EU-U.S. Plans for Free Trade Pact (Essay Sample)

EU-U.S. Plans for Free Trade Pact
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Table of Contents
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Introduction 3
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hy the world would benefit from the free trade deal beteen EU and US 3
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Globalization and free trade deal 5
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Overall Economic Results 6
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The national income effect 6
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Changes in aggregate trade flows 6
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Changes in bilateral trade 7
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Challenges and how mobile learning would overcome them 8
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Balance of payment changes 8
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Exchange rate 9
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Net effects on consumers and producers 10
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Consumers 10
Producers………………………………………………………………………………………10
Conclusion………………………………………………………………………………………11
references………………………………………………………………………………………12
Introduction
According to news by Reuters on 7 May 14, 2013, China is worried about EU and US plans, for free trade pact. EU and U.S are expected to negotiate an ambitious free trade agreement. According to EU official, China fears that the deal is a protectionist one. In other words, China feels that the move would insulate the two regions from the rest of the world. Currently, EU and America are the world biggest trading partners. They account for one third of the world’s trade and a half of the world’s GDP. Both of them are the biggest investors in one another’s economies. The tariffs between the two regions are 3 percent on average, among the least in world’s regional integrations. However, non-tariff barriers between the two regions are stricter. According to EU officials, they aim to open up the US requirement market. Currently the EU procurement market is more open than the US. One of the key reasons behind this is the fact that the government of US cannot compel states to open up their procurement system to the foreign bidders. Although the EU is keen on the deal, it would mean a lot to them given the fact that the region has not yet recovered from the euro zone crisis. Additionally, economists differ on the potential outcome and some think that the move could destroy WTO (Prestowitz,2011). I believe the move would not insulate the two regions from the rest of the world, but would benefit the entire world.
Why the whole world would benefit from the trade deal between EU and US
On of the key reasons why the numerous countries across the globe would benefit from the deal is the fact that the deal would enhance efficiency in production of the goods and services within the two regions. Output level as well would increase significantly. It is not only the two regions, which would benefit from the deal, but numerous other countries as well. This is because the two regions make the largest proportion of the world’s trade. Therefore, benefits that would arise within the two regions would spill over to other countries (Gabriel, 2013).
According to the theory of comparative advantage, countries should specialize in production of what they produce using the least opportunity cost (Carbaugh, 2012). In other world, countries should produce what they are best in its production i.e. producing cheaply. The free trade deal between EU and US would promote specialization within the two regions. Each region would specialize in producing what it produces cheaper than the other region. This would result to increased output within the two regions.
Given the fact that EU and US, make 50 percent of the world GDP, the world GDP would grow significantly because of the deal. This would mean job creation across the world. Over the last half a decade, the global unemployment rate has been on rise. By increasing trade between the two regions, many people would be employed to facilitate the increase in production as demand for goods and services increases.
US would be the biggest winner in the deal. The growth of bilateral trade between the two regions would mean a lot to US. One of the key reasons behind this is the fact that more of its good flow to EU than, those that flow from EU to US. Therefore, the US economy is expected to grow significantly.
The United States firms would benefit more than the firms in EU’s countries would. The firms within the EU would face more competition from American firms than before the deal. This is because the companies within the EU were already benefiting from the region’s free trade agreement.
Therefore, they will lose some of their markets to US’ firms. On the other hand, the US local firms would not lose more of their home advantages because; local firms always have an advantage than the foreign firms (Feenstra, 2011).
The EU would be the second largest gainer from the trade. This is because of the growth of the market in which they serve. Those EU’s firms that produce products at the least opportunity cost would benefit from the US market. Therefore, the US markets that produces those products would face increased competition from the EU’s firms. Global firms within the two regions would increase their competitive advantage relative to other global firms across the globe. This is because of increased profitability. They would be able to finance their strategic plans using the increased revenue and profitability. Additionally, efficiency within the firms would increase significantly and, therefore, they would be able to produce goods and services at lower cost of production than other global organizations. This would translate into lower prices of goods and services. By charging competitive prices in the global market, these firms would increase their market share, which would translate into increased profits.
Globalization and the Free Trade Deal
Because of the increased connectivity amongst nations across the world, the trade agreement between EU and US would have positive effects to the rest of the world. Globalization has boosted the mobility of factors of production across the world. Therefore, the increase in production within the two regions would demand more factors of production, for example, labor and capital. Because of globalization, people from countries outside the two regions would as well benefit from increased demand for labor. Many global organizations are outsourcing cheap labor from the emerging economies, for example, India and China, as a way of boosting their competitive advantage.
Therefore, countries with low cost labor would benefit a lot from the deal. Some of the companies within EU and US would as well shift their operations to low labor cost countries, for example, African countries and then transfer the finished goods to the EU and US. Additionally, the capital would as well flow from the rest of the countries into the two regions. For example, for firms to be able to meet the increased demand for goods and services, as they become cheap due to free trade, they would need capital in terms of equity and loans for expansion. They may access equity or loan capital from countries with low cost of capital in form of foreign direct investments. Countries with low cost of capital would benefit immensely through earning of returns from their invested capital i.e. through earning of interest and dividends.
Overall Economics Results
The National income effect
Because of enhanced efficiency caused by liberalization within the two regions, the cost of producing goods and services would reduce significantly. This would translate into low prices of goods and services. Therefore, exports within the two regions to the rest of the world would be cheap. This would increase demand for exports from countries within the two regions thus increasing production. As the level of exports goes up, the national income within the countries in the liberalized regions would go up.
Additionally, consumption within these countries as well would go up because of decrease in prices of goods and services. Consumption has a multiplying effect on the national income, which would go up as well. To increase production, firms would demand more labor, causing wages to increase. Through increased wages, t...