Economics Assignment 1: Free Trade, Climate Change, Global Governance

This economics assignment analyzes the arguments for and against free trade, considering evidence of potential trade liberalization setbacks. It explores the implications of liberalisation, trade barriers, and the roles of GATT and WTO in promoting free trade. The report examines the evolution of tr...Read More

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ECONOMICS ASSIGNMENT
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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 implies the freeing up of trade by the elimination of trade barriers.
Globalisation has helped in the formation of the concept of liberalisation. Under the laws of
GATT and WTO, countries have accepted liberalisation of trade with all the economies of the
world. Elimination of trade barriers implies the removal of restrictions, which includes tariffs,
embargoes, sanctions and quotas (Bayne 2017). These barriers restrict the free flow of goods
by increasing the price of goods and services and reducing demand for imports and exports.
WTO does not allow the use of harsh tariff rates and other forms of restrictions. Additionally,
it monitors the trading behaviour of countries and restricts the illegal behaviour of economies.
These are done to promote free trade and liberalisation to increase global welfare.
The concept of trade has emerged long back the inception of the concept of
globalisation. The traditional theory of free trade is known as Mercantilism. Commercialism
or mercantilism means the promotion of free trade to accumulate wealth. The British have
initially used mercantilist theory to dominate certain poor economies such as India to prosper
their colonial rule. This system helped Britain to transfer wealth from the substantially
underdeveloped economy of India. Mercantilist system supports export growth to increase
government revenue of the country following the system (Magnusson 2019). However, this
theory does not focus on the prosperity of both the economies indulged in trade. It tends to
destroy the wealth of one and makes the other nation wealthy. This is evident from the
restrictions imposed on imports. However, this theory has been removed since the day
globalisation appeared.
From globalisation to liberalisation, free trade has emerged to foster the growth and
development of a country. Free trade allows countries to indulge in trade-related activities
without the inclusion of barriers. Several countries facilitate free trade agreements to trade

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freely among one another. There are several free trade agreements present, which includes as
SAFTA, NAFTA, CAFTA-DU, EU and APEC. All these help in boosting economic growth
and infrastructural development. The most successful example of the Free Trade Agreement
(FTA) id the formation of the European Union (EU). EU alone has a GDP growth rate that
can surpass the GDP of any dominant economy such as the United States and China
(Voinescu and Moisoiu 2015). Moreover, the development of the region is extensive and
rapid. This growth is possible due to the formation of a free-trade region. ASEAN is another
form of tariff-free trading association among the Southeast Asian nations. However, there is a
presence of a certain amount of restrictions to facilitate the growth of export sectors.
Free trade has facilitated the easy movement of goods and services that helps
countries to foster in their respective expertise area. Several trade theories indicate the
benefits of free trade and their various motives. The classical theory of free trade suggests
that countries should produce a particular good where they have relative specialisation
(Gnangnon 2017). This implies that countries that can produce a good with low opportunity
cost should concentrate on the export of that single good, and the rest of the commodities
should be imported from different countries. This is the famous theory of comparative
advantage that ensure free trade benefits all. However, the classical theory fails to sustain the
dynamics of real world issues. These issues are incorporated into the new trade theory.
The new trade theory focuses on knowledge spillovers and includes the concept of
efficiency and competition (Lu Tao and Zhu 2017). According to the new trade theory,
countries can both import and export a single commodity with the help of knowledge
spillover. This helps in the formation of technological innovation. This theory is absent in the
classical model of trade theory. In addition to this, new trade theory indicates that there is a
presence of competition among firms that helps in enhancing efficiency and resource
allocation (Bhagwati 2017). However, this theory does not eliminate the concept of

