over the world, also known as globalization, has taken the centre stage among other hotly-debated topics in the international economics. Poverty reduction and rapid growth of economies in the rapidly industrializing countries such as India, China and others that were poor a few years ago are some of the positive aspects of globalization. Specifically, the process of globalization has allowed greater interaction among countries, persons and businesses around the world, leading to increased development national economies characterised by increased political, social, cultural and technological integration of individuals, societies and economies all over the world, (Boudreaux 2008). Among other benefits, has globalization led to liberalization of economic policies leading to reduction in the levels of poverty due to the associated wider market for local goods and services. But as Goyal, (2006) points out, Liberalization Privatization and Globalization (LPG) has also led to significant negative effects such as increased inequality and environmental degradation. Precisely, the costs of globalization are usually experienced more among the rapidly developing nations than in developed nations. On top of that, developing countries gain the least share of the benefits from globalization. Globalization has significant effects on environment, which are largely negative (Goyal, (2006). In this concern, this paper discusses the effects of globalization on people and environment, giving special specific reference to India. But before this, it will be prudent to briefly examine the meaning of the term ‘globalization’ and the recent reforms in India sparked by globalization.
Definition of globalization
The term ‘globalization’ has many different meanings depending on the context of focus. Though there is no clear-cut definition of globalization, it will be appropriate to adopt the definition advanced by Guy Brainbant for the purpose of this discussion. According to Guy Brainbant (as cited in Goyal, 2006), “globalization includes opening up of world trade, development of advanced means of communication, internationalization of financial markets, glowing importance of multinational companies, population migrations and more generally, increased mobility of persons, goods, data, ideas infections, diseases and pollution.” Thus, in essence, globalization connotes the increased possibility for accomplishments between and among people irrespective of geographical constraints. As a result, the world is more interdependent now than ever. As Malhan, & Rao (2007) points out, globalization has enabled multinational and international companies to produce goods across many nations and sell them to consumers across the globe. Technology, raw materials and money have broken international barriers. According to Malhan, & Rao, this is brought about by the linearization of international trade, hence paving way for corporations to pursue larger markets. It implies that all actors around the world are able to participate in global relations under common rules. Several agreements including the World Trade Organization (WTO) agreements provide rules for trade, labour relations, environmental care, sanitary and food safety compliance among others. When a government signs them, it is ruled by the agreements. In many cases, it becomes inevitable for countries to revise already laid national policies so as to conform to the requirements of globalization, (Malhan, & Rao, 2007).
Globalization has seen Indian economy experience dramatic policy changes in the last two decades. India initiated reforms with regard to the trade, social and industrial and these have enhanced integration of the Indian economy with the global economy. According to Gupta et al, (2010), India has recently adopted a new economic model called Liberalization, Privatization and Globalization in India (LPG). One of these changes was the devaluation of Indian currency by 18% to 19% in order to solve the balance of payment problem that led to a major crisis in economic performance in 1991. Further, to achieve the objectives of the LPG model, many of the public sectors in India were sold to the private sector. In addition, Foreign Direct Investment was allowed in a wide range of sectors in the country. Foreign investment in India was also highly encouraged. According to Gupta et al, (2010), the key objective of adopting the model has been to make Indian economy one of the fastest growing economies in the world. This has had enormous consequences to people and to environment in India.
Impact of globalization on peopleGlobalization has far reaching effects on people, both positive and negative. To start with, globalization leads to a model of allocation of resources that is inconsistent with comparative advantage (Rangarajan, 2006). As a result it leads to specialization which enhances productivity. In India, it is generally held that international trade is beneficial and that restricting trade impedes overall growth. As such, India which is currently ranked as a rapidly industrializing nation and which initially applied the growth model of import substitution has recently adopted a policy of outward orientation. Consequently, Indian companies which have performed well, both locally and in foreign nations, have been able to attract a lot of foreign investment hence pushing up the foreign exchange reserve available in Saudi Arabia.
