Free_Trade_China

The article focuses on how the vision of free trade between countries has been affected by global recession. International trade is that part of economics which deals with transactions between countries in terms of goods and services, financial flows and factor movements. Free trade refers to a treaty where there is no restriction on the movement of goods and services between countries (does not mean complete removal of all duties on commodities). The World Trade Organization has, for long, been pushing the case of free trade but in the current economic situation of global recession, it seems highly impractical. During a global recession or economic crunch, it is already difficult for economies to survive; on top of that, free trade between countries would allow certain countries to export (possibly dump) their products into other countries. These exports may have better quality or prices that are lower than domestic equilibrium prices and thus give birth to intense foreign competition. Foreign competition refers to external forces created by foreign companies which sell their goods in a country. The goods sold by foreigners compete with locally produced goods. An effect of foreign competition could be seen in the graph (overleaf). Since imports have a lower price than domestically produced goods, price level drops and more consumers can now afford the commodity. The problem, however, is that not a lot of domestic suppliers are willing to supply at this price level and thus domestic industries output decreases from Qe to Q1 and foreign imports increase to Q1-Q2. This reduces the demand for locally assembled goods or services and would not only cause unemployment for the locals but also increase the dependency of one country on another. The headline of the article says: “US-China trade friction rising”. This “friction” depicts a scenario where both countries try to tackle foreign competition and take advantage of the other. In order to tackle foreign competition, countries exercise protectionism policies. Protectionism refers to use of policies that safeguard home industries from foreign competition. The main aim of protectionism is to build up local industries by either giving bounties to the locals or by imposing high custom duties on foreign products. After Pascal Lamy took over as the director-general of WTO, there has been a “crippling global slowdown” in economic growth, as mentioned in the article. In such cases, countries are bound to use protectionist policies in order to save local industries. Lamy, however, says that his institution has analyzed countries and has been successful in “preventing a slide into global protectionism”. They have been doing so (as mentioned in the last paragraph) by holding discussions with governments with the “aim to …. slash subsidies and cut tariffs” to reduce trade barriers. Subsidies or government aids are another trade barrier. Subsidies (might well be in the form of outright cash) are given to local industries to make them more competitive with imported goods. This reduces the cost of production and prices of locally produced goods so that demand for local goods will increase. The following graph indicates effects of government subsidies. As evident from the graph, subsidies shift initial domestic supply curve (Sd1) rightwards to Sd2. This results in the increase of domestic producer’s revenue from A to AEFB and foreign revenue decreases from BCD to CD. Tariff is a tax levied on goods when they cross national boundaries that is, imposed on imports or exports (usually on imports). Like any excise tax, it shifts supply curve of the foreign good upward and tends to raise world price of the good (in the country that imposes tariff) and reduces demand for imported goods; hence leading to a rise in demand for local goods. The following graph indicates the effect of tariffs. As evident from the graph, a tariff increases the price of an import from SW1 to SW2, resulting in foreign producer revenue decreasing from BCDE to CD. The domestic producer’s revenue increases from A to AFGB, whereas the shaded area (HI) represents the government’s revenue by imposing tariff. The implementation of such protectionist policies is highly against the ideology of free trade between countries. World leaders have been pushing for free trade globally but the success and justification of free trade can be debated upon, however, the fact remains that local unemployment poses the biggest threat to the idea of free global trade. This is echoed by Pascal Lamy who says: “unemployment figures …. test the free trade credentials of world leaders”.