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comparative advantage but includes the importance of knowledge spillover and innovation
(CHANG HUANG and JIANG 2017). Apart from these, the new trade theory includes the
intervention of government that can create turmoil in free trade. However, the government
supports organisations to increase their movement in trade activities. This theory highlights
the importance of distance between nations that can either limit trade or foster it. Therefore,
this can be seen that there are both advantages and disadvantages of free trade.
Since the introduction of free trade and liberalisation concept, there is wider
innovations and development in infrastructures. This is due to the help of liberalisation in
trade, labour and capital mobility that helped economies to gain knowledge from one another.
Consumer’s welfare is continuously increasing because they can consume a wide variety of
goods and services at differentiating prices. Buyers can differentiate between both
commodities and their prices due to the facilitation of free trade and liberalisation. Removing
trade barriers helps in increasing business activities, efficiency and productivity. This reduces
the advent of monopoly power and raises total welfare. Liberalisation has helped in the
integration of people as well as business. Multinational corporations’ moves to different
countries to expand their operations; this helps in creating job opportunities for the host
country (Görg and Strobl 2016).
Additionally, it increases economic growth by providing tax revenue to the
government of the host country. The inward movement of FDI is possible due to the
acceptance of globalisation and trade liberalisation (Gnangnon 2017). Several countries that
are unable to consume certain commodities are now able to consume those commodities due
to liberalisation of trade and adoption of free trade. Spain lacks precious metals and Nepal
cannot produce fuel, the facilitation of trade has helped these economies to consume the
product that they are lacking. Therefore, trade helps in technical, productive as well as
allocative resource efficiency.

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Although free trade and liberalisation are beneficial for the welfare of the global
market, it certainly hurts domestic production and the growth of start-ups. The vast
competition between business and industries affects the entry of new firms. These new start-
ups or infant industries are unable to cope with the stiff competition of the market. Moreover,
the entry cost of certain industries like the automobile industry is immense. This restricts the
further growth of the business. More specifically, developing and emerging nations face
difficulties in entering the business market to compete with the big organisations of the
advanced economies (Jones and Kierzkowski 2018).
Moreover, the world market is huge and there is greater availability of low-cost items.
Low-cost good quality products attract consumers. This distorts the domestic producers of the
country by importing such low-cost items. This leads to trade conflict or war between
nations. This is the reason behind the US-China trade wars and the softwood lumber trade
dispute between the US and Canada. The US is facing wide deficits in its current account due
to higher level of imports and comparatively lower exports.
Apart from the US, the UK is facing problems of the liberal trade policies of the EU
and has initiated Brexit movement. These developed countries are affected by trade
liberalisation. However, several developing countries are affected by liberalisation. The
advent of MNCs distorts the market and affects the growth of new entrants in the market.
Moreover, if they decide to relocate, there is a rise in unemployment that affects the host
country. Thus, even though liberalisation creates the growth of business and expansion in
productivity, it can distort the economic functioning of domestic producers. Therefore, to
conclude this can be said that liberalisation stagnates growth and development by creating
conflict and war.

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References
Bayne, N., 2017. The G7 and Multilateral Trade Liberalisation: Past Performance, Future
Challenges. In New Directions in Global Economic Governance (pp. 199-216). Routledge.
Bhagwati, J., 2017. Trade liberalization among LDCs, trade theory, and GATT rules.
In Value, Capital and Growth (pp. 21-44). Routledge.
CHANG, Y., HUANG, Z.T. and JIANG, F.Y., 2017. Analysis on Complex Network
Characteristics of Multinational Corporations' Technology Spillovers in Host
Countries. DEStech Transactions on Computer Science and Engineering, (ameit).
Gnangnon, S.K., 2017. Multilateral trade liberalisation and foreign direct investment
inflows. Economic Affairs, 37(1), pp.66-84.
Gnangnon, S.K., 2017. Multilateral trade liberalisation and foreign direct investment
inflows. Economic Affairs, 37(1), pp.66-84.
Görg, H. and Strobl, E., 2016. Multinational Companies, Technology Spillovers and Plant
Survival. In Multinational Enterprises and Host Country Development (pp. 289-303).
Jones, R.W. and Kierzkowski, H., 2018. The role of services in production and international
trade: A theoretical framework. World Scientific Book Chapters, pp.233-253.
Lu, Y., Tao, Z. and Zhu, L., 2017. Identifying FDI spillovers. Journal of International
Economics, 107, pp.75-90.
Magnusson, L., 2019. Mercantilism. In The Elgar Companion to John Maynard Keynes.
Edward Elgar Publishing.
Voinescu, R. and Moisoiu, C., 2015. Competitiveness, theoretical and policy approaches.
Towards a more competitive EU. Procedia Economics and Finance, 22, pp.512-521.