Further, globalization has led to increased capital flow across countries. According to Rangarajan, this has played a significant role in enhancing production base. Rangarajan notes that “Capital mobility enables the total savings of the world to be distributed among countries which have the highest investment potential” this implies that the growth of one country is not constrained by its own domestic savings. According to Rangarajan, the inflow of foreign capital has played an important role in development of Indian economy recently. A lot of foreign companies have been invested in India through establishment of branches. According to Rangarajan (2006), this has increased productivity at national level and led to significant growth of Indian economy. The result of this has been a reduction in poverty levels brought about by the increased income per capita in India.
Globalization enhances spread culture. According to Hauss (2008), globalization enables different cultures in the world to come together. People realize the flows existing in their culture by observing other culture of other people, they pick up the more correct practices and in tune with times. In India, globalization has seen an increase in number of people accessing television from 10% in 1991 to 78% in 2005 (Hauss, 2008). Further, cable television and foreign movies have become available for the first time, aiding in breaking the barriers to cultural boundaries. As Hauss (2008) points out, this has greatly changed the perceptions of the ordinary people in India. Another powerful impact of globalization is the spread of education. In the contemporary world, one can move in search of the best educational facility in the world without many difficulties. A person living in India can move to another continent in search some courses in education which are not available in the home country or in search of new experience, (Hauss, 2008).
According to Kelly et al (2006), globalization leads to increased rates of either employment or unemployment. Kelly et al note that, globalization has enabled multinational companies to invest in the developing countries and hence generating employment opportunities for them. However, this may negatively impact on the development local companies in developing nations, which often lack capital, leading to increased levels of unemployment. Though India has witnessed high rates of economic growth in the 1990s, it has attained a negative growth in the rate of employment. According to Kelly et al (2006), this has been so due to outsourcing and downsizing by firms, including industries in the public sector, so as to be competitive in the new globalized environment. Any improvement in job expansion has been attributed to the IT-related and service sectors, thus benefiting individuals with the knowledge and skills required in these sectors. Data collected by National Sample Survey Organization (NSSO) in India in 1993 indicated that the rate of unemployment was at 3.6% while 2000 data showed that unemployment rate had risen to 4.4%, (Malhan & Rao, 2007).
Globalisation has led to advancement in communication technology across the globe. This has greatly increased communication among people from different parts of the world on a more permanent basis and at much low costs (Malhan & Rao, 2007). In India, for instance, improvement in Information Communication Technology has led to increased communication through internet services leading to stronger personal and corporate relations. This has enabled individuals and corporations to advertise products and service, to acquire knowledge and obtain entertainment among other benefits. Further, as a result of development of new technology in India, financial transactions are carried out more quickly with much less charges. On top of that, newer technology in research, IT and production has led to reduction in the costs of production and has increased levels of sales. Globalization has also seen an increase the level of skills possessed by the labour force (Malhan & Rao, 2007).
Apart from the above positive impacts, globalization has some costs. According to Nayar (2006), globalization leads to unequal distribution of income within and among nations. Globalization emphasizes efficiency and hence, benefits usually accrue to countries which are favorably endowed with human and natural resources. The developed countries have a head start over the developing countries by far. They have technological base which is both wide and sophisticated. Thus, while international trade is meant to benefit all countries, greater benefits accrue to the developed and advanced nations. As a result, developing nations become poorer. Further, globalization can also lead to widening of income gaps within countries. As Nayar (2006) explains, globalization usually benefits people who have knowledge and skills to cope with the advanced technology. This means that the higher growth rate of a country’s economy may be at the expense of incomes of the people who lack the relevant knowledge and skills.
Another cost of globalization is that it leads to loss of a country’s sovereignty. Precisely, as (Malhan & Rao, 2007) point out, globalization leads to loss of autonomy in the pursuit of economic policies of a nation. A country cannot pursue policies which are in contrast with worldwide trends due to the high integrated world economy. Usually, capital and technology move to where there are greater benefits. As countries come together, whether in the social, political or economic arena, they inevitable sacrifice some sovereignty.
