Any obstructive measures launched by powerful economies to inhibit the free flow of goods and services may have potential to adversely affect the entire developmental process in the entire world. Recent, spark of “Trade War” among leading economies isn’t good omen for global economy and stakeholders. So, it is bound to impact the livelihood of common people when the coronavirus pandemic has already exposed the fragility of human lives. Let’s see “Trade war disadvantages for consumers, as well as producers” across the world.
It is well said that open market always unlocks the growth potential of market participants with consumers and producers surplus. We know that the degree of market participation is proportionately related to the rate of economic growth and so the standards of living.
Hence, the resurrection of trade war is nothing less than a threat for idea of comparative advantage and common good.
The magic of comparative advantage
Difference In factors of production prices
The prices of factors of production aren’t same across global economy. Surplus labour force in the developing as well as under developed countries results in lower wages whereas opposite is true in the developed world. The wage rate in the African and some of the Asian is around 4-10$per day. On the other hand, it is more than 40$ in European, North American and some developed nations of Asia.
Question over the heavy investment in research and development
Logically, poor countries are unable to pump lot of money in the research and development. So, they cannot invent state-of-art technology but the industrialized can because of theirs capital surplus. Germany, Korean countries, Japan and America invest around 5-8 percentage of the GDP which is much more than other Third World countries. It is equally true about the capital investment. Capital surplus is distinct reality for beginners therefore they cannot afford to produce capital intensive products.
Here one thing is clear that developing or third world countries cannot afford to produce capital and technology intensive goods because even though they produce they cannot compete with the advanced.In this situation, opportunity cost becomes important. In terms of capital and technology intensive goods, emerging nations have to consider higher opportunity cost. For the advanced nations, producing labour intensive goods is not viable option due to higher opportunity cost.
Secret of economies of scale
Economies of scale reveals the secret of cheap affordable prices with mass production. In simple words, more the production lesser the price. Then, as per the principle, it is in the interest of both to produce goods and services in which they have lesser opportunity cost and more surplus. when they do so, then both will be in surplus.
Such mechanism helps to save more money for consumers with greater satisfaction and affordable prices due to economies of scale. At the same thing, mass production generates greater surplus for producers.
In a nutshell, the magic of comparative advantage in the open market enriches the treasure of both producers and consumers. It is really, win win situation for both.
Both consumers and producers would be victims then
Tariffs on imports and exports reduce the savings and profits of consumers and producers. Suppose USA has imposed tarrifs on the Chinese iron and steel, then what happens, the price of steel rises in the USA because of higher the opportunity cost. The producer will not reduce price. The wage rate, raw materials and other factors of production aren’t cheap than China.Hence, the consumers of USA have to pay extra means more erosion of saving.
In case of producers, it looks good in short term but in long term, the consumer consume less so the production declines. Lesser production can’t be a good sign for employment opportunities. In the exporting countries, price crash become common with surplus or no employment. That is why economists are against the trade wars.
Higher unemployment lower standards of living.
Dynamic market determines the rate of employment and standards of living. Labour is one of the most important factors of production. As per the law of demand and supply more the demand higher the rate and vice versa. With the lesser production, both will decline employment as well as wage rate. We cannot forget the 1930s Great Depression nor the 2008s recession when the rate of unemployment was sky rocketed.Even now according to the reports of IMF and World Bank, global economy is drastically slowing down.
Stock market crash
Share markets always take bear root in the backdrop of trade wars. For this, there are two major reason.One,people prefer to invest in the safer heaven fearing no growth and lesser return. Second,lower rate of employment generates fewer surplus so people try to keep it for themselves.In this year, the decline in the major share markets prove this logic. Dow Jones, Nikkie, NSE, and Chinese share markets are sailing through choppy waters.
Questions over WTO relevancy and role of international organizations
The context of WTO was to facilitate free trade. After the second World War, the constructive work had began with the origine of GATT to improve trade relations among nations with cooperation and harmony. The real context was to ensure level playing field for everyone.In 1995, with the establishment of WTO, the idea of free trade got adequate momentum.
Unfortunately, ongoing trade war isn’t good sign for further negotiations to smoothen idea of free trade.
The potential impacts of trade war cannot be limited within the geographical as well as political boundaries. It not only affects the monetary aspect of consumers and producers but it hardly spares any sector untouched. Considering its irreparable impacts, no one dare to imagine to advocate this evil. We know that proliferating the trade war further means pulling back our developmental endeavour to experience the past agony.