FREE TRADE
ARIZONA STATE UNIVERSITY
OMT 440 - INTERNATIONAL BUSINESS
WEEK 3
Introduction:
Free trade is a trade policy that does not restrict imports or exports. It is an idea that is
applied in international trade in order to facilitate the international trade of goods and
services.
Trade agreements occur when two or more countries agree on the terms of trade
between them. They determine the tariffs and duties that countries charge on imports and
exports. All trade agreements affect international trade. As in international trade, imports and
exports occur.
Imports are goods and services produced in a foreign country and purchased by
domestic residents, including anything shipped into the country even if it is done by a foreign
subsidiary of a domestic company. If the consumer is within the country's borders and the
provider of the goods is outside, then the goods or services are imported.
Exports are goods and services made in a country and sold outside its borders,
including anything sent from a domestic company to its foreign affiliates or branches.
. In undergoing free trade, countries that undergo free trade usually remove import
duties on goods that have been listed in the agreement, so that the price of goods becomes
cheaper or as cheap as the imported product in its country of origin. This will then lead to a
decrease in demand for local goods due to the arrival of imported products, especially if the
imported products are similar or competitive or are also substitutes for local products. A
further consequence of this is the demise of local entrepreneurs because they are unable to
compete with cheap imported products. In government, free trade is dominated by political
parties that hold liberal economic positions while left-wing and nationalist political parties
generally support protectionism, the opposite of free trade. Protectionism is a measure to
protect the safety of domestic products and services, in order to save the life of local goods
and services. As for liberalism, it is an ideology adopted by a person or a country to enforce
all laws (liberal). As a result, if there is no protection from the Government, it could be that
small entrepreneurs who have a small scale of business, with small capital, become helpless.
Therefore, the role of the Government to save SMEs is through protectionism.
A free trade area (FTA) is an area/place or location that does not impose tariffs or
import quotas to receive/import products from one country to another.
Many free trade agreements already exist, such as :
(1)
EFTA (European Free Trade Association) includes Norway, Iceland, Switzerland and
Liechtenstein.
(2)
NAFTA (North America Free Trade Association), covering the United States, Canada
and Mexico.
(3)
Etc. (See Book: International Policy Implementation and its Relation to Indonesia).
5.1.
Types of Trade Agreements:
There are three types of trade agreements (Amadeo, 2020)::
5.1.1.
Unilateral Trade Agreements:
It is a trade agreement that occurs when a country imposes trade restrictions and no other
country reciprocates. A country can also unilaterally relax trade restrictions, but that rarely
happens. This puts the country in a competitive position. The United States and other
developed countries only do this condition as a type of foreign aid to help new markets to
strengthen strategic industries that are too small and not a threat. An example of this
agreement is the US to developing countries, to help the market economies of developing
countries to grow and create new markets for exporters.
5.1.2.
Bilateral Trade Agreements:
It is an agreement involving two countries. Both countries agree to relax trade
restrictions to expand business opportunities between the two countries. They lower tariffs
and grant favored trade status to each other. The salient points usually center around key
domestic industries that are protected or subsidized by the government. For most countries,
this means the automotive, oil, or food production industries. According to Amandeo (2020),
the US is negotiating a new the world's largest bilateral agreement, the Trans-Atlantic Trade
and Investment Partnership with the European Union.
5.1.3.
Multilateral Trade Agreements:
These are agreements entered into by three or more countries and are therefore the
most difficult to negotiate. The larger the number of participants, the more difficult the
negotiations. Naturally, they are more complex than bilateral agreements, as each country has
its own needs and demands. However, once negotiated, multilateral agreements are very
powerful. They cover a larger geographic area, which gives the signatories a greater
competitive advantage. All countries also grant each other most favored nation status -
providing the best mutual trade terms and lowest tariffs.
The largest multilateral agreement is the United States-Mexico-Canada Agreement
(USMCA), formerly the North American Free Trade Agreement or NAFTA between the
United States, Canada, and Mexico. According to Amandeo (2020), their combined economic
output is over $21 trillion. During the first two decades of the agreement, regional trade
increased from about $290 billion in 1993 to more than $1.1 trillion in 2016.
The United States has one other multilateral regional trade agreement: Dominican
Republic-Central America FTA (CAFTA-DR). This agreement includes arrangements with
Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua that
eliminate tariffs on more than 80% of US exports.
According to Amadeo (2020), the Trans-Pacific Partnership would have replaced the
USMCA as the world's largest agreement in 2017, but President Donald Trump withdrew the
United States from the agreement. The US currently has 14 trade agreements involving 20
different countries.
5.2.
The WTO's Role in Trade Agreements:
The WTO is the World Trade Organization, which is the world trade organization.
The WTO provides assistance once an agreement goes beyond the regional level. The World
Trade Organization helps negotiate and enforce global trade agreements.The WTO currently
enforces the General Agreement on Tariffs and Trade.
According to Amandeo (2020), the world is increasingly enforcing greater free trade
than ever before, known as the Doha Round Trade Agreement. Doha is the capital of the
country of Qatar. Qatar Free Zones Authority (QFZA) is an independent authority created in
2018 to oversee and regulate world-class free zones in Qatar, offering tremendous
opportunities and benefits for businesses looking to expand globally (QFZ, 2020). The Doha
round negotiations lasted for more than a decade, and the reasons for their failure were
complex, especially many issues hinged on the two most powerful economies - the US and
the EU (Amandeo, 2020).
5.2.1
WTO as arbiter:
The WTO is the World Trade Organization, which is an international organization that
handles international trade and regulates fair international trade and the WTO provides
solutions to misunderstandings that occur in international trade. As countries overprotect their
local products, the WTO usually admonishes them to pay attention to product offerings from
other countries, especially if the country is a rich country and the offerer is a poor country.
Since globalization is now inevitable, all countries should conduct international trade as their
participation in globalization. Globalization also intends to jointly care for the environment so
that all creatures on earth are saved. Things that are not in line with globalization, such as
differences in perception of climate change, will become a topic of discussion in world news.
The existence of the WTO also serves as an arbiter in disputes that occur between one country
and another relating to international trade. The WTO also has the right to reprimand countries
that are dumping their products, resulting in high demand due to low prices. This can lead to
an imbalance in demand for the product and a decrease in demand for similar products from
other countries that are not dumping.
5.3.
Impact on Agribusiness Products:
According to Amandeo (2020), the United States and the European Union refuse to
reduce agricultural subsidies in their respective countries, so the price of agricultural products
is lower than it should be because agricultural subsidies make the price of agricultural
products cheaper. Whereas if the US and EU not reduce agricultural subsidies, it will make
their food export prices lower than in many emerging markets. As is well known, many
farmers in developing countries run inefficient farms, so the price of their products cannot be
competitive. For example, Indonesia's soybean production cannot compete with that of the
US. Therefore, local soybeans always lose out to imported soybeans, both in terms of price
and quality. Whereas agriculture in developed countries, due to technology, as well as the
government providing sufficient subsidies, their products are exported at competitive prices,
which are generally quite low compared to the production of less developed countries. . As a
result, the produce of farmers from developing countries can go out of business. The US and
EU refuse to cut subsidies, which would mean destroying the Doha round agreement, which
says that all traded goods are completely fair. On the one hand, by not reducing subsidies to
US and EU farmers, they are protecting their farmers and because