Does trade war really hurt interests of market participants ? What are the trade war disadvantages for consumers ? How does free trade system boost economic growth worldwide ? What is mean by economies of scale and comparative advantage ?
Meaning and definition of trade war
“Trade war is a retaliatory actions of imposing heavy tarrifs, sanctions on the goods and services of targeted countries to make such things more costlier”.
Usually, trade war results due to trade disagreements between two or more countries over the issues of import and export excess in the respective countries.
Moreover, export driven and import substitution policies are also hold responsible.
Possible trade war disadvantages for consumers, as well as producers
- The size of global market will shrink rapidly due to less market participants.
- Therby, lesser surplus of market participants will result — consumers and producers surplus.
- The pace of research and development will slow down, leading obsolete energy consuming technology.
- Technology diffusion will hamper due to lack of “Product cycle”
- No quality of technology for users.
- Saving, purchasing power, and consumption of people will decline.
- Impacts on the rate of investment would be higher in the absence of foreign investment.
- Higher degree of resources consumption would begin.
- No increase in the rate of employment due to lesser demand in the contracting market.
- Lower standard of living and rate of poverty may advanvce further.
- Stock market crash and loss of investment.
- International organization like WTO, World Bank, IMF will become ineffective at certain extent.
- “Incidents of insolvency and bankruptcy will rise.
Apart from these economic impacts, the list of political consequences may be much longer.
Pros and cons of free trade system
First of all, I will present here two points of view favouring free trade system and trade restrictions or trade war. Understanding about the free trade system and it’s pros and cons is very vital.
It is because, without knowing the advantages of free trade, how could one gets better insight of opposite view?
Then, I will reach at the conclusion with various possible trade war disadvantages for consumers and producers.
How open market and free trade are favourable for economic growth and development ??
In order to get probable answer of this genuine question, we need to neatly consider the point of views of proponents, respondents, and opponents of “Free trade system”
Argument in favour of free trade system”
According to them open market always unlocks the growth potential of “market participants” and overall market.
“Free trade system” is attributed for greater “consumers and producers surplus” through “comparative advantage,”, and consequently, improved standard of living.
At the same time, they argue that the degree of “market participation” is proportionately related to the rate of “economic growth and development”.
Hence, the resurrection of “trade war” between US and China won’t prove beneficial but detrimental for comparative advantage, as well as surplus of consumers and producers.
SO, the idea of free trade is widely attributed to economic advancement; whereas, trade war yields “economic stagnation and recession”
“For more clarity about the proponents argument, the clear understanding of terms such as ‘comparative advantage and economies of scale is utmost important”
Comparative advantage is an economic term widely used in the decision making of production of goods and services.
Magic of comparative advantage in free trade
Whenever there are differences in factors of production (FOP) of prices of any commodity or service among two or more trading nations, it is used to said that nations with lesser (FOP) have greater advantage compare to peers.
As such, the prices of factors of production aren’t same across the global economy owing to inequality in the pace of development.
Surplus labour force in the developing as well as under developed countries results in lower wages whereas opposite is true in the developed world.
For example:– “The wage rates in the African and some of the Asian are around 4-10$per day. On the other hand, they are more than 40$ in European, North American and some developed nations of Asia as well”.
This is the reason why certain countries hold favourable comparative advantage in some products, and not in others… This is beautiful rationale behind free trade.
“Secret of economies of scale”
‘Economies of scale’ notion reveals the secret behind the cheap affordable prices of a commodity with large-scale or mass production. In simple words, more the production lesser the price.
Then, as per this principle, it is in the interest of competing players to produce goods and services in which they have lesser “opportunity cost” and more “consumers and producers surplus”.
Such mechanism will definitely help to save more money, resources with greater level of satisfaction for “participants of market”.
In case of non- functionality of comparative advantage and economies of scale, everyone would be loser and economic regression may begin thereafter…
Now, by decoding the meaning and essence of both concepts — comparative advantage and economies of scale, anyone could understand the pro argument of proponents of free trade system in this regard..
Counter argument against free trade system”
Naturally, the respondents may or may not be convinced by the arguments of proponents of ‘free trade system’. Let’s see what respondents thinks on the presented ideas to support against free trade system.
No level playing field in the comparative advantage for poor nations
It is too difficult to think for poor or underdeveloped Third World countries to develop “State of-art-technology”, to compete in global market.
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.
For example, Germany, Korean countries, Japan and America invest around 5-8 percentage of the GDP which is much more than other Third World countries.
Besides, Capital surplus is also a distinct reality for beginners as well. Therefore, they cannot afford to produce capital intensive products.
In the point of view of respondents and proponents in respect to comparative advantage in the capital intensive goods, the 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.
Nations might opt for export driven growth strategies
In case of comparative disadvantage, nations might think to switch over import substitution and export promotion growth strategies. If they do so, then, host of challenges will alter the equation of peaceful world.
Monopolistic tendencies may rise
Further, due to economies of scale and comparative advantage, a firm in advantage might become price maker and manage the price of respective product. In this manner, competition may get worsen.
And, the ultimate result may be war of words, tarrifs, sanctions. We easily term it “Trade war”
OK, the list of cons of free trade system can be much longer. But, the negative impacts of trade war would be even more dangerous.
This is the reason why usually nations opt for “mutual economic cooperation” in the process of development.
So, let’s see the noticeable trade war disadvantages for producers, as well as consumers.
Any obstructive trade policies adopted by leading economies not only adversely affect the income and consumption pattern of consumers but also slow down the entire developmental process. And, thereafter, political tensions and trade war makes matter more worse.
The potential impacts of trade war cannot be limited within the geographical as well as political boundaries. After considering its irreparable impacts, no one could dare to imagine to advocate this evil. Everyone knows that proliferating the trade war further means pulling back our developmental endeavour to experience the past agony.