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CASE STUDY 4

PREPARED BY:

GOPI A/L KALAIRASAN

CASE STUDY 4

1) There are some 200 economic integration agreements in effect around the world already, far more than even a few years ago. Virtually every country is now party to one or more free trade agreements. Supporters argue that free trade is good for nations.

a) What is the basis for their support? That is, what are the specific benefits that countries seek by joining an economic bloc?

Free trade is a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports) or quotas. According to the law of comparative advantage, the policy permits trading partners’ mutual gains from trade of goods and services.

The specific benefits of countries joining under the free trade agreements (“FTA”) are likely because of FTA that promotes innovation and competition. This is because it makes the economic sense to buy a product more another who specializes in such production or who can make it more easily or for less cost. Indeed, access to a greater variety of goods and services is the purpose of trade. Imports, then, are not a sacrifice, a necessary evil for the good of exporting. One exports so that one may acquire goods and services in return. This logic is evident on a personal level as well.

Free trade is the only type of truly fair trade because it offers consumers the most choices and the best opportunities to improve their standard of living. It fosters competition, spurring companies to innovate and develop better products and to bring more of their goods and services to market, keeping prices low and quality high in order to retain or increase their market share.

Free trade also promotes innovation, along with goods and services, the flow if trade circulates new idea. Since companies must compete with their overseas counterparts, American firms for example can take note of all the successes as well as the failures that take place in the global marketplace.

Consumers then benefit because companies in a freely competing market must either keep up with the leader in order to retain customers or innovate to create their own niche. Thus, removing counterproductive barriers to competition, such as quotas and tariffs that limit access and competition is both good economic policy and good public policy.

The second benefits are FTA generates economic growth. This can be explained through free trade that rewards risk-taking companies by increasing the sales, profit margins, and market share. Companies can choose to build on those profits by expanding their operations, entering new market sectors, and creating better-paying jobs.

The third benefit of joining FTA is it disseminates democratic values. This is because FTA fosters support for the rule of law. Companies that engage in international trade have reason to abide by the terms of their contracts and international agreed-upon norms and laws. The World Trade Organization (“WTO”), for example, compels its member countries to honor trade agreements and, in any trade dispute, to abide by the decisions of the WTO’s mediating body. By supporting the rule of law, FTA can also reduce the opportunities for corruption. In countries where contracts are not enforced, business relationships fail, foreign investors flee, and capital stays away. It is a downward spiral that especially hinders economic development in countries where official corruption is widespread. Thus, FTA removes the incentives that is related to corruption and spurs the economic growth, increasing the number of better-paying jobs, and ultimately increasing the level of prosperity.

Finally, countries that enact FTA policies create their own economic dynamism thus fostering a wellspring of freedom, opportunity, and prosperity that benefits every citizen. In recent years, the...
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