Chapter I: Free trade in the light of regional integration
1.1 World economy globalization and regional integration.
No one could deny that the term “globalization” has rapidly become one of the most fashionable buzzwords of contemporary political and academic debates. In fact, globalization focuses on several important issues among which are: the pursuit of free market policies in the world economy (“economic liberalization”), the increasing dominance of western political, cultural and economic forms, the proliferation of new information technologies as well as global integration, which is to be understood as the formation of one single unified community. However, what is put on the pedestal right now as far as this phenomena goes, is undoubtedly the world economy globalization.
Firstly, the definition of above term is strictly connected with the process of creation one common single market for goods, services and factors of production covering all countries as well as geographical regions. It is of a vast importance to emphasize the fact that all national and international markets should join and work as one. In this case, globalization means a wide and unrestricted access to those markets for all interested economic subjects, regardless of countries from which they come from. Globalization leads to one working liberal mechanism of the world economy. What is more, all economic organizations and institutions controlling national and international markets’ functioning becomes dependent on each other. However, it is more than a takeover of weaker by stronger ones, but more prominently, it is about getting the essential knowledge how to prosper better.
From one hand regional integration and globalization are competitive occurrence but on the other, it is believed that they are complementary. It is due to the fact that they exist simultaneously. Nevertheless, regional integration is one step forward to the global extent, some kind of a transition from conducting economy policy on a national level, then regional and finally internationally meaning globally.
To be more precise, regional integration is a process in which states sign a regional agreement in order to enhance and improve regional cooperation. It is done by a set of regional institutions and rules that bound all member countries. The aims of the agreement range from economic to political. They frequently concentrate on removing barriers to free trade in the region, increasing the free movement of people, labour, goods, and capital across national borders. Additionally, they are about reducing the possibility of regional armed conflicts and adopting cohesive regional stances on policy issues, such as the environment, climate change and migration. In a nutshell, regional integration is the joining of individual states within a region into a larger entirety. The degree of integration depends upon the willingness and commitment of independent states to share their sovereignty.
In the light of what has been stated above, both globalization and regional integration make their progress on the basis of economy liberalization. As for integration, it concerns only the flow of goods, services and factors of production within a particular group of countries making the region. Still, the relations with other non-member countries are considerably limited. On the contrary, liberalization in the view of globalization, deals with the movement of previously mentioned things inside the entire world. Therefore, it eliminates any constraints towards any country or region. As a consequence, integration and globalization create equal chances for countries and economic subjects taking part in this process. Integration offers those changes to member countries of regional groupings while globalization to all subjects willing to open worldwide.
In practice, those chances are differentiated. Taking integration into account, they are the same only if partners represent similar possibilities of competitiveness, namely an identical or comparable level of economic development especially technological and industrial one. That is why, integration is believed to unite areas in terms of development level of economic potentials with similar economic and institutional infrastructure at most. In contrast, globalization generates conditions for the free flow of goods, services and factors of production in the world as one, making this way better and wider chances for being more competitive towards other subjects, if thinking or those stronger ones. It is addressed to countries plus national and international companies and economic subjects as well[1].
Summing up, in opposition to what has been stated, regional integration is treated as a form of defense by small and weaker countries against dangers caused by globalization through binding their potentials. This is because, they would not have any power separately and individually. Thanks joining their forces they are able to face the competition. This, in turn, may be seen as taking a crucial step towards globalization.
1.2 Features of free trade
According to the simplest definition:
“free trade is a system of trade policy that allows traders to trade across national boundaries without any interference from the respective governments”[2].
In the light of this statement, free trade policy establishes such conditions, in where any barriers or difficulties relating to the access of foreign goods and enterprises to the domestic market, which would restrict in any way the free trade development, are barely impossible to occur. What is more, it is believed that under the conditions of full competition in all markets it is possible use factors of production optimally and thanks to this, achieve the maximum benefits from foreign trade.
First and foremost, it is noteworthy to focus on the features of free trade, which undeniably make a far reaching impact on the entire economy concerning trade.
