Free Trade and Liberalization

Topics: International trade, Economics, Free trade Pages: 6 (2043 words) Published: January 4, 2013
Since the end of the Second World War the Western World has lead the way in the quest for free trade between nations. The International Monetary Fund (IMF),The World Trade Organisation (WTO and The World Bank have been the main international organizations through which the developed world has driven the idea of liberalisation. Most of the economic literature considers that trade liberalization leads to an increase in welfare derived from absolute advantages,comparative advantage, the relative abundance of its factor endowments and economic of scale. in my opinion free trade between nations is, on average, benefical for all of the involved countries and for the companies. However, the gains from trade are not distributed equally in all industries. Undoubtedly, some people and industries suffer.This essay will consider each argument on behalf of economic liberalization and ultimately show how the economic theories of trade,(neoclassic and modern trade theories) which has underpinned WTO and IMF policy for much of the past half century explain why free trade is not zero-sum game.

Trade theories suggest there is a definite statistical link between freer trade and economic growth. Economic theory points through Adam Smith’s classical theory that all trade is mutually beneficial, which is explained through Absolute Advantage. According to Smith, for the world to benefit from absolute advantages,a country should produce goods for which it has absolute advantage and import those goods in which it has absolute disadvantage. However what happens if one country has absolute advantage in both products?.Although this inconsistency in the theory of Adam Smith, David ricardo managed to made the observation that trade can benefit both partners even if one is more efficient in producing both goods.The theory of comparative advantage suggests that countries should specialize not only in those products for which they have absolute advantage but also for those products in which they have comparative advantage. The main idea that supports the previous two theories is that free trade allows consumers of both countries have greater buying options, beside they can consume more than would be possible in a world without trade. Theoretically, at least, everyone benefits.

At this point, I will analyze the maquiladora industry in Mexico, which based on its comparative advantage in the production efficiency mainly through labor costs. Maquiladoras were a strategy for maximizing the comparative advantages. the basis of the above is that Mexico can manufacture more goods at a lower cost than the United States Because Mexico has a larger workforce willing to work for less money. Beside, the mexican companies has had the capacity to develope processes of world-class production, which allow them to produce products more efficent and quality. But the question is How could Mexico and US benefit each other from the comparative advantage of the maquiladora industry in Mexico?.Due to increased industrial production in America, particularly of cars, Mexico's maquiladora industry, achieved to increase their production due to in large part to making car parts; and the same way, they achieved to increase their export to US during the year 2009. Regarding US, they could produced cars more economical because they obtained car parts more cheaper than they could have produced in their country. According to Roberto Coronado, an economist with the Federal Reserve based in El Paso, without that increase in trade between mexico and US , America's GDP growth over the past several quarters would have been much smaller.

On the other hand, the companies and industried can take advantages of free trade model based on the hypothesis of the life cycle theory,new trade theory, and the Diamond of michael porter, which explain that countries gain comparative advantage through the cost-saving gains from specialization and economies of scale. But acoording to adove how...
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