Free trade can be defined as a situation where goods and services are purchased and sold among different countries without tariffs, quotas and duties being imposed on them. A closed market on the other hand describes an economy that does not allow foreign competition. Free trade enables countries to maximize on their core competitive advantages in the production of goods and services they are best in (Pastor, 2011).
Such countries get the best in their economic output and promote the growth of income among the individual citizens of the countries. These advantages would be distorted by a closed market which would impose constraints and discourage other interested players from engaging in the market (Manzetti, 2000). Even though free trade has some disadvantages, the advantages outweigh such disadvantages. Free trade therefore ought to be adopted by the other countries in Latin America who have not yet done so as it would help them in boosting their economies.
This paper discusses how free trade has been a fundamental aspect of the market reforms carried out in the Latin America region. Besides, the paper highlights challenges that are facing countries that have not yet embraced globalization and free trade. Finally, the advantages and disadvantages that lowering tariffs and opening up to globalization have brought to Latin American economies have been discussed in the paper.
Closed market and free market regions in Latin America
The Latin America Free Trade Association (LAFTA) was formed in 1960 under The Treaty of Montevideo. The original members were Argentina, Brazil, Chile, Mexico, Paraguay, Peru and Uruguay. The major aim of these nations was to do away with the existing constraints and levies imposed on commercial activities in a time span of 12-years. Four most countries namely Bolivia, Colombia, Ecuador and Venezuela, they were left with no option but to join LAFTA by 1970. However, in the financial year 1980 the association (LAFTA) reorganized to become the renowned Latin American Integration Association. The membership was not changed again until 1999 when Cuba joined (Schmitter 1969, p.1).
LAFTA brought many benefits to Latin America. It helped in the maximization of the capacity of production so as to supply the needs of the region. Besides, expanded output and specialization among regions helped in the reduction of costs among industries which also enabled the region to attract new investments (Przeworski & Wallerstein 1988, p. 11)
Most countries in Latin America have been underdeveloped for a long time. Thus, the treaty appeared as an approach to bringing up more commercial contacts between such nations hence lifting up the statuses of most economies of the inferior countries. In fact, it was responsible for formulating the regulations dealing with licensing, price control, quality control, environmental protection, quality control as well as many other policies and regulations to ensure that the major aim is achieved (Manzetti, 2000). The agreements gradually faded away due to lack of political goodwill making most of the countries in the region to start afresh.
In economic terms, Latin America is presently divided into two. For instance, there are countries facing the Atlantic namely Brazil, Argentina and Venezuela which do not embrace globalization. Conversely, there are countries facing the Pacific including Mexico, Chile, Peru and Columbia that are involved in free markets and globalization. Being on the same geographical set up, the countries face a dilemma on what type of economy to embrace as a bloc (Wise & Quiliconi, 2007).
Challenges facing countries that have not yet embraced globalization and free trade
Economists predict prosperity and higher productivity gains in the countries that engage in free trade. The countries have been negotiating on the standardization of rules and procedures for smooth border transactions. They are also working on agreements on the extent at which local goods should be tariff-free. This is in addition to the fact that they have already removed visa requirements for each other’s citizens. As a result, the average economy of the Pacific Alliance trade bloc is expected to grow by 4.25%. This is due to the increased levels of foreign investment and reduced levels of inflation (Riggirozzi & Tussie, 2012).
On the other hand, Argentina and Venezuela seem to be facing price increment and challenges in the management funds. Venezuela, for instance, has an inflation that is rising above 50%. This culminated into the poorest exchanges in this area in the financial year 2013 comprising of Venezuela, Argentina and Brazil. In fact, the Argentinean Peso rates against the Dollar even fell by 32% at official rates in the fiscal 2013 (Dade & Meacham, 2013).
The government of Argentina imposed price controls on energy supply in 2012. This was meant to be a solution to the 2008 and 2009 financial collapse but it has instead scared off electricity companies who have stopped putting additional investments in the country. Based on these impacts, the economy of Atlantic group that has not yet embraced free trade is expected to grow by only 2.5%. It is even more worrying that the economy of the biggest economy in the region, Brazil, is expected to grow by only 1.9%. This shows a clear advantage of embracing globalization and free trade (David, 2014).
