Free+Trade+Agreement

Names: Jodi Lau, Sacha Ong, Ong Hui Fen, Evelyn Yeo, Yeang Li Jing CG: 11S112

This report would introduce the concept of a free trade agreement and its objectives. We would also be evaluating its advantages and disadvantages to the various parties involved. With reference to the US-Singapore Free Trade Agreement, we aim to further analyse and evaluate the benefits of free trade agreements as well.

A free trade agreement (FTA) is a legally binding agreement between two or more countries to liberalise trade and bring about closer economic integration. Commerce of goods and services can be conducted across common borders of countries with reduced or an elimination of tariffs, quotas or other hindrances.  **Several objectives of FTAs:** i) To establish a free trade area that will promote market opportunities for goods, services and investment between countries. ii) To improve the efficiency and competitiveness of their goods and services sectors, and expand trade and investment between them. iii) To strengthen the relationship between countries, through the conclusion of a free trade agreement, which addresses their economic interests and the evolution of the multilateral trading system. iv) To establish a cooperative framework to further promote and enhance the economic, trade and investment cooperation between countries. v) To liberalize and promote trade in goods and services between them and to establish a transparent, predictable and facilitative investment regime.  ** __Advantages__ ** 1. **Increased production**  Free trade enables countries to specialize in the production of those commodities in which they have a comparative advantage. With specialization, countries are able to take advantage of efficiencies generated from economies of scale and increased output. International trade increases the size of a firm’s market, resulting in lower average costs and increased productivity, ultimately leading to increased production.   Table above shows the production of Good A and Good B by each country before specialization. Table above shows the production of Good A and Good B by each country after partial specialization. <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"> <span style="background-color: #ffffff; color: #000000; display: block; text-align: justify; text-decoration: none;"><span style="background-color: #ffffff; color: #2a2a2a; display: block; font-size: 90%; text-align: justify;"><span style="font-family: Arial,Helvetica,sans-serif;">2. **Production efficiencies** <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"><span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;">Free trade improves the efficiency of resource allocation. The more efficient use of resources leads to higher productivity and increasing total domestic output of goods and services. Increased competition promotes innovative production methods, the use of new technology, marketing and distribution methods. <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"> <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"><span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;">3.**Benefits to consumers** <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"><span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;">Consumers benefit in the domestic economy as they can now obtain a greater variety of goods and services. The increased competition ensures goods and services, as well as inputs, are supplied at the lowest prices. For example in Australia imported motor vehicles would cost 35% more if the 1998 tariff levels still applied. Clothing and footwear would also cost around 24% more. <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"> <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"><span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; line-height: 0px; overflow-x: hidden; overflow-y: hidden; text-align: justify;"> <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"> <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"><span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;">4. **Foreign exchange gains** <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"><span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;">When a country sells exports overseas it receives hard currency from the countries that buy the goods. This money is then used to pay for imports that are produced more cheaply overseas. <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"> <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"><span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;">5. ** Employment ** <span style="color: #2a2a2a; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;">Trade liberalisation creates losers and winners as resources move to more productive areas of the economy. Employment will increase in exporting industries and workers will be displaced as import competing industries fold (close down) in the competitive environment. Many jobs have been created in Australia, especially in manufacturing and service industries, which can absorb the unemployment created through restructuring as firms close down or downsize their workforce. When tariffs were increased substantially in the period 1974–1984 for textiles and footwear - employment in the sector actually fell by 50 000, adding to overall unemployment. <span style="color: #2a2a2a; font-family: Arial,Helvetica,sans-serif; font-size: 90%;">6. **Economic growth** <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;"><span style="font-family: Arial,Helvetica,sans-serif; font-size: 110%;">The countries involved in free trade experience rising living standards, increased real incomes and higher rates of economic growth. This is created by more competitive industries, increased productivity, efficiency and production levels. <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;"> <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;"><span style="font-family: Arial,Helvetica,sans-serif; font-size: 110%; line-height: 0px; overflow-x: hidden; overflow-y: hidden;"> <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;"> <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;">__**<span style="font-family: Arial,Helvetica,sans-serif; font-size: 110%;">Disadvantages **__ <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;"> 1. **Structural Unemployment** <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;"><span style="color: #2a2a2a; font-family: Arial,Helvetica,sans-serif; font-size: 110%;">With the removal of trade barriers, structural unemployment may occur in the short term.This can impact upon large numbers of workers, their families and local economies. Often it can be difficult for these workers to find employment in growth industries and government assistance is necessary. <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;"> <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;"><span style="color: #2a2a2a; font-family: Arial,Helvetica,sans-serif; font-size: 110%;"> <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;"> 2. **Increased domestic economic instability** from international trade cycles, as economies become dependent on global markets. <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;"> This means that businesses, employees and consumers are more vulnerable to downturns in the economies of trading partners, eg. Recession in the USA leads to decreased demand for Australian exports, leading to falling export incomes, lower GDP, lower incomes, lower domestic demand and rising unemployment. <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;"> <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;"> <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;"> 3. **International markets are not a level playing field** as countries with surplus products may dump them on world markets at below cost. <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;"> Some efficient industries may find it difficult to compete for long periods under such conditions. Further, countries whose economies are largely agricultural face unfavourable terms of trade (ratio of export prices to import prices) whereby their export income is much smaller than the import payments they make for high value added imports, leading to a large current account deficit and subsequently large foreign debt levels. <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; text-align: justify;">4. ** Developing or new industries may find it difficult to become established **in a competitive environment with no short-term protection policies by governments, according to the infant industries argument. It is difficult to develop economies of scale in the face of competition from large foreign TNCs. <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;">5. **Free trade can lead to pollution and other environmental problems** as companies fail to include these costs in the price of goods in trying to compete with companies operating under weaker environmental legislation in some countries. <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;"> 6.**Pressure to increase protection during the GFC** <span style="color: #2a2a2a; display: block; font-family: Arial,Helvetica,sans-serif; font-size: 90%; text-align: justify;"> During the global financial crisis and recession of 2008-2009, the impact of falling employment meant that protection pressures started to rise in many countries. In New South Wales, for example, the state government was criticised for purchasing imported uniforms for police and firefighters at cheaper prices rather than purchasing Australian made uniforms from Australian companies. Similar pressures were faced by governments in the United States, Britain and other European countries.
 * Definition:**
 * || Good A || Good B ||
 * Production by Country A || 30 || 15 ||
 * Production by Country B || 5 || 10 ||
 * Total Output || 35 || 25 ||
 * || Good A || Good B ||
 * Production by Country A || 40 || 10 ||
 * Production by Country B || 0 || 20 ||
 * Total Output || 40 || 30 ||