According to Malhan and Rao (2007) globalization has also led to displacement of farmers in India. There have been policy initiatives that promote takeover of natural resources, take over of farm land and moving farmers out of agricultural land. In addition, globalization has greatly affected many of the illiterate poor farmers in especially in rural areas, with small land holdings. According to Malhan and Rao, many of them lack information and facilities that can assist them to improve their productivity, their income and living conditions as well as their participation in economic development. Malhan and Rao notes that in spite of improvements in agricultural production that are associated with globalization, poverty alleviation programs poverty alleviation programs have not been able to make a substantial headway in India. For instance, floods, hailstorms and drought conditions in some places in India causes loss of crops. As a result of globalization, there has been a significant drop in prices of agricultural products.
Impact of globalization on environmentGlobalization has profound effects on environment, which are largely negative. According to Birundha (2008), globalism has seen an increase in the rate of transportation of materials at long distances in the atmosphere as well as establishment of new industrial, leading to emissions of biological substances that affect the environment and consequently on human health and well being. Further, the increased global inequality has paved way for increased environmental such as protection of O zone layer, climate change, desertification and bio-diversity. As noted earlier, public production of goods was de licensed to allow foreign firms and the private sector to produce them in India. The CPCB Annual Report released in 2003 classified the majority of industries in these sectors as the most polluting industries. This included industries such as chemical industries, mining power production industries and others, all of which produce dirty emissions.
According to Reddys (2006), between 1991 and 2000, the share of local industries releasing harmful emissions amounted to 51% in India, of these, 4.5 percent was in chemicals, 27.4 percent energy, 5.5 percent Metallurgy, 7.5 percent transport and 3.5 percent in food processing. Though the National Environmental Programme (NEP) in India suggests that foreign firms should obtain licenses, it does not prevent them from establishing industries that produce hazardous emissions in India. For instance, Unilever which is a US-Dutch company established a branch in India called Hindustan Lever limited which specializes in producing mercury thermometer factory. The company produced these products mainly for export. Consequently, the level of mercury poisoning in the surrounding environs of Kodaikanal, where the industry was located rose to approximately 250 times of the permitted limits in the region and this adversely affected the environment (Reddys, 2006),.
Equally alarming is the recent trend of Coca-Cola Company through pollution of land and ground water in India. A Coca-Cola plant located in Mehdiganj has been indiscriminately discharging its waste in the surrounding fields, poisoning land water and soils as well as rendering the underground water unfit for consumption (Birundha, 2008). On top of that, this plant has two tubes that draw thousands of water from the underground from lowering the water level from15 to approximately 40 feet. In Kerala area, Coca-Cola was distributing its solid wastes as fertilizer to farmers. When the waste was tested, it was found to contain extremely high concentrations of heavy metals such cadmium and lead (Birundha, 2008).
The aforementioned changes in the environment amidst globalization have had a great adverse impact on the atmosphere, leading to increases in temperatures. A recent study by Dinda, (2009), demonstrated how temperature changes have already hit the global economy with a 30% drop in agricultural production India between 1981 and 2000. Reddys (2009) notes that, as a result, production of maize, wheat, and barley in India has hit the maximum due to temperature rise and this is threatening to kill India’s agrarian economy
ConclusionIn conclusion, globalization has had a huge impact on people and environment. As demonstrated with the Indian economy, globalization leads to increased productivity of and growth of economies and this aid in reduction of poverty among citizens. Further, globalization leads to spread of different cultures across the globe with people adopting new cultures that suit them. Globalization also enhances spread of education, which gives opportunity for people to move in search of knowledge and new experiences in foreign countries. As noted in this discussion, globalization may lead to increase in employment or unemployment of people in a country. Advancement in technology leads to increased communication and reduction in the cost of communication among other benefits. One negative impact of globalization on people is that it leads to unequal distribution of income within and among nations. Further, it leads to loss of a country’s sovereignty. In India, the impact of globalization has negatively affected farmers and hence, the level of agricultural production has dropped significantly. The impact of globalization on environment is huge and largely negative. The increased rate of transportation of materials at long distances in the atmosphere as well as establishment of new industrial has led to emissions of biological substances that affect the environment and consequently on human health and well being. The emissions have led to a rise in temperatures and this has indirectly affected agricultural performance as demonstrated with Indian agricultural sector.
