Table of Contents
- The Trade War, The U.S. vs China
- The Global Perspective
- Africa Perspective
- The South African perspective
- The Advantages of Free Trade in Developing Countries
The report is to determine whether Free Trade is Passé’. The report is looking at the pros and cons of Free Trade as compared to tariff impose trade between different countries. Recently the new U.S. administration has started to impose tariffs on China imports products like steel and aluminum which resulted in China retaliating by imposing tariffs on U.S. imports. The report is looking at the impact the Trade War that has been waged by the U.S. on China imports has on global markets. Previous researches on Free Trade has been the source of collecting data and recent events on trade war between the U.S. and China has been used to understand the impact of trade war globally. The actions of these two large economy countries have negatively affected trading with other countries globally which resulted in them looking for new trading partners and forging new economic ties.
The classical trade theory is based on constant returns to scale and perfect competition, driven by comparative advantage, and endorses free trade. This classical theory emphasized the idea that trade was brought about by differences in tastes, technology, or factor endowments between countries. However, the new theory of international trade is driven by increasing returns to scale, also known as economies of scale, and leads to imperfect competition.
Nations with similar resource exchanged similar products with each other. The new theory states that economies of scale provide an incentive for a country to specialize in a particular product. Krugman presents two arguments against free trade based on the new trade theory. The first argument that opposes free trade is a strategic trade policy. He argues that, when a nation employs a strategic trade policy, the nation’s government subsidizes its firm’s production of a particular good in an industry that can only support a few firms because of substantial economies of scale. By supporting its firm in international competition, the nation could potentially shift excess returns from foreign to domestic through an export subsidy. The world is more connected and a significant portion of the trade is conducted on a global scale.
Free trade does have benefits to countries that are involved in terms of economic development and an increase in overall production. Free trade benefits far outweigh costs and that the primary gain is the efficiency of production achieved through comparative advantage. This desire to obtain greater profits by decreasing cost and increasing efficiency of production results in innovations that may include time-saving technology or better methods for manufacturing. Therefore, free trade fosters global competition for lower prices, cost-effective production techniques, and a greater emphasis on quality and performance. Free trade promotes economic growth in the nation whilst improving the quality of life for its workers. Furthermore, because the nation is becoming more prosperous, social problems such as unemployment and illegal immigration may be alleviated as well.
The Trade War, The U.S. vs China
A Trade war is a nation imposes tariffs or quotas on imports and foreign countries retaliate with similar forms of trade protectionism. As it escalates, a trade war reduces international trade. A Trade war, in the long – run, costs jobs and depresses economic growth for all countries involved. It also triggers inflation when tariffs increase the prices of imported goods.
The trade war that the U.S is waging with China is reshaping the global economy and it creates uncertainty around the markets. It has also started to spread to other countries like Canada and Europe. The tariffs the US has imposed has caused a raise in consumer prices. The trade war has raised costs for steel users, like car manufactures and they may have to pass those costs onto consumers. The trade war is already increasing the prices of consumer goods, higher costs, profitability is lower. Exporters may have to cut costs and lay off workers to remain competitively priced. Companies within the industry don’t need to innovate, the local product would decline in quality.
The Global Perspective
The trade war will have geopolitical consequences that would affect investment across the world especially in trade – dependent countries. The trade war that the U.S. has waged with China has caused the value of some currencies to drop against the dollar. The trade war has caused other countries to look elsewhere than the US for trading partners, Asia today is far more important to the EU than the U.S. The US trade war has resulted in the EU and Asia to speed up the opening of their markets to forge closer economic ties. China is now the largest market for an expanding list of countries. The US trade war has created a faster and wider economic integration outside of the U.S. Tariffs from countries with closer economic ties will come down and business competition will intensify. Businesses operating in these open markets will become more efficient, innovative and dynamic.
Consumers will enjoy more, better and cheaper products and services provided by competitive and creative businesses. China can produce consumer goods at lower costs than other countries can. China has a lower standard of living, which allows its companies to pay lower wages. American companies can’t compete with China’s low costs, so it loses U.S. manufacturing jobs. The trade war has also limited the transfer of trade secrets between the two countries. The value chain is impacted by this trade war and it makes it difficult to predict the amount of impact the tariffs will have on one element in the value chain.
The problem envisaged faced by Africa is that Pan-African Free Trade Agreement (CFTA) cannot fully change the status quo in the future. Kohnert’s view is that CFTA won’t be able to transform intra-African services with speed. He cites the existing controversial EU-Africa trade agreement, and that some major players in the agreement such as South Africa, Nigeria and Uganda have not joined the CFTA. Kohnert perceives African countries like South Africa, Rwanda, and Egypt as having minimal strength to retaliate on U.S. actions on the trade war, as opposed to EU and China. There are inter-regional talks among African Countries to formulate trade agreements with the aim to solidify their economies and strengthen relations and fast-forward business ties and benefits. Economists suggest that Tripartite Free Trade Agreement (TFTA) would boost chances of implementation of free trade agreements from the trading block that includes Common Markets for Eastern and Southern Africa (COMESA), SADC and East African Community (EAC). It will be a facilitating structure for continental Free Trade Area (FTA) in Africa.
The South African perspective
Economist suggests that the trade war would lead to further hardships in South Africa as the country is already dealing with its own economic problems like technical recession and the country could be among the most who will suffer from this trade war. South Africa is highly dependent on foreign and global trade has shifted from emerging market and this is bad news for countries that depend on foreign inflows.
