The Benefits and Costs of Free Trade, and its Validity after the Covid-19 Pandemic Era | Sample Coursework

Abstract

The essay aims at examining the benefits and costs of free trade. Free trade agreements help in huge economic activity and job creation in countries. It helps in delivering opportunities for big and small Australian businesses to benefit from free trade. These agreements reduce and remove any tariffs to cope with behind-the-border restrictions that can affect the flow of products and services. This helps in encouraging investment, enhancing the rules of free trade. The arrival of Covid-19 has influenced free trade tremendously (Agarwal & Chonz, 2020). The business activities across the world have been disrupted. Although the restrictions have been taken away, the spread of the virus is still not controlled in many countries. The impact of Covid-19 on global free trade is negative as of now but years later, the impact of the pandemic on trade may improve. This is since governments, workers and people have started to learn to cope with this phase and bring their lives back on track. However, the feasibility of free trade in the future remains a question which needs more research.

Introduction

The concept of free trade is extremely popular among organisations. Free trade is a trade where nations conduct various economic activities without many restrictions like import and export tariffs, putting barriers to market entry and developing various policies. Free trade agreements provide businesses and clients with diverse products and services, technologies, and innovation (Lake, 2018). It enables the Australians to get high benefits from foreign investment. This helps in promoting regional economic integration and enhancing trade and investment opportunities for high economic growth. These agreements help in buildings effective links between people to people and business to business.

There are nations that have benefited from free trade particularly in developing countries. Certain benefits include improving infrastructure, huge markets, free movement of labour and money, political relations etc. The advantages have played a key role in various economic developments of developing nations. There has been criticism for free trade as well as certain scholars believe that the advent of free trade has led to a burden on developing countries (Bhagwati, 2021). There have been issues like industrialised environmental pollution, unemployment of local labour, low business for local companies due to which the country’s economic growth gets affected. But free trade influences the developing countries in a positive way as well. However, the crisis of Covid-19 has developed so many issues for the appropriate conduct of free trade. There is a huge disruption to the economy and world trade as the activities like production and consumption have been hit tremendously.

The purpose of this essay is to examine the benefits and costs of free trade, and its validity after the covid-19 pandemic era. The essay first examines the benefits and costs of free trade and then analyses the impact of Covid-19 on free trade.

Literature Review

Free trade is about removing any tariffs, quotas, and other restrictions from global trade so that products that are produced at the best locations can be shipped wherever the demand is high (Bhagwati, 2021). Consumers get diverse options for products/services at reasonable prices with free trade which result in enhancing the living standards. The economic growth and development improve since resources are used effectively to be used for manufacturing the best products. Free trade enables the organisations to become efficient as the level of competition is extremely high. The multinationals can run on a large scale so that they can save considerable cost. There are various examples to back this claim. Reports have suggested that trade stimulates economic development. Companies like China, Germany, India are leading examples of engines of economic growth. Free trade experiences a lot of opposition as well. Economists believe that free trade might be good for certain organisations but not everyone (Lake, 2018). This is since eliminating any tariffs could result in local businessmen going bankrupt due to international competition. The local workers lose their jobs due to internationalisation. Therefore, economists sometimes get sceptical about the advantages of free trade.

Benefits and costs of free trade

Free trade implies that the nations can import and export products without any need for tariff barriers and other non-tariff barriers for conducting trade activities. Economists believe that free trade helps in lowering the prices for consumers, better exports, advantageous economies of scale and high choice of goods. It is vital to discuss various benefits of free trade. As per Bhusal, (2020), the theory of comparative advantage is the first benefit of free trade. There can be an increase in economic welfare for all nations by specialising in goods where nations have low opportunity cost. Free trade lets countries specialise in the products that have a comparative advantage. Another benefit of free trade is trade creation due to low tariff barriers. Trade opportunities are developed when the consumption of product/services are from low-cost producers. There are increased exports which leads to better economic welfare for the countries that export their products overseas. When countries specialise in specific products it helps them get economies of scale. For the industries with high fixed costs, the prices of products/services become low for consumers and there is high efficiency for exporting organisations (Javorcik, 2020). There will be more incentives to reduce cost and increase efficiency preventing any monopolies. They cannot charge too high prices. International trade has become one of the key contributors for economic growth, which is a key benefit of free trade. The countries that have raw materials in excess can benefit from it tremendously. For instance, in Middle Eastern countries like Qatar, free trade helps in ensuring that the country gets huge benefits from its abundant oil reserves. On the other hand, Japan has less raw materials so without international trade, the GDP of the country would be low. Henec, international trade is extremely important (Liu et al, 2020). Tariffs also help in encouraging inefficiency. When an economy protects its domestic industry by increasing the cost of tariffs, it can be tough for the industries to have any incentives to reduce cost. So, international trade is extremely beneficial for the world to be connected and for the countries to improve their economic welfare.

