Environment, Trade, and Investment

Running head: ECONOMICS OF TRADE AND ENVIRONMENT
ECONOMICS OF TRADE AND ENVIRONMENT
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ECONOMICS OF TRADE AND ENVIRONMENT1
Discuss the arguments for and against free trade in the light of evidence that trade
liberalisation may have peaked and may now be rolled back
Liberalisation has turned out to be a successful outcome for a number country.
Liberalisation refers to the removal of trade barriers and allows a country to trade freely with
other countries of the world. Free trade helps in raising world welfare by liberalising or
removing the use of tariff, quotas, sanctions, embargoes and several other trade restrictions.
Tariff and quotas are used to limit the import of goods and services in a country. Thus,
removing such restrictions can foster the free movement of goods and services in
international trade operations (Shah and Khan 2016). On the other hand, sanctions and
embargoes are much more restrictive and can destroy free trade and the qualities offered by
liberalisation. Free trade has come into the limelight with the inception and the establishment
of trade organisations such as the World Trade Organisation (WTO). This organisation
controls and loos after the global operation of international trade practices. Additionally, it
supervises and restricts illegal actions of countries involved in a trade. All these are enacted
to increase the level of global trade performance.
Trade is a traditional concept that has been occurring since ages. People and regions
prefer performing trade to increase welfare and profits. The traditional theory of trade is
known as the Mercantilist theory, which is termed as commercialism as well. This theory
refers to an accumulation of wealth through performing the trade. Furthermore, mercantilist
theory prefers fostering trade through practising export. Several economies used mercantilism
to increase their wealth from trading with other countries and develop their economic
structure. Britain made colonial rule over India and drained all its precious metals and wealth
(Costinot and Rodríguez-Clare 2014). Mercantilism aims at affecting the growth of one
country and raise the prosperity level of another country. This concept has vanished with the
advent of globalisation and liberalisation of trade.

ECONOMICS OF TRADE AND ENVIRONMENT2
The advent of globalisation incepted the need and highlighted the benefits of trade
liberalisation. This again gave rise to free trade, which renders power to countries to perform
trade freely without any restriction. WTO allows countries to form agreements to trade freely
as well as legally. Several countries make groups or associations to form a single union to
trade freely with one another. This formation of unions or free trade areas helps in increasing
the total welfare of the region as well as an individual nation. Several agreements and union
have helped countries to increase their economic as well as infrastructural growth. Trade
agreements include the formation of free trade areas such as ASEAN, EU and APEC.
On the other hand, the free trade agreements that help free movement of the trade
include NAFTA, SAFTA, CAFTA-DU and other free trading zones such as the European
Economic Area. ASEAN has alone created a change by making an association among
southern Asian economies. Today, ASEAN has developed to become the most advanced
region with substantially high economic growth. Similar to this, the EU has made its mark by
the rapid development of the entire Euro Zone (Voinescu and Moisoiu 2015). This rapid
growth of the member economies is possible because of the creation and development of the
free trade area and the eradication of trade barriers.
Several trade theories describe the benefits and the need for fostering free trade in the
country. There are both traditional as well as new trade theories that explain the various
dimension of trade. According to the classical theory of free trade, countries should accept
the benefits of comparative advantage and produce a single commodity with maximum
specialisation. Classical trade theory refers to the free movement of goods between
economies and directs countries to specialise in the production of a single commodity with
low opportunity cost in production. Classical trade theory includes Mercantilist theory, a
theory of absolute advantage and comparative advantage (Laursen 2015). Additionally, this
trade theory tends to distinguish between labour-intensive and capital-intensive economies.

ECONOMICS OF TRADE AND ENVIRONMENT3
However, new trade theory is complete opposition to the classical theory. The only similarity
is that the country uses the concept of comparative advantage for increasing their returns to
scale. The contrast lies in the fact that countries both produce one good and import the same.
Several developing economies are both producing technological goods as well as importing
them (CHANG HUANG and JIANG 2017). This is due to knowledge spillover, which has
been developed with the inward inflows of FDI in developing regions. In addition to this,
new trade theory highlights the need for government intervention to control competition and
support the growth of new or emerging firms. Opening up of trade leads to extensive
competition that can restrict the business of new firms in the market. This theory gives rise to
intra-industry trade (Madeira 2016). This aspect is absent in classical or the traditional theory
of trade.
The liberalisation of trade and free trade has helped the world to come across more
innovation of products. This is because of knowledge integration and the concept of “learning
by doing”. Trade liberalisation not only helps in tariff-free trade but also ensure free
movement of capital. Several economies like Saudi Arabia depends on expatriate labour force
for increasing participation in the labour market. Furthermore, producers are benefited from
low-cost labour and capital imports. Apart from the producers, consumers are benefited from
wide ranges of commodities and lower prices. This low-cost market for goods helps in
increasing the welfare of the entire community (Lu Tao and Zhu 2017). Free trade helps in
increasing the growth, employment and wealth of the country. FDI or multinational
corporations prefer establishing in developing or emerging countries. This corporation brings
employment, wealth and development of the country. Moreover, they help in knowledge
spillovers as well (Görg and Strobl 2016). These corporations enable the government to
create revenue from taxation. Several economies are unable to consume certain goods due to
their inability to produce such goods. Free trade helps in providing such goods to the