According to the Department of Trade and Industry, US is a smallest steel and aluminum market for South Africa, this, of course, will hurt South African steel industry more than those countries that have been exempted from U.S. tariffs. The other danger that is facing South Africa is where China could divert their exports of aluminum to countries that would negatively impact our country directly.
South Africa stands to gain on from the U.S., China Trade war in terms of agricultural products if the country could increase its export to the Chinese market rapidly and resolve the issue of quotas in those products.
The analysis that was done by Citi group shows that South Africa’s total exposure to the U.S. markets is relatively small, cushioning it from any major economic fall-out that may occur in the U.S. Economists suggest that South Africa should adopt self- reliance and focus on internal economic development and start working with other African countries.
The Local Perspective
The Coega Special Economic Zone (Coega SEZ), found near the clamoring Nelson Mandela Bay Metropolitan Municipality, is South Africa’s preeminent venture hotspot for businesses with a worldwide viewpoint. Created and overseen by the Coega Development Corporation (CDC), this spearheading multi-billion Rand venture plans to drive neighborhood and remote direct interests in sending out situated enterprises – situating South Africa as the center point for Southern African exchange.
The Coega SEZ, while offering worldwide intensity through the world – class foundation, charge motivations, discounts, and an obligation free zone, is reason worked for assembling including beneficiation of fare products, speculation and nearby financial development – abilities improvement and employment creation.
Adjoining this, the biggest SEZ in the Southern Hemisphere is the Port of Ngqura – a cutting-edge multi-client profound water harbor created by the National Ports Authority of SA as a door to worldwide markets.
The Coega SEZ is inherently an attractive place for investors wanting to establish operations in South Africa. The SEZ offers the following key features:
- Global competitiveness through incentives
- Tax incentives, rebates, and customs controlled areas.
- South Africa is a low-cost and top location for ease of doing business.
- South Africa is among the top ten globally for securing investor protection and sound fiscal governance. South Africa has a stable economy and a market-oriented business culture.
- World-class infrastructure.
The organization means to execute two key undertakings this year. The first being the development initiation of Beijing Automobile ¬International Corporation (BAIC) for a totally thumped down car fabricating plant and the execution of vitality related tasks, for example, the gas-to-control program with 1 000 megawatts of the power office dispensed to the IDZ.
The noteworthy R11 billion Beijing Automotive Company venture was declared a year ago and would to a great extent be supported by BAIC and the Industrial Development Corporation. It will be China’s greatest car interest in Africa in the course of the most recent 40 years.
BIAC Automobile SA will employ 2500 people directly, off whom over 1000 will be locals and 10 000 indirectly during the first phase. Measured by the volume of cars produced, the new facility will put Nelson Mandela Bay in the forefront of vehicle production nationally. The investment is excepted to contribute 8% to the GDP. Coega IDC has additionally pulled in the new best in class FAW truck and traveler auto plant. FAW’s choice to fabricate the plant in South Africa is as critical as it may be, to date, a standout amongst the most essential ventures made by a Chinese element in South Africa. The aggregate speculation of around R600 million has been financed by FAW China.
The entry of FAW in this area includes amazingly, one more blue-chip car organization to the territory. The undertaking will unite 26 nations with a joined populace of 600 million and a general GDP of roughly US $2 trillion (around R200 trillion). The CDC not long ago reported that venture ventures worth over R 1billion are prepared for execution in the Coega IDZ. The three undertaking which incorporates R 650million assembling bond crushing Plant, R71 million prepared blend solid Plant, and R350 million Gas Cylinder Plant.
The Advantages of Free Trade in Developing Countries
The best utilization of free trade is the decrease or evacuation of business obstructions between nations. This permits a more liberated stream of work and products between part nations in an exchange settlement.
- Higher Employment Rates
- Less Child Labor
- Access to New Markets
- Higher Levels of Investment Capital
- Increased Life Expectancy
As created nations can move their tasks into creating nations, new openings for work open up for nearby specialists. Expanded levels of work prompt a higher expectation for everyday life and more buyer buying. This, at last, starts the nation’s economy and may grow the privately claimed business.
Child labor happens in creating nations for some reason however one of the fundamental reasons is absences of innovation. Children are used as a shoddy substitute for assembling hardware. Free trade enables organizations to put resources into hardware and pay higher wages to grown-up laborers through outside venture. With higher family earnings, kids can go to class as opposed to work.
Not exclusively does free trade permit remote possessed organizations to build up themselves in creating nations, it likewise enables local organizations to pitch to outside business sectors. This grows their client base and prompts new items and administrations and the practicality of putting resources into development. This is especially valid for private ventures in creating nations. These organizations never again need to stress over retaining the expenses of taxes and different obstructions to show case the passage and can offer their items free.
Most free trade agreements also reduce restrictions on foreign investment. With new capital entering a developing country, it begins an upward productivity cycle that stimulates the entire economy. An inflow of foreign capital can also stimulate the banking system, leading to more investment and consumer lending.
An increase in employment levels, incomes, and the general standard of living alleviates hunger and lack of medical care in developing countries. Preventative medical care including checkups and vaccinations are available to more of the population. It also increases the number of children who are educated and attend school regularly. The ultimate result is an increase in the average lifespan and a reduction in infant deaths.
Countries involved in free trade policy should establish simple rules that keep mutually harmful actions to a minimum. Free trade is simple enough to be a focal point for international agreements to prevent a trade war. Free trade can serve as a focal point on which countries can agree to avoid trade wars. It can also serve as a simple principle with which to resist pressures of special-interest politics. To abandon the free trade principle in pursuit of the gains from sophisticated intervention could, therefore open the door to adverse political consequences that would outweigh the potential gains. Therefore, Free Trade is not passé, but it is not what it once was.