The advantages and disadvantages of lowering tariffs and embracing globalization to the Latin American economies
According to Teichman (2001), the first advantage of embracing free trade has been an increase in production. This is founded on the fact that individual countries have been enabled to produce more goods besides the provision of more services they are best placed to generate. This enables the countries to benefit from economies of scale. That is, it helps in maximum utilization of resources in an economically advantageous way hence assisting various industries in individual countries to minimize their costs and increase their earnings. The extra earnings can be used by the Latin America industries in their expansion domestically or even internationally to countries that are their partners. This in the long run means that more gross domestic income will be generated for the individual country as well as for the residents’ hence economic development.
In Latin America, a free economy also contributes to the efficiency in the allocation of resources and ensures maximum utilization of a country’s resources. This is the case with Mexico, Chile, Peru and Columbia. The countries make maximum usage of the available resources in their areas of competitive advantage and allow partners to fully exploit the resources they need in their areas. Such kind of free trade is intended to supplement each other economically besides being each other’s consumer and at the same time supplier. In fact, for Mexico, Chile, Peru and Columbia, this trade usually leads to increased productivity of goods and services domestically while ensures that a number of the countries’ population is involved thereby providing employment opportunities (Teichman, 2001). This is apparently not the case for Brazil, Argentina and Venezuela which are closed markets economies in Latin America.
From Stiglitz (2002) study assertions, countries in Latin America that allow free trade and globalization to take place enable their wider population to access the resources and ensures that healthy competition thrives. In turn, this usually promotes innovation, use of new technology and novel methods during production, marketing and distribution processes. The resultant effects apparent in such states are improvements in the quality of production in terms of efficiency and effectiveness which warrant that the consumers are getting the best and quality products. Furthermore, it ensures that there is time saving and maximum production within short time periods (Williamson, 1993).
Increased level of competition in any market economy, closed or open, also has an impact on the consumers. For instance, it enables them to get access to a variety of goods and services of different tastes, prices and qualities. Thus, they have an option of choosing the ones that best satisfy their needs at competitive prices. This implies that consumers in open economies like Mexico, Chile, Peru and Columbia are hardly forced to strain their pockets. The competition also makes the domestic firms that are open to free trade and their international counterparts to create incentives which ensure that their goods and services are always up to standards so as to edge out their competitors (Carrothers, 2002).
In Latin America open economies, free trade promotes better usage of the available labour. For instance, in globalized and free trade countries such as Chile and Peru, multinationals complement the domestic industries in providing employment opportunities to individuals who the domestic labour market could not fully absorb. This ensures that there is improvement in the individuals’ lives and that of their families. A study by Castañeda (2012) shows that the assertion is true as it ensures a growth in the economy since they contribute to the incomes the government gets through taxation.
The individuals who may have been involved in dangerous activities like crime resulting from unemployment thus become more useful to the economy. Unlike in countries such Venezuela and Brazil, free trade in Latin America states like Mexico, Chile, Peru and Columbia ensures that there is no brain drain since individuals with various skills, abilities and knowledge have diverse opportunities to engage their skills. That is, such people with potentials do not have to be idle or leave their countries in search of greener pastures.
In general, free trade promotes a rise in the standards of living, warrants higher individual incomes and growth in the economy of individual countries as well as the global economy at large. The more competitive industries become, an increase in productivity, rise in the levels of production and efficiency are the main contributors to these growths (O’Donnell & Schmitter, 1986). This is only reported in Latin America countries such as Mexico, Chile, Peru and Columbia whilst it hardly the case in Brazil, Argentina and Venezuela.
Free trade and globalization usually go hand in hand. Globalization can be defined as a situation where various states become dependent on each other in different aspects. These include education, economy, politics and democracy. There is free flow of ideas, policies, cultures, beliefs and theories from various parts of the world. In Latin America, globalization usually promotes free flow of advanced technology (Mainwaring & Scully, 2008).
This helps industries in developing countries such as Mexico, Chile, Peru and Columbia to work effectively while using new discoveries, inventions and innovations adopted from other already developed countries. Besides, skilled manpower is easily shared since highly skilled or talented individuals are able to freely use their skills in various places, but not basically their places of origin. The new advanced skills help in saving time, costs and ensuring an increase in the quality and quantity of production. As a result, such open countries within Latin American region generate more profits and earnings for individual industries and their domestic economies as well (Castells, 2012). This is not the case in closed economies like Brazil, Argentina and Venezuela.
Globalization encourages prospects for new-fangled marketplaces. In fact, various corporations are able to invest in diverse nations and attract clients to purchase the products. This ensures maximization of resources to produce as much as possible commodities. Besides, any surplus generated does not go to waste since it gets consumption in other countries that may have the need for the products or services but do not have their own or have no access to them. This helps countries to raise capital from foreign domestic investments and individual countries to improve on their economies (Cardoso & Faletto, 1979).