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Explain how climate change illustrates the challenges of global economic governance
and asses the issues in evaluating the cost and benefits of action to lessen potential
impacts
In recent times, climate change is one of the most challenging factors in the world.
Climate change is not a regional or national issue; it is a concern of the world. Therefore,
there is a need for global governance for tackling the problems caused by global warming.
The government needs to make coordinated responses to ease the threats and risks caused by
climate change. There are several policies formulated by UNDP and various other
environment-protecting institutions. However, the response of these policies is limited to
paperwork. The implementation and the success story of the policies are poor and ineffective
(Iisd.org. 2020). Therefore, the government and the institutions should design effective
governance mechanism to control the threats of this escalating global crisis.
Climate change is a serious and critical concept that is posing severe threats to the
global economy as well as global environmental governance. The rapid change in climatic
conditions in the current world is completely different from the environmental changes in the
traditional era. The traditional concepts of climate changes were ozone layer depletion, acid
rain. Today, the climate change is all about rise in sea level, submerging cities, climatic
variations and typical fire ignition. Although several OECD countries are taking steps to
control global warming but they are not enough to control the climatic crisis. However, they
are not compromising their economic functioning to mitigate the problem possessed by
climate change. There are wide use and innovation of technologies that readily harm the
climate. The increasing use of electricity and electrical appliance causes damage to climate
(NewsComAu. 2020). Additionally, the so-called developed and advanced nations are
continuously using ocean and marine resources as a dumping ground. Thus, it is affecting
marine vegetation as well as the important species that helps in the formation of oxygen.

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Apart from this, several economies use coal and other minerals to support their living
and income. On the other hand, the burning of coal leads to the production of hazardous
gasses. Australia is well known for its rare biodiversity, flora, and fauna. The country is
bestowed with natural scenic beauty, golden beaches, coral and the world-famous the Great
Barrier Reef (GBR). Additionally, the country is known for its large-scale carbon dioxide
emission. This is because the mining industry is one of the crucial sectors in Australia. Thus,
the mining industry requires dynamites and other forms of explosive to carry out their
production. As a result, this harms the climate and environment of the country.
Furthermore, there is large-scale dumping of sewage and oil spills in the ocean water.
This is not only increasing ocean temperatures but also restricting the growth of corals in the
ocean. Reports suggest that the corals of GBR cannot regrow and is continuously dying due
to climate change (Authority 2016). Apart from these, nuclear activities are leading to rapid
change in weather conditions. Shanghai remains covered under smog for more than a year.
The quality of air is continuously dropping leading to a deterioration of public health. The sea
level around the globe has risen over 8 inches and this is continuously increasing
(climate.nasa.gov 2020). As a result, several islands and cities are rapidly submerging
underwater, and more are on the verge of extinction. This includes Maldives, Jakarta, and
Venice and so on. Moreover, the ocean water is rapidly acidifying due to constant
decomposition of toxic chemicals and harmful substances in the water.
Climate is changing rapidly and it is liable to affect the business and wealth of a
country. Apart from affecting ecosystems, wildlife and environment, this rapid global
warming is affecting business. The agriculture in Australia is recording a continuous drop in
productivity and the farmers are affected by low yield (Noaa.gov. 2020). Australia has
recorded wide periods of drought due to changing weather conditions. Additionally, the bush-
fire in Australia has been ignited by the hot temperatures. This is affecting the entire