“Free trade implies the following features:
Ø Trade of goods without taxes (including tariffs) or other trade barriers (e.g., quotas on imports or subsidies for producers)
Ø Trade in services without taxes or other trade barriers
Ø The absence of "trade-distorting" policies (such as taxes, subsidies, regulations, or laws) that give some firms, households, or factors of production an advantage over others
Ø Free access to markets
Ø Free access to market information
Ø Inability of firms to distort markets through government-imposed monopoly or oligopoly power
Ø The free movement of labor between and within countries
Ø The free movement of capital between and within countries”[3].
Going beyond this, free trade is a system in which goods, capital, and labor can move freely between nations, without barriers which could stop or restrict the trade process. To make this flow possible, many countries sign free trade agreements, and several international organizations promote free trade between their members.
Primarily, it is widely known that within a free trade policy, prices indicate true supply and demand, and they are the only determinant of resource allocation. In other words, free trade is mainly different from other forms of trade policy as they are characterized by that fact that the allocation of goods and services among trading nations is determined by artificial prices, which may or may not reflect the true nature of supply and demand. Besides, they are the consequence of protectionist trade policies, whereby governments interfere in the market through supply restrictions as well as price adjustments. Such government interventions can enlarge or reduce the cost of goods and services to both consumers and producers. To make it more clear, those interventions consist of subsidies, taxes and tariffs, non-tariff barriers, such as regulatory legislation and quotas, and even inter-government managed trade agreements like the North American Free Trade Agreement (NAFTA) and any governmental market intervention resulting in artificial prices.
All in all, as a matter of fact, the majority of countries in the world have become members of the World Trade Organization (WTO), which limits to a certain extent but does not eliminate tariffs and other trade barriers. In addition, some countries are also members of regional free trade areas for example Mercosur countries which benefit from the free trade area intending to low trade barriers among each other.
1.3 Benefits and drawbacks of free trade
Trade has always played an incomparable and undeniably exceptional role in the development and growth of any country’s economy. The act of opening up economies known as free trade has given rise to a great deal of controversy. No question about the fact that globalization has made the world a much smaller place, hence, any doubts expressing fears from both rich and poor countries are so unavoidable. No wonder that the same situation is so common taking into a close look the advantages and disadvantages of free trade. As the first thought coming naturally is always who is going to benefit the most, the idea behind free trade obviously has gained its opponents as well as supporters.
To start with, a number of barriers to trade are reduced in a free trade agreement. All taxes, tariffs, import quotas, subsidies, tax breaks, and other forms of support to domestic producers are removed. This means that free trade allows foreign companies to trade just as easily, effectively, and efficiently as domestic producers. For this particular reason, home producers cannot rely on government subsidies and other forms of support any longer. Furthermore, quotas, which basically force citizens to buy from domestic producers, are also eliminated. This in turn, lets foreign companies make inroads on new markets since barriers to trade are lifted.
On the other hand, free trade is responsible for promoting international cooperation by encouraging countries to exchange freely goods, services and factors of production. It is fundamental to take into account the point that agreements made between trading partners increase some educational advantages namely, sending engineers to train with people in the top of the engineering field in one nation, or sending agriculture experts to rural areas to teach people about new farming techniques and food safety practices.
Another key benefit may be the need of innovation that is sparked by various companies. Indisputably, free trade encourages the appearance of innovative products and solutions to capture market shares.
As for drawback, opponents of free trade often dispute that domestic producers suffer by growing competition for the reason that foreign companies function in countries with less harsh labor laws. For instance, in the European Union, there is a specific set of laws regarding working hours, conditions, and fair rates of pay, which boost the cost of production for companies operating in the European Union. By contrast, labor laws in many developing nations are much more loose, letting companies to produce products at low cost, because in reality, they have low overhead costs.
