Chapters
Trade agreements and free trade have been part of the school curriculum for a long time. In recent years, they’ve also been a topic of debate in politics in the UK as the country has left the European Union, which features one of the most iconic trade agreements in the world.
In this study guide, we’re exploring the role of free trade and globalisation and how trade works, including free trade agreements.
What Are Free Trade Agreements?
Free trade agreements (FTAs) are formal arrangements between countries designed to reduce or eliminate barriers to trade, such as tariffs, import quotas, and other restrictions. The goal of these agreements is to promote international trade and economic integration by allowing goods and investments to flow more freely between the participating nations.
One of the most prominent examples of a free trade agreement is the European Union (EU). The EU is an economic and political union of 27 European countries that have eliminated most tariffs and trade barriers among themselves, creating a single market where goods, services, capital, and people move freely.
This integration allows businesses within the EU to operate more efficiently and competitively across member states.
Other significant examples include the North American Free Trade Agreement (NAFTA), which was replaced by the United States-Mexico-Canada Agreement (USMCA) in 2020, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which connects 11 countries around the Pacific Rim.
Arguments For and Against Free Trade
✅ Arguments for Free Trade:
Some people argue that free trade promotes economic growth by allowing countries to specialise in producing goods and services where they have a comparative advantage, leading to more efficient resource allocation and higher standards of living.
It can also be good for consumers by providing lower prices and a greater variety of goods and services, resulting from increased competition among producers globally.
Free trade can encourage job creation in industries that benefit from expanded export opportunities and attract foreign direct investment (FDI), which brings in capital, technology, and new skills.
❌ Arguments Against Free Trade:
Critics argue that free trade can lead to job losses in industries that cannot compete with cheaper foreign imports, putting pressure on workers in less competitive sectors.
This can contribute to wage suppression, especially in developed countries facing competition from lower-wage economies.
Additionally, some argue that free trade agreements can undermine national sovereignty, as countries may need to modify their laws or standards to comply with international trade rules.
The Bottom Line on FTAs
Free trade agreements like the EU are significant because they encourage economic cooperation, reduce the likelihood of conflicts, and create larger markets for businesses to operate in. By providing companies with access to a broader customer base, FTAs help boost sales as well as help with innovation, and increasing economic growth.
Globalisation
Globalisation is the process by which the world's economies, societies, and cultures have become increasingly interconnected and interdependent. It involves the global movement of goods, services, people, capital, and ideas, which has led to a more competitive world economy and arguably more similarities between different countries.
Main Features of Globalisation
Globalisation means a substantial increase in international trade and foreign direct investment (FDI), which allows companies to operate and invest across borders. It also involves the widespread exchange of cultural values and ideas which is helped by technological advancements in communication and transportation. It is easier for people and items to travel as well as being easy to outsource different goods and services. Additionally, globalisation promotes the mobility of labour, enabling workers to move between countries in search of better employment opportunities.
Benefits and Drawbacks of Globalisation
For producers, workers, and consumers in developed countries, globalisation offers both benefits and challenges.
On the positive side, businesses gain access to larger markets, enabling them to increase sales and profits. They can also lower production costs by outsourcing to countries where labour and materials are cheaper. Consumers benefit from a wider range of goods and services at lower prices, thanks to increased competition and efficiency.
However, there are drawbacks as well. Job losses can occur in industries that cannot compete with cheaper imports, and wage inequality may rise as certain sectors benefit more from globalisation than others. In some cases, industries in developed countries may decline as production shifts to countries with lower costs, leading to economic disruption and a loss of cultural identity.
In developing countries, globalisation can create opportunities for economic growth by attracting multinational companies that invest. This may create jobs and transfer technology and skills.
In turn, this can lead to higher standards of living and improved infrastructure. However, there are also significant disadvantages, such as exploitation of workers, poor working conditions, and low wages. Events like World Cups have been criticised in recent years for the way they have handled these issues.
Environmental degradation is another concern, as increased production often leads to pollution, deforestation, and other forms of environmental harm. Furthermore, these countries may become economically dependent on foreign markets and companies, making them vulnerable to external economic shocks.
The Growth of Globalisation
Lots of key factors have contributed to the rapid growth of globalisation in recent decades.
Technological advancements, particularly in communication and information technology, have made it easier for businesses to operate on a global scale. The internet and mobile technologies enable instant communication and the efficient transfer of information, while improvements in transportation have reduced the cost and time needed to move goods and people across borders.
Multinational companies have also played a crucial role by setting up operations in multiple countries, driving economic integration and growth.
Think of a company like McDonalds or Starbucks. These companies have extended to many locations around the world. We live in the age of global brands, and online this can be even more apparent. X (formerly Twitter) and Facebook are two more examples.
In the UK, globalisation brings several benefits, such as economic growth through access to global markets, increased foreign investment, and a wider variety of goods and services for consumers at competitive prices. However, there are also drawbacks. Some sectors of the economy, particularly those unable to compete with cheaper imports, may experience job losses and economic decline. As with most economic factors there are pros and cons to globalisation.
Revision Questions
How does globalisation potentially impact jobs?
What is a trade agreement?
What impact can leaving or joining the EU have?
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