INTERNATIONAL BUSINESS ASSIGNMENT

International Business Assignment

International Business Assignment

Free trade is a market model in which trade in goods and services between or within countries flows freely without any restriction, such as tariffs, quotas, nontariff barriers, or taxes. Utilizing the argument that the free market is the best “governor” to ensure increase in wealth, free trade demands that government intervention with the “free” market be eliminated and all restrictions be removed. In history, the merit of free trade was extensively discussed by Adam Smith in 1776 in his book The Wealth of Nations, examining the gains of free trade in the context of specialization and division of labor (absolute advantage theory).

The idea of free trade was also later formulated by David Ricardo by using one factor of production with constant productivity of labor in two goods, but with relative productivity between the goods different across countries (comparative advantage theory). David Ricardo claimed that gains from free trade will be great once a policy of free trade is adopted in an institutional setting. For Jagdish Bhagwati, the classical and neoclassical schools of economic theory constantly emphasized the advantages of free trade policies for the improvement of popular living standards and the promotion of overall rates of economic growth, and the disadvantages of protectionism. The rudimentary conclusion of academic and up to date neoacademic economic theory is that the advantages of free worldwide trade represent basically only a exceptional case of the benefits of the free market system in general.

Nevertheless, in the 20th century, “New Trade Theory” manifested itself as the economic critique of international free trade from the perspective of increasing returns to scale and the network effect. Some economists asked whether it might be effective for a nation to shield infant industries until they grow to sufficient size to compete internationally. According to this theory, the optimum-tariff and infant-industry arguments constituted some grounds for protection and protectionist policies by some countries, and more importantly were seen as a departure from free trade within the framework of the traditional theory. However, the general trend in international trade is in line with the reduction of tariffs and other trade restrictions through international negotiations.

Arguments in Favor of Free Trade

According Anne Krueger, one of central themes of economics for the last two centuries has been the proposition that free trade between nations will be beneficial, and any nation that adopts a policy of free trade will benefit highly from free trade opportunities. Nevertheless, the protection to infant industries and pressure for it found enough support to create circumstances that support protectionism in trade. There are mainly two different opposite arguments in international free trade literature. These are arguments in favor of free trade and against of free trade.

Arguments for free trade mostly concentrate on its enhancing power of national welfare. To be able to explain the welfare impacts, these arguments focus on three aspects. These are (1) the efficiency gains from free trade; (2) the additional gains from economies of scale; and (3) the ...