Trade is one of the oldest activities of man since time immemorial. For many years, man has never been able to survive and stay as an independent unit. There has been the interaction of people from diverse parts of the world, as a result of diverse wealth and commodity distribution. People have always found themselves exchanging goods and services to others for complementation of what they do not produce locally.
This phenomenon of exchanging goods and services is not limited to people within particular boundaries of a country or state. Since the ancient periods and through the middle age, trade has been taking place in unique ways depending on the levels of civilization, which is coupled with a general improvement in technology and communication. In the early days, domestic and international trades were mostly carried out by utilizing domestic animals like donkeys and camels as means of transport. For just an example, this was common practice in the Arabian nomads who could control the long-distance trade in the Far East. (Alexander, 1991 pp. 45-47)
As people advanced in knowledge and became more interested in exploring and adventurers, trade took different directions and dimensions. The free movement across and between states diminished and restrictions were then imposed on people and goods entering or leaving the country. These were aimed at controlling the country’s economy so as to develop. It was also a means of ensuring the security of people in a country’s boundaries were not at risk. As it is known, during the seventeenth and the eighteenth century, there were enormous disturbances that lead to the blockage of several main trade routes.
Free trade areas have grown to greater numbers in the recent past. As its main agenda of a free trade area is to eliminate tariffs and quotas, hence give preferences on most or all goods between the member countries, it seems that the economic growth of many countries has become complicated. This may be articulated to either increase in production of new products in one country or the ceasing of production in another one.
Free trade areas are important in economic argumentation as the integration of states forms an economic structural complement. This is achieved through the implementation of the same policies which favor member countries but imposing and implementation of different policies to non-members. Although this is one way of creating good relations with other states, it may easily lead to exploitation if not well monitored through goods re-exportation. It is therefore prudent to put into factor the faithfulness of the members. This can be avoided by drafting concise and outstanding rules to guide them. This is very paramount not to put the economy at a stake.
If such exploitation and mistrust emerge, then the relationship of the integrated countries may decline. This will definitely cause hatred, enmity and may lead to war. Further consideration of free trade areas dishonesty yields incorporation which creates misunderstanding even when foreign aids are required. This makes citizens of the country requiring the aid bear severe unnecessary suffering than they would have done before. (Feldman, 1991 pp. 56)
Free trade areas have impacted both positive and negative effects on different countries. This has led to the division of countries according to regions and economic status. Most members of different free trade areas have similar characteristics that may associate either with the region or economic values. Most industrialized countries develop and form their own free trade areas. In the same manner, under-developed countries also merge and form theirs. While considering the place, region, those states in the European continent mostly form their free trade areas; while those in Africa’s continent do so. The same applies to American, Asia, and any other continent.
Furthermore, there is small fragmentation even within these particular continents. For instance, while we have a preferential trade area that covers most countries both from east Africa, central Africa, and South Africa, there is an east Africa community that comprises only the three countries of East Africa. This may create a feeling of some countries being more superior to others. Instead of creating unity, countries become subject to unnecessary political restriction and purge, and more so marginalization is born. (Brooks, 1992 pp. 34)
If now someone may ask, how do these free trade areas have an advantage if they are formed by countries which are in or almost of the same level of development? I think the sole purpose of free trade areas becomes more obscured when a state forming them emerges from one area. This creates the production of similar goods hence they would be able to exchange in order to achieve their goal of supplementation.
Imposing of different rules of non-members states makes different states perhaps be at distance incorporation. It also complicates the process of making transactions between the parties concerned. Their operation in the overall trade participation becomes full of bureaucracy which deters drastic growth of economic as expected. (Gil, 1992 pp. 23-24)
The application of the same tariff by a state to all other states means that a country will import from the most efficient producer who will provide the commodity at the lowest price. The preference of free trade agreement bars the importation from this most efficient state.
This gives preference to one state whose price is likely to be lower than that of the other due to the fact that the goods are tax-free. The barring of the efficient exporter due to free trade agreement makes a country import from higher-cost manufacturers hence causing trade diversion. Diversion of trade hurts non-members states both economically and politically. This creates a strained relationship between the two states which were initially friendly to be no longer friends. This is because there is the disadvantageous working of the decreased output of goods and services.
Free trade areas are mostly faced with difficulties in the collection of taxes. This is because it protects the manufacturers of foreign countries more than the domestic producers. Demos tic manufacturers who do not take the advantage of exporting their goods are more burdened with tax payment while those manufactures from other states take the of tax removal or reduction. This makes the internally produced goods to be high priced than those being imported.
As many people prefer low prices to high, the local goods face stiff competition, and this results in their lack of market. Fair taxation and protection of essential commodities help to protect the poor citizens of a country. The control of tax determination in most states is placed in the hands of the noblemen of that particular state. This position and power very influence the formation of free trade areas. So depending on the perceived advantage or disadvantage that he will retrieve from such trade, the protection from free trade may also be replicated. It is this mistake for joining free trade areas for political influence and one’s own interest that make great harm to people in different producing sectors. (Torries, 1992 pp. 45)
Although there are many demerits that can be borne by practicing or taking part in free trade, there are also more merits that co-exist with these demerits. It may be a fault not to mention the significant barriers that are removed during such involvement in the trade. These include the exclusion of trade tariffs or import quotas as well a speedy transfer of goods from one place to another or otherwise from one country to another. This easy movement ensures there is no delay which may result in a shortage of goods or service supplies. When the formulation of free trade is prudently drawn, hence yield to reduced barriers, it consequently leads to specialization by countries and division of labor.
Unrestricted marketplace with each source of production being at equilibrium tends to specialize in an activity where it has a comparative advantage. This free trade area forming single markets has increased productivity due to increased division of labor. While there is freedom of movement, this facilitates all movement of all factors of production to the associated member countries. This in turn enhances efficiency in the allocation of these factors, which further facilitates increased productivity.
A free trades area acts as means of removing monopolies within a country. They open a single market which gives the chances of competitive environments making monopolistic state of business and market more difficult to exist. Inefficient firms and businesses are prone to suffer great market loss and thereafter with the consequent result of closing down. On the other side, those well-performing companies take hold of the benefit of economies of scale. This increases their competitiveness and lowers the costs of general production and operations. (Koehnke, 1992 pp. 34)
The impact of free trade areas to the consumer is also realized whereby he/ she has to benefit from the cheaper products resulting from the competitive environment. He also enjoys the chance of getting high-quality commodities from efficient producers. At the same time variety of goods are flocked in the market where he can make a choice. Still, competition will lead to innovation to create new products which will be more appealing to the consumer
Reference
Alexander, D. C (1991): The North American Free Trade Area: Potential Framework for an Agreement. Pp 45 – 50.
Brooks, D. (1992): Mexico-U.S.-Canada Relations in the New World Order. Pp. 34-40.
Feldman, L. P (1991): U.S.-Mexico Free Trade Agreement. Pp. 56-70.
Gil, A. V. (1992): NAFTA to Open Most Mexican Markets. Pp. 23-26.
Koehnke, P. E. (1992): North American Free Trade: Mexico, Canada and the United States. Pp. 34-35.
Torres, E. (1992): The Proposed North American Free Trade Agreement and the Implications for U.S.-Mexico Relations. Pp. 45.