Free trade theories incorporate the policies that most nations use to allow importation and exportation of goods and services into or out of their territories. These policies majorly work among the countries that have formed multilateral trade agreements like the World Trade Union (WTU). They champion for the elimination of trade barriers like taxes on imports. The markets information flows smoothly among members since the policies permit free market access. There are however two assumptions in free trade theory which are unreal as discussed below.
First, the idea of allowing imports into a country without any barrier will result in the death of industries in the nation (Todaro& Smith, 2015). Import duty and other consequent taxes are a requirement for any goods or services from another territory. Untaxed products will always be cheaper hence causing a disturbance in the existing pricing models in a nation. Secondly, the elimination of legislation decreases the freedom of a nation’s economy (Miller, 2012). The new entrants will pose an unfavorable competition in the labor market. The workers’ rights in a country will eventually be undermined as they will be undervalued (Brown, 2011).
Global value chains (GVCs) encompass the coordination of activities such as development, purchasing, and sourcing with an aim to maximize the output of products in the world. GVCs have complemented the conventional free trade theories in numerous ways. For instance, the third world nations are the chief beneficiaries of the value-added trade. The GDPs in developing countries are getting stronger due to the GVC’s impact on the free business (Lema, 2015). Additionally, GVC is playing a crucial role in ensuring that most nations adopt the efficient technology and the right skills that will eventually enhance productivity (Gereffi & Lee, 2012).
In conclusion, free trade theories can propel an economy forward when utilized well. However, the underlying policies incorporate some assumptions like the elimination of taxes and a free entry into markets which are both unreal. The global value chain is essential in promoting free trade since it is responsible for the improvement of the GDPs in the developing nations.
- Brown, D.K. (2011). A North American Free Trade Agreement: Analytical Issues and a Computational Assessment. Retrieved from http://www.worldscientific.com/doi/pdf/10.1142/9789814340373_0040
- Gereffi, G., & Lee, J. (2012). Why the World Suddenly Cares About Global Supply Chains. Journal Of Supply Chain Management, 48(3), 24-32. doi: 10.1111/j.1745-493x.2012.03271.x
- Lema, R. (2015). Reorganising global value chains and building innovation capabilities in Brazil and India. Research Policy [Ebook] (pp. 44(7), 1376-1386). Retrieved from http://www.CfP_Innovation_Systems_September_2015.pdf
- Miller, T. (2012). Index of Economic Freedom:Promoting Economic Opportunity and Prosperity [Ebook]. Retrieved from http://www.ndex2012_Highlightsbooklet-V6.indd pdf.
- Todaro, M., & Smith, S. (2015). Economic development (12th ed.). Harlow: Addison-Wesley, Inc.