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Effects of globalization of multinational companies
Effects of globalization of multinational companies
Introduction
Globalization can be described as the process of extending various social of organizations across the world. Globalization can be said to arise due to the movement of people from one place to another, including things and ideas. Globalization of business organizations has led to some positive aspects as far as businesses and the global economy are concerned. Negative effects that are associated with globalization include the exploitation of workers especially from the third world countries. Some arguments portray globalization as being more harmful than beneficial. The phenomenon describes the relationships among macro-social forces in terms of cultures. The various forces leading to globalization include religious forces, political factors, and economic factors. This paper describes the issues of globalization of multinational companies including the positivity and negativity of this kind of globalization.
Globalization is said to be in a position of increasing financial instability globally through the increasing global trade. This effect comes from the fact that globalization of systems and corporations means that a country’s economy may cause influence to another company from another country in which the globalization process is targeting (Business Essays , 2011 ). An economic problem that may arise in one country as caused by multinational corporations could result to a widespread financial crisis that spreads to the entire world of business. In the case of financial crisis, the rich countries would always tent to gain more money but the poor on the other hand face a decreased access to financial resources as well as natural resources.
While globalization is capable of helping mega-corporations that engage in high level of environmental pollution get away with it, the less powerful business organizations incur many social costs because the law bends in such a way that the mega companies are protected. In many cases, the developing world lose from the action of globalized Multinational Corporation in that the poor availability of economic resources may not provide grounds for fighting with the effect of environmental implications of globalization. Such poor or developing countries are more likely to face mega problems such as a severe effect from global warming, an aspect of environmental pollution by globalized Multinational Corporation. It is however argued that globalization creates an economic advantage to an extent of combating all negative aspects of globalization including environmental pollution. Globalization is said to have led to a great level of economic growth although this kind of growth is realized in the most developed nations from which the multinational corporations are based.
Globalization of Multinational Corporations leads to the exploitation of workers especially in the less developed countries. It would be a common aspect to find Chinese workers being exploited by the United States Multinational organizations as seen in the case of Wall-Mart’s exploitation of Chinese workers in China (Dolack, 2013). While Multinational Corporations from great economic nations such as the US benefit from the existence of cheap labor in the lower economic countries like China, the exploitation of these workers is seen as a negative aspect of globalization of the multinational organizations. On the case of workers and globalization, Multinational Corporations provide employment opportunities to people in the less developed countries. These countries are mainly targeted by the Multinational Corporations since they provide cheap labor and market for these corporations.
Globalization has increasingly led to new demands on companies and organizations to extent their business operations across the world. Multinational corporations are said to be ht main agents of globalization. Most of the multinational corporations benefit from globalization but the effect could be in two directions. While most of the organizations benefit from globalization, the effect could be negative to some corporations despite their nature of operating globally (Button, 2013). The reason why multinational organizations are affected in either way by globalization is that most of them have numerous subsidiaries. Some of these subsidiaries benefit greatly from globalization while other subsidiaries lose from the effect of globalization (Button, 2013). In this case, it comes out that the effect of globalization could be either good or bad. This factor of globalization of multinational companies having negative or positive effect on the corporations, other businesses, workers, or other subjects depends on the type of multinational organization in question.
Globalization in particular gives businesses the ability and increased chance of accessing various markets. These markets could have been difficult to access in the past but globalizations of multinational corporations provide the chance of getting complete access to these markets. With internet, globalization customers from all over the world are able to order products from various regions of the world. While this is the case globalization of multinational corporations tend to diminish this factor in that they want to spread in every region of the world and dominates the market in such a way that inefficiencies could increase (Business Essays , 2011 ). Multinational corporations could operate in a way that is harmful to its consumers and workers especially in the developing countries. While globalization such harmful effects to the developing nations mainly, the positive aspect of globalization covers all the negativities.