In contrast, due to many scandals, free trade is also a source of concerns about product safety among many consumer advocates. Surely, free trade encourages a big number of companies to relocate and rearrange, as when barriers to foreign trade are abolished, domestic companies may feel free to move their operations and processes overseas or wherever to take advantage of cheaper labour, inexpensive supplies, or more prominently, lax regulatory systems.
However, what seems to be the most worrying and troublesome is the diversification of countries wealth. Whereas free trade strives to achieve the same and equal chances for nations to prosper better, the obstacle that appears throughout the way relating to inequality of trade turns out to be the most difficult to fight with. As opponents argue, it may become not just a tool but the most undesirable weapon. To make it more comprehensible, countries impose on diverse restrictions such as tariffs on goods from other non-member countries, imported goods become more expensive and less competitive than goods from their own country.
One more thing may also be subsidizing domestic businesses. This is based on some sum of money or other forms given by governments to support local or domestic businesses. It is done to ensure that they are cheaper and low-priced over imported products and services. Above and beyond, this can allow ineffective and unproductive businesses to do well, as they receive all kinds of government support. And while these businesses keep on to growing, smaller or local producers, especially in many poorer countries – the ones that need support the most - are being destroyed [4].
All things considered, there are a number of arguments both for and against free trade practice, from a range of economists, politicians, industries, and social scientists. The scale and pace of this kind of trade increases permanently and has become a very powerful tool. Not only is the international trade considered a prime drive and indicator of how well countries develop, but it also affects very much how well the economies of different countries are doing. It is true that many well-off countries use these tactics to support their own domestic economies, making it impossible for smaller or less developed countries to gain a foothold in the global marketplace. Still, free trade means opening up markets by bringing down trade barriers such as tariffs. Doing this allows goods and services from everywhere to compete with domestic products and services.
1.4 Free trade area (FTA) as a form of regional integration
Regional integration led to the emergence of many forms of institutional integration, including: a free trade area (FTA), a customs union, a common market, a monetary union, an economic union and a political one. Nonetheless, a free trade area is the simplest institutional solution.
“It is a type of trade bloc of a designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all) goods and services traded between them. It can be considered the second stage of economic integration”[5].
It is widely believed that countries choose this kind of economic integration form if their economical structures are complementary. If they are competitive, they are more probable to choose customs union.
To begin with, broadly speaking, a free trade area means an elimination of duties and quantitive restrictions in the trade within a particular group of countries. They in turn, keep their own independent external tariff and conduct their own autonomous policy towards non-member countries. Going beyond this, unlike a customs union, members of a free trade area do not have a common external tariff, meaning different quotas and customs. Still, to avoid evasion (through re-exportation) countries use the system of certification of origin, frequently called rules of origin, where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods. Only goods that meet these minimum requirements are permitted for the special treatment envisioned by the free trade area provisions.
It is also of an immense importance to highlight the cumulation which is the relationship between different FTAs relating to the rules of origin. Looking closer, sometimes different FTAs supplement each other, in other cases no cross-cumulation exists between FTAs. As regard this, a free trade area is a consequence of a free trade agreement (a form of trade pact) between two or more countries. As a matter of fact, if some countries enter into an agreement to become a part of a free trade area and choose to negotiate together (this can be done either as a trade bloc or as a forum of individual members of their FTA) another free trade agreement with some external country (or countries), then the new FTA will consist of the old FTA plus a new country (or countries)[6].
To be more exact, inside an industrialized and well-developed country the exchange of goods and services hardly ever meets any problems because of very few barriers if any at all. For instance, there are usually no trade tariffs or import quotas, as a result, there are usually no delays as goods pass from one part of the country to another. On top of this, there are normally no dissimilarities of taxation and regulation. Of course, the situation is slightly different among countries as many barriers occur as far as goods exchange is concerned. Each and every single country imposes various sales tax and regulation, hence the flow is not as uninterrupted as it could be.
To conclude, the purpose of a free trade area is to reduce barriers to exchange freely so that trade can grow as an effect of specialisation, division of labour and most prominently, through the comparative advantage. Still, countries belonging to an FTA abolish tariffs and other barriers to trade, but ...
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