Cost of Free Trade

With free trade, organisations get plenty of options to sustain their operations. This results in plenty of benefits for free trade agreements for developing countries. Trade costs include policy restrictions, transportation costs, communication costs, exchange cost, local distribution cost etc. Global trace costs have been estimated to be 74 percent while the local distributional cost has been 55 percent. As far as tariffs are concerned, the contribution of tariffs to total trade costs has reduced. This is due to the development of the General Agreement on Tariffs and Trade (Ruiz Estrada & Khan, 2020). With the establishment of GATT, the import tariff fell from 14 percent to 3.9 percent. This is true for developing as well-developed countries. Tariff reductions among developed countries led to the development of the EU and North American Free Trade Agreement.

Another type of cost of free trade is transportation cost. This trade cost is higher than tariffs. The expenditure on shipping for total imports was three times higher than overall tariff duties. A research conducted by van Staden, (2020) has indicated that most of the trading partners in the US have higher transportation cost for exports than tariff cost. This cost penalises goods developed at many stages in different nations since producers must pay for the products at every stage of the supply chain. However, reduction in transportation cost can be extremely advantageous for free trade. Transportation cost also varies depending on the mode of transportation taken such as road, water, or air.

Third type of cost of free trade is communication cost. People need to communicate so that trade can take place. Traders need information about various opportunities that can be profitable to them and as per needs of the consumers. Then the producers need to get appropriate suppliers (van Staden, 2020). The suppliers need a low-cost channel for searching, collecting, and communicating information. Inefficient communication mediums are restrictions for the production process since the transport modes and delivery time is dependent on information flow. The cost of communication varies based on the medium of communication chosen. The reduction in the communication cost is a plus point for free trade.

So, the costs of free trade are mentioned above but not limited to these as there can be several costs associated with free trade.

As per a research conducted by Agarwal & Chonzi (2020), there is a downward trend in trade costs such as transportation cost, communication cost etc. for instance, in case of transportation through water, there is a reduction in shipping times. The transportation costs to far-off destinations have reduced tremendously. In the post-pandemic era, different costs associated with the free trade are expected to increase as the world has already suffered from huge financial crisis in 2020 and this is still going. It is not certain that when this virus will completely go, and countries will be able to resume their trade activities entirely. However, the cost associated with free trade will increase which is one of the barriers for free trade. High cost will result in huge problem for the conduct of free trade. Hence, governments need to come up with strategies to reduce the cost even in post-pandemic era but there is a need to put huge efforts to this.

Analysis and Discussion

Free trade has helped the countries stay connected and companies’ flourish. However, this situation has changed a lot after Covid-19. The onset of pandemic has led to widespread disruption of the trade activities. The global trade has just stopped leading to huge financial crisis across the world. The pandemic is considered a health crisis primarily. However, this has affected many aspects of the international order. International trade is hit hard by the pandemic. As a result of this, global merchandise trade has recorded the largest decline in the second quarter of 2020 (Agarwal & Chonzi, 2020). The international trade fell by 14.3%. However, when lockdowns were lifted, there have been many efforts to rebound it but still the recovery of the international trade entirely is likely to take several years. The changes to the global trading landscape have led to huge consequences for physical and mental health such as the supply of drugs and medical tools, nutritious food, and massive decline in government income.