According to Nye and Donahue (2000), ease of transportation in most Latin American countries has been a result of globalization. It is now easier and faster to transport goods from one corner of the world to another for countries such as Mexico, Chile, Peru and Columbia that embrace globalization. The growth of containerization for oceanic distribution has led to the minimization of expenditures, production overheads and hence the price of the produces in the global souks. Barriers in the movement of goods between these Latin America states’ boundaries have also been cut down thus enabling easy access of goods from various countries (Weyland, 2004).
In Latin America countries, vacation industry has been upheld by globalization. Many countries found in this region have tourism as a major source of income for their economies. However, open trade facilitated international trade among various countries and this enables individuals involved in such trade to visit tourism destinations as tourists and encourage their colleagues. Hence, this tends to promote the economies of free trade and globalized Latin America countries they visit. The tourists are able to consume other products and services in the countries they visit, which in turn improves the economies of those countries (Rodrik, 2009). The resulting effect is that countries that are open to free trade create additional employment opportunities and accrue more revenue from tourism activities.
Through globalization, companies as well as state and sub-domestic debtors in some Latin America nations have been able to obtain outside funds. This has helped to solve the obstacle that underprivileged states have of not being able to offer tolerable funding to their domestic corporations. Investment has thus been made possible to individuals and industries that would have been disadvantaged thus helping in the growth and development of upcoming industries in developing countries including Mexico, Chile, Peru and Columbia. Other already existing industries are also able to expand by use of foreign borrowing (Skidmore & Smith, 2005).
In most of the open trading states in Latin America, globalization has promoted peaceful relations among countries. Various nations have done away with their hostile historical involvements so as to improve on their commercial associations, raise more funds and harden their stand in transnational business. Countries such as Venezuela and Brazil have benefited a lot from this (Weyland, 1996).
By utilizing web services in globalization, the earth appears to be very connected like a community. This has encouraged the interchange of views and philosophies in Latin America economies thus enhancing the ethical tie in the mentality of individuals. This has promoted the understanding of the diversities in social setups that had previously kept certain parts of the Latin America world divided. There have been several cross cultural interactions promoting cultural diffusion and companionship among individuals from diverse cultural backgrounds (Williamson, 1997).
Despite all these, there are still opponents to globalization and free trade. Some of the arguments against the two include the argument that with the removal of trade barriers, structural unemployment may occur in the short term (Schamis, 1991). This may impact negatively on a large number of the population comprising of workers and their families.
There is an argument that various economies become dependent on global markets leading to increased domestic economic instability. This usually implies that businesses, employees and consumers are vulnerable to crises in the economies of their trading partners. For example, a recession in any other country that trades with an open Latin American country like Mexico, Chile, Peru and Columbia leads to a decrease in the demand for the exports of one country. The result is a slump in incomes, lower demands domestically and in most cases unemployment (Remmer, 1991).
It is argued that transnational marketplaces are hardly an equal performing ground. There are cases where countries with surplus products may dispose them in the world market at very low prices even below the cost of production. This makes it difficult for some efficient industries in open Latin America states to compete in such conditions (Silva, 1996).
In Latin America, free trade is argued to discourage the establishment of developing or new industries since there are no policies formulated by the government to protect them. It becomes very difficult to establish themselves alongside large foreign multinationals that already have large economies of scale. This is usually a demotivating factor among young upcoming investors (Fumagalli, 2010).
Globalization has made the opulent better-off while the underprivileged worse in some Latin America countries. Some multinationals are accused of social injustices and unfair working conditions for their workers leading to deterioration in their livelihoods. Multinationals which are based in developing countries are similarly accused of buying raw materials from open Latin America countries at very low rates. Such corporations’ process the raw materials back in their countries and then bring back the processed goods to the developing countries in Latin America. The commodities are sold at hiked prices hence promoting the development of their home economies while hindering that of the countries where they are based (Popkin, 2003).
Latin American countries like Brazil and Argentina have underlying problems in their rates and taxes which are relatively high. As a result, these states have challenges in their infrastructure given that investors are scared of the charged rates and imposed taxes. Such countries should follow examples of a country like Mexico which has formed wide trade networks like its North American Free Trade Agreement with the United States. Opening up to free trade and globalization will ensure that the countries that are still struggling with their economies get incentives, which can help them in lifting their economies. Even though globalization and free market have disadvantages, the benefits outweigh the demerits. Thus, it would be wise for countries like Brazil and Argentina to embrace it in Latin America to ensure more stable economies.
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