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economy. Several retailers are witnessing a fall in sales due to a fall in demand
(NewsComAu. 2020). The consumers are shifting their demand from clothing and other
related products to respiratory machines.
Human health has been affected by the emission of toxic gasses, which is leading to a
fall in employee participation. This is capable of affecting economic growth and can reduce
income around the globe (Panayotou 2016). There is a severe drop in the production of goods
and a stagnation over business activities (Ipcc.ch. 2018). In 2011, the United States faced a
severe drought; several types of meat producing and processing industries were forced to shut
down and shift their business activities. These climatic changes affected agriculture in the
Great Plains and adversely affected business in the region (Fao.org. 2020). For instance, the
economy of Australia is already facing a continuous decline in GDP growth and employment.
The tourism industry has been readily affected by the poor inflows of tourist in the country.
After the incident of a bush fire, Australia is recording a steep fall in tourism activity. The
wealth generated from this tourism sector and the various interlinked recreational services are
affected as well. All these climatic changes are hampering business and agriculture around
the world. Therefore, this can be implied that world business is at stake and is at the mercy of
climate change.
The government needs to plan appropriate policies and increase its investment in
protecting the environment. However, the cost of safeguarding environment is vast. The cost
and benefit analysis requires key elements such as the total value of costs and the expected
benefits. It requires a huge amount of cost and the estimation of cost is easy. On the other
hand, the estimation of benefits is difficult and the projects prepared does not necessarily
yield benefits. Therefore, the estimation of the benefit of a particular project is difficult. The
net present value of an environment-protecting project cannot be prepared due to the
uncertainty of benefits. However, the government should prepare a project and raise its

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investment to protect the environment. Apart from this, the pollution abatement cost is high.
If the private marginal benefit is less than the private marginal cost, then the industries do not
find it profitable to invest in pollution abatement techniques (Tai Chao and Hu 2015).
Industries always analyse their costs and benefits before incurring a cost. Under such a
situation, the government needs to intervene with a subsidy to protect the deteriorating
condition of the environment. Only if their benefit is greater than the cost incurred, the
industries will invest in pollution abatement techniques. Apart from this, the government can
impose various taxation measures to reduce the emission of gasses. This includes the
imposition of a carbon tax or limiting the amount of pollution by providing pollution permits.
These are the various pollution limitation techniques used by the government to curtail and
eliminate the effect of pollution. The UNDP has introduced the sustainable development
goals program that is binding upon all the countries (Noaa.gov. 2020). This program includes
the agenda of protecting the environment and controlling global warming.
Global warming and climatic changes are an alarming situation for global
environmental governance. It is affecting the business and agriculture of several countries.
There is an increase in the sea level that is affecting cities near shores. The government needs
to develop appropriate policies to protect the environment and maintain the growth of the rate
of the economies. However, the government finds it difficult to analyse the cost and benefit
of designing an appropriate project for protecting the environment.

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References
Authority, G.B.R.M.P., 2016. Interim report: 2016 coral bleaching event on the Great Barrier
Reef.
climate.nasa.gov 2020. Climate Change: Vital Signs of the Planet. (2020). Climate Change
Evidence: How Do We Know?. [online] Available at: https://climate.nasa.gov/evidence/
[Accessed 17 Jan. 2020].
Fao.org. 2020. [online] Available at: http://www.fao.org/3/I8905EN/i8905en.pdf [Accessed
17 Jan. 2020].
Iisd.org. 2020. [online] Available at: https://www.iisd.org/pdf/2008/geg_climate_gov.pdf
[Accessed 17 Jan. 2020].
Ipcc.ch. 2018. [online] Available at:
https://www.ipcc.ch/site/assets/uploads/2018/02/WG1AR5_Chapter12_FINAL.pdf
[Accessed 17 Jan. 2020].
NewsComAu. 2020. Aussie retail icon’s shock announcement. [online] Available at:
https://www.news.com.au/finance/economy/australian-economy/where-theres-smoke-aussie-
retail-icons-shock-announcement/news-story/f1ec897eb0ae05c4996c4a33d00bc709
[Accessed 17 Jan. 2020].
NewsComAu. 2020. Hidden billion-dollar cost of bushfire crisis. [online] Available at:
https://www.news.com.au/finance/economy/australian-economy/a-massive-blow-dark-side-
to-celebrity-bushfire-donations/news-story/8748dc87e0ca331e2f9476d795d478ea [Accessed
17 Jan. 2020].
Noaa.gov. 2020. Climate change impacts | National Oceanic and Atmospheric
Administration. [online] Available at:

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https://www.noaa.gov/education/resource-collections/climate-education-resources/climate-
change-impacts [Accessed 17 Jan. 2020].
Panayotou, T., 2016. Economic growth and the environment. The environment in
anthropology, pp.140-148.
Tai, M.Y., Chao, C.C. and Hu, S.W., 2015. Pollution, health and economic growth. The
North American Journal of Economics and Finance, 32, pp.155-161.