Covid-19 has been considered a humanitarian crisis on an international level. It has spread across the world and put health systems under huge stress to save the lives of the people. The virus has worsened the situation in low-income countries that have weak healthcare systems. Reports have suggested that the global growth has halved and the collapse of free international trade (Liu et al. 2020). To support international trade, there is a need to get support packages through central banks and fiscal actions and the long-lasting impact of managing the debt. The impact of Covid-19 in developing countries has been such that most of them have set to enter recession. A key challenge for international trade is the uncertainty about Covid-19 in terms of scale and spread of infection. As the virus is proceeding in waves and most of the nations have succumbed so there is a need to introduce certain measures.

As per the data recorded by WTO, it is predicted that the global free trade could fall between 13 and 32% this year followed by the impact of Covid-19 (Ruiz Estrada & Khan, 2020). The adverse effects of coronavirus on globalisation can go for several years. The recovery of free trade depends on how quickly the virus is managed and trade can return to its original position. For this, there are vigorous strategies needed like countries working together so that there can be faster recovery than if each country takes efforts alone.

However, studies have been conducted to find out the impacts of Covid-19 on several dimensions.

• The negative trade impacts of the pandemic can be mitigated by the work-from-home working model as there is a huge share of value being developed remotely. This model has helped to be productive even when they were unable to visit their offices.
• There is a weak effect for goods with a high contract intensity. Long-term relationships are crucial.
• The negative impacts are high for durable consumption goods. But the impact is weak for capital goods (van Staden, 2020).
• Lockdowns across the countries have restricted free trade and business activities are now confined to national boundaries even if lockdowns have been taken up.

It can be indicated that a pandemic is expected to have a negative impact on free trade. Although the restrictions have eased up, it will take several years for the countries to get back to pre-pandemic time. For this, rigorous steps are needed from the governments so that they can ease down the restrictions and get back to global free trade to improve their disrupted economy and safeguard the welfare of the people.

Conclusion and Recommendations

It can be concluded that free trade is valid but there is a need to address the issues developed due to Covid-19 through timely and proper information. The research conducted to explore the impact of pandemic on free trade is extremely less and there is a need to conduct more research to it so that strategies to mitigate the impact of Covid-19 can be developed. There is a need to make people aware about free trade so that they can make sound decisions. It can be indicated that the conducting free trade post Covid-19 is still uncertain as the spread of virus has not stopped yet and there are countries that have been working hard to cope with this. The virus is still in progress and its trade impacts in the coming year may differ from its current impact. This is since workers, organisations and governments have been able to learn from it and adapt to it well. The start of vaccination drives has enabled societies to return to their original modes due to which this can even influence free trade. The impact of these changes on the future trade is still unexplored and there is a need for the economists to dig deep to understand this.

The pandemic has hit countries differently. However, accessing global demand through open markets and consistent trade is critical for supporting and sustaining economic recovery. There is a need to consider ways to keep the trade flowing properly in the existing crisis and ensure that the rate of recovery is fast. The decisions taken by the countries today will determine the situation of free trade tomorrow. There is a need for the governments to take actions at different levels and collaborate with other countries to recover faster to develop a sustainable global economy. The economists must conduct a thorough research on this as the crisis of covid-19 is still going on. There is constant research needed to develop new ways to cope with this.

References

Agarwal, P., & Chonzi, M. (2020). Impact of COVID-19 on international trade: Lessons for African LDCs. Available at SSRN 3693901.

Bhagwati, J. N. (2021). Free trade today. Princeton University Press.

Bhusal, M. K. (2020). The world after COVID-19: An opportunity for a new beginning. International journal of scientific and research publications.

Javorcik, B. (2020). Global supply chains will not be the same in the post-COVID-19 world. COVID-19 and trade policy: Why turning inward won’t work, 111.

Liu, H., Manzoor, A., Wang, C., Zhang, L., & Manzoor, Z. (2020). The COVID-19 outbreak and affected countries’ stock markets response. International Journal of Environmental Research and Public Health, 17(8), 2800.

Lake, D. A. (2018). Power, Protection, and Free Trade. Cornell University Press.

Ruiz Estrada, M. A., & Khan, A. (2020). Globalization and pandemics: the case of COVID-19. Available at SSRN 3560681.

van Staden, C. (2020). COVID-19 and the crisis of national development. Nature human behaviour, 4(5), 443-444.