Negative impact of Globalization of Multinational Corporations
Multinational Corporations are large companies whose activities are extended globally through the process of globalization. The corporations could be seen to spread the good aspects of developed countries to the developing world but the effect of is more harmful than beneficial in some cases. The issue of economic development associated with Multinational Corporations in the developing nations is doomed by the fact that individual workers are exploited through low salary remunerations provided to them. These corporations disguise themselves through selling their products and services at a lower price than most other local business organizations. The power to sell goods at a lower price than local competitors is provided by the cheap resources in the developing nations including low cost of labor.
Most of the Multinational Corporations gain a stronghold of the local media thus generates superiority in influencing the ideologies of consumerists on people through commercialization. These consumerist are forced by the prevailing conditions to buy goods are produced through a mass production process by these Multinational Corporations whether in the country or in other countries. Having to buy the goods from the Multinational Companies becomes the only way of ensuring higher standards of living by these consumerists in the developing countries in which there is the utilization of cheap labor. Workers standards of leaving could be deteriorated because they work more in a way that contribute significant benefits to the multinational corporation but they get less compensatory wages instead of receiving wages that are equal to their marginal productivity of labor. The media is blocked in way that the bad practices such as workers exploitation through poor working conditions and low wages are hardly portrayed to the public or the required authorities. This aspect of taking power over the media and the local authorities is mainly experienced in the developing countries where corruptions and other related social evils are intense.
In some cases, the multinational corporations may make use of cheap labor in less developed countries and sell their products in the most developed countries. This case can be seen in the case where Wall-Mart, a United State Multinational Corporation, makes use of the Chinese cheap labor to ensure mass production and then ship the products to the United States in order to benefit by selling them at a higher price (Parker, 2013). Instead of China gaining from Wall-Mart, the Multination Corporation exploits the countries labor resources and transports most of the products back to the United States where consumers can buy the products at a higher price. Wall-Mart takes the shape of the historical belief in multinational corporations in that they are able to take control of a country’s economy and having power in political systems of the countries in which they are established.
The reason why they are able to take such position especially in developing countries is that they are said to have so much investments in such countries such that there rejection may result to significant economic problem (Parker, 2013). Multinational Companies are said to take advantage of political systems in the developing nations due to their strong impact on the nations’ economies. The countries find it devastating if the corporations reached a point of removing the many investments from their economies. Some of the economic impact creating fear of imposing strict regulations on such companies includes increased unemployment as those employed in the companies being set off from their jobs. Some evils created by these multinational organizations include paying some top government officials in order to protect the companies from being shut down. Sometime the corporations may have much power to compel the government to make adjustments in the labor policies and other policies that may renter the companies to shutting down.
Given this situation whereby a multinational company has taken full control of the government policies concerning its operations in a certain country, the multinational company may not be punished accordingly for breaking the country’s law. They extent their evil practices in the exploitation of the countries labor and natural resources as well as evading from tax payments (Parker, 2013). Multinational corporations are known to steal huge sums of money through tax evasion especially from developing countries in Africa, parts of Asia, and Latin America.
Some mega multinational corporations like Apple Corporation exploit workers in a big deal such forcing them to work long hours and paying them poorly. Some Apple workers are said to suffer much humiliations as they aspire to engage in the company’s production of iPads and iPhones (Chamberlain, 2011). The exploitation was particularly on the Chinese works engaged in the production of Apple iPad. These iPads and iPhones are produced to be sold to consumers across the world. The case of Apple was too serious to an extent that consumers across the world took their live to prompt an investigation into the working conditions within the company’s factory in Shenzhen, a city in southern China. In the same case, some Chinese sociologists got involved in writing letters to the media in which they called for an end to the persistent restrictive employment restrictions in some of the worker practices. The aspect of worker oppression was said to be whereby the fundamental human dignity of the workers is highly sacrificed to promote the corporation’s development (Chamberlain, 2011). Corporations like Apple are disguised by their image of being superior in quality products. Apple Corporation was mainly established in China to enjoy its many cheap resources in both labor and natural resources.