__Case Study of The US-Singapore Free Trade Agreement (USSFTA)__ <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"><span style="color: #333333; font-family: Arial,sans-serif;">The key objective of the US-Singapore Free Trade Agreement (USSFTA) is to facilitate trade by eliminating or reducing tariffs, increasing supply and lowering the equilibrium price of imports. <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"> <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"> <span style="color: #333333; font-family: Arial,sans-serif;">Singapore exporters benefit from lower cost of production by carrying out the high end or sophisticated processes in Singapore while outsourcing the labour intensive areas are outsourced to neighbouring locations. <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"> <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;"><span style="color: #333333; font-family: Arial,sans-serif;">Cost-savings are enjoyed in these key sectors:
 * <span style="color: #333333; font-family: Arial,sans-serif; line-height: normal;">Electronics and Information Technology
 * <span style="color: #333333; font-family: Arial,sans-serif; line-height: normal;"> Precision Instruments
 * <span style="color: #333333; font-family: Arial,sans-serif; line-height: normal;"> Chemicals and Petrochemicals
 * <span style="color: #333333; font-family: Arial,sans-serif; line-height: normal;"> Processed Food
 * <span style="color: #333333; font-family: Arial,sans-serif; line-height: normal;"> Textiles (originating from Singapore / US)

<span style="background-color: #ffffff; color: #333333; display: block; font-family: Arial,sans-serif; text-align: left;">As such, Singapore exporters benefited from tariff concessions, increase in competitiveness and attracting investors. Furthermore, the USSFTA has facilitated the removal of non-tariff barriers which will keep cost of doing business low and exports more competitive. <span style="background-color: #ffffff; color: #333333; display: block; font-family: Arial,sans-serif; text-align: left;">However, some believe that both developed economies saw the signing of agreement as more than merchandise trade. After 9/11 and the invasion of Iraq, the Bush administration linked granting trade preferences to security policy. Instead of using FTAs as a tool to reduce the ballooning trade deficit and to forge FTAs with such major trading partners as China, Japan, and the European Union, the Bush administration politicized the FTA process by going after smaller economies in order to garner their support for its global security strategy, in this case Singapore. Some organisations, such as the United SteelWorkers of America, strongly oppose this agreement due to the many disadvantages that come along with it. 1. Lack of core labor rights and environmental protections The inherent lack of labour and environmental protections allows both countries to attract investment without facing any consequences. The penalty for not adhering to its own laws is insufficient to be a deterrent.

2. Establishes Off-shore Sweatshop Havens The Singapore FTA grants unreciprocal market access to goods from two Indonesian islands. Operations on these islands, however, aren’t bound by any of the other provisions of the agreement, including the provisions on labor and the environment. In doing so, the Singapore FTA established a sweatshop haven which will be harmful for workers in all three countries. Moreover, the agreement allows for additional Indonesian islands to be added, and could potentially be expanded to other countries. 3.Contains labor rules which are weaker than existing US-Singapore trade rules Does not require Singapore to adopt or enforce core International Labor Organization standards. In addition, under the Generalized System of Preferences (GSP) the U.S. is able to scrutinize whether or not a country’s labor laws actually comply with international standards in determining market access. The US-Singapore FTA is contingent only that Singapore enforce its existing labor laws regardless of their adequacy.

4. Would reduce access to essential medicines Intellectual property rules in the US-Singapore FTA greatly reduce the flexibility available under WTO rules for governments to make generic medicines available in order to address public health crises.

5. Opens public interest laws up to challenge by foreign corporations Investment rules in the Singapore FTA include the right for foreign corporations to sue governments when they believe that a domestic regulation unfairly infringes on their profits. Similar rules under NAFTA have led to challenges in all three NAFTA countries against health, safety, environmental, and zoning and development laws.

6. Threatens natural resources Despite the fact that Singapore is a major transshipment point for both plant and animal endangered species, the Singapore FTA doesn’t protect against illegal transshipment of plant and animal life.

In conclusion, while the FTA is aimed at bringing economic growth to the countries involved, it has both advantages and disadvantages depending on the parties involved. While firms and its shareholders enjoy better profits, the ones at the disadvantage are its workers, particularly the lower skilled ones, as they face the possibility of the retrenchment as labour-intensive manufacturing process is outsourced. This results in inequality, widening the income gap between the rich and poor.

Sources: [] <span style="background-color: #ffffff; color: #000000; display: block; text-align: left; text-decoration: none;">[] [|http://www.businessdictionary.com/definition/free-trade-agreement.html#ixzz1jtaz4ssH] http://www.citizenstrade.org/ctc/trade-policies/existing-trade-agreements/other-bilateral-trade-agreements/u-s-singapore-free-trade-agreement/ http://hsc.csu.edu.au/economics/global_economy/tut7/Tutorial7.html