The major issue in these corporations is exploitation of resources especially in labor. Other than exploiting workers, these corporations deprive them their rights in various ways. In many cases, they are demeaned with a claim that they are inferior due to their country of region.
Positive Impact of Globalization
Globalization has led to much negativity in the developing countries. The positive effects are however greater than the negative effects making the practice relatively beneficial as far as economic growth is concerned. The advantage of globalization is that it creates the power of creating more jobs within the countries that they have been established. Developing countries are characterized by high levels of unemployment but this condition is reduced to some extent when multinational corporations are established in such countries. The creation of jobs mainly occurs whenever large quantities of labor force are required. Most of the Multinational organizations are large to an extent of creating a significant aspect of unemployment level reduction in developing countries. These corporations are mainly established to benefit from the cheap labor in the developing countries. There capacities are large enough to accommodate a significant number of workers. The Coca Cola Company is one of the Multinational Corporations that work towards job creating in the developing countries. The Coca Cola Company has increased its investments in various countries. In Malaysia, the company was established at a cost of 301 million aiming to generate an employment opportunity of more than eight thousand workers (Business Essays , 2011 ).
Multinational Corporations are known to promote technology transfer through their globalization. The transfer of technology however depends on the available resources to be used by the Multinational Organization transferring the technology. The company also has to hav the capacity of achieving the required level of technology so that it could be more competitive in the prevailing market. In many cases, technology in the developing countries is substandard and any improvement means that technology transfer has to occur. Globalization of multinational corporations participates greatly in technology transfer (Business Essays , 2011 ). These new technologies are very helpful to such countries in that they are able to create development in the local aspects in that developing country thereby aiding in economic development. Some developing countries employ high efforts and costs when importing new technologies that can otherwise be established using the incoming corporations or any other ways promoted by globalization of business. Technology is a key aspect of economic development without which many companies may fail to advance in structure and business. Other ways of developing knowledge about new technologies are available such as the use of internet. Globalization of multinational corporations however gives local businesses and organizations a chance of witnessing a practical aspect of technology or innovations (Business Essays , 2011 ). Creativity of multinational corporations can be adopted locally by local business organizations to improve on performance as well as promote various researches aimed at improving business.
Socially, globalization of multinational companies and corporations is able to bring down the number of people living below the poverty line. This change in social and economic status of some individuals in developing countries is usually brought about by job creation by the international companies, which employ workers at all levels of employment. In this case, the standards of living of the people securing employment with the multinational corporations improve greatly. Other than getting jobs, people in the developing countries may end up creating good relationships as they advance their living standards (Fiss & Hirsch, 2005).
Globalization is known to have a positive impact on a country’s economy. Globalization of multinational corporations or companies plays a significant role in generating an economic affluence through the offering of new hope to most of the developing countries (Frank, 1998). Through globalization, trade barriers are reduced creating a chance for easy transaction activities between countries. With the increased globalization of business organizations, trade barriers removed create a free flow of goods, labor, and services from one country to another. The increased cases of globalization of companies create a situation of increased trade (Frank, 1998). The increased trade globally leads to an increase in the general income for the developing countries. Increased income for the developing countries serves as a greater opportunity in stabilizing their economies. This stabilization is accomplished by taking advantage of the increased free movement of goods and services between countries.
Conclusion
Globalization is mainly seen as to create positive impact to any country’s economy. The main reason why businesses, companies, or organizations employ global strategies is that they find globalization being in a position to increase profitability of the company. Companies gain various benefits by employing global strategies. While some companies want to become multinational, those that are already multinational corporations benefit from a broadened market. Globalization makes the companies growing or operating globally to enjoy the benefit of underutilized resources in the less developed regions of the world (Ritzer, 2011). The main problem with globalization or multinational companies is that some employ business practices that are hardly ethical but harmful to the society and economy.
Companies operating through corrupt way to cover their bad practices such workers exploitation, environmental pollution, or creation of inefficiency and market failures should be stopped irrespective of their direct contribution to the country concerned. In many cases, compensations for their harmful practices go to the rich few while those affected end up being uncompensated. Given that the few harmful practices by multination companies are dealt with effectively globalization would have more and stronger positive impacts to the world economy than it is today (Stever, 1972). Globalization is therefore great in improving the economies of all countries including the global economy. Business law in all countries should be established to deal with all evils associated with globalization.
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Effects of Free Trade on Economy
Effects of Free Trade on Economy
Author
Institution
Introduction
Trade has always been recognized as one of the most fundamental aspects of any country’s economy. It is well recognized that it allows countries to obtain goods that are not produced locally, as well as export their surplus thereby benefiting in terms of foreign exchange. In most cases, however, countries impose tariffs, levies and other trade barriers so as to limit importation of goods. These are some of the protectionist efforts to allow for the growth of the domestic industries. Recent times, nevertheless, have seen the introduction of Free Trade Agreements. Free Trade is a term used to underline a situation where two countries eliminate the artificial barriers such as subsidies and tariffs that restrict the free flow of services and goods between the trading nations (Mankiw, 2009). Free trade, undoubtedly, comes with a number of effects on the economy. This has been the source of controversy with a large number of people opining that it has negative effects, while an equal number believes that it has positive effects. Nevertheless, there has been long-standing U.S policy in support of multilateral trade liberalization. This support is in line with well-acknowledged conclusions from empirical evidence and economic reasoning pertaining to the beneficial effects of free trade for the participating countries.
One of the key effects of Free Trade revolves around increased production in the participating countries. Economic models of trade show that there would be increased aggregate production once an economy shifts to free trade from autarky. The increased production results from production efficiency as the two countries would have the capacity to produce more services and goods with similar amounts of resources (Mankiw, 2009). For free trade to improve the production efficiency, it is imperative that resources are shifted between the varied industries in the economy. This underlines the fact that the some industries have to expand their operations while others contract. However, the basis or underlying stimulus for trade between the two countries determines the industries that contract and those that expand. Varied stimuli for trade are emphasized by different scholars or models of trade. These include the variations in technology between the participating countries as the predisposing stimuli for trade, or differences in endowments, as emphasized by Ricardian models and factor proportion models among others. Scholars note that there is likelihood that, in the real world, these stimuli play a role in stimulating the observed trade patterns. In essence, as trade opens between the two countries, each of the countries specializes in products and services in which it has comparative technological advantage, or shifts production to industries where the relatively abundant factors of the country are used most intensively (Mankiw, 2009). Alternatively, production would be shifted to products and services that the country has comparatively less demand in relation to other parts of the world, or the production would be shifted to products that show increased economies of scale in their production. In case the production shift results from any of these reasons as or a combination of them, it follows then that the aggregate production would increase as postulated by the models. There would be an empirical reflection of this through increased Gross Domestic Product of the country. Without free trade, every country would have to manufacture every product that it needs including things that it may not be efficient in their production. However, once free trade is allowed, every country would concentrate on the production of items that it is most efficient in their production relative to the other countries and export a proportion of the output in exchange for imports of items that it is inefficient in their production (Mankiw, 2009). This activity would result in an increase in increased production and output both nationally and globally. Economic output would also increase thanks to the increased usage of economies of scale considering that industries in one country would have the capacity to serve two or more countries instead of one.
In addition, Free Trade would result in an increase in consumption through enhanced consumption efficiency. Improvements in consumption efficiency result in instances where changes or variations in the relative prices of services and goods allow an individual to obtain higher levels of utility. Having in mind that the change in price results in a change in the number of choices hat a consumer has, it is safe to conclude that improvements of consumption efficiency underline the fact that the consumer can access more satisfying choices. The increased production efficiency means that the consumers would be likely to have more choices of products available to them (Masimo, 2001). This is complemented by the fact that the increased number of goods also underlines increased competition, which would underline a reduction in the magnitude of monopolistic pricing, as well as the inefficiency that emanates from it. These, therefore, mean that the consumer would have the capacity to attain consumption efficiency, which, in economic terms, means that the consumer would have to a higher indifference curve through income distribution (Wessels, 2006).
In addition, trade liberalization result in increased employment opportunities in the economy thanks to increased production (Masimo, 2001). It is worth noting that it results in winners and losers as resources are moved to increasingly productive areas of the country’s economy. There would be an increased in employment in the exporting industries, while workers would be displaced due to closedown of the import competing industries (Samuelson & Nordhaus, 2005). However, the industries where there are increased employment opportunities would be likely to have the capacity to absorb the unemployment emanating from restructuring. This is the case for Australia where jobs have been created in the service and manufacturing industries capable of absorbing the unemployment from firms that closed down. Imposition of tariffs between 1974 and 1984 in textile and footwear industries resulted in a decrease in employment in the sector by 50000. A similar scenario can be observed in the United States. The U.S economy had a net gain of more than 20 million new jobs from 1993 to 2002. In fact, the creation of NAFTA (North American Free Trade Agreement) has resulted in a net increase of more than 26 million jobs in the labor market (Samuelson & Nordhaus, 2005).
Needless to say, the overall effect of free trade would be increased economic growth. This is especially considering the increasingly competitive industries, as well as increased efficiency, production and productivity, and consumption levels (Wessels, 2006). On the same note, it is worth noting that the increased productivity would mean that a higher amount of goods would be exported to other countries or rather there would be increased trading between countries. The increased trading would also means that the economy makes foreign exchange gains as it would receive hard currency from the country to which it exports its productions (Samuelson & Nordhaus, 2005). This foreign exchange would then come in handy in purchasing items whose production is done more efficiently in the other countries, in which case they would be offered at a considerably lower cost. This is undoubtedly bound to enhance the economic growth in the participating countries.
However, there are also some negative effects of pertaining to Free Trade on the economy. Scholars note that there would be increased instability in the domestic market emanating from the international trade cycles. This is because the participating economies would become dependent on the global markets (Masimo, 2001). In essence, the businesses, consumers, and employees would become more vulnerable to downturn occurring in the economies of their trading partners. This is the case for USA economic recession, which has reduced the demand for the products of its trading partners such as Australia and African countries, resulting in reduced GDP, export incomes, increased unemployment and reduced domestic demand (Lipsey et al, 2007). On the same note, it is worth noting that the international markets do not always offer a level playing field especially considering that countries that have surplus products may sell them at below cost in the world market. This means that some efficient industries may be unable to compete in the long-term under such conditions (Lipsey et al, 2007). On the same note, countries whose economies are dependent on agricultural production are usually faced by unfavorable terms of trade where the incomes of their products is way lower than the import payments that they would make for value added imports, which may increased the level of foreign debts.
In conclusion, recent times have seen an increase in free trade agreements between different countries. While this may have varied effects, Free trade usually has a positive impact on the economy. It allows for increased output thanks to increased production efficiency, consumption efficiency, increased employment and foreign exchange, which would increase the economic growth (Lipsey et al, 2007). However, it may also result in increased economic vulnerability to international market due to dependency, as well as trade deficits especially in the case of agricultural exporting countries as their products fetch less than the items that they would buy from their trade partners.
References
Lipsey, R. G., Chrystal, K. A., & Lipsey-Chrystal, . (2007). Economics. Oxford [u.a.: Oxford Univ. Press.
Massimo, Ca. (2001) “Investment and the Persistence of Price Uncertainty,” Research in economics, Vol. 55,
Mankiw, N. G. (2009). Principles of economics. Mason, OH: South-Western Cengage Learning.
Samuelson, P. A., & Nordhaus, W. D. (2005). Economics. New Delhi: Tata mcGraw-Hill.
Wessels, W. J. (2006). Economics. Hauppauge, N.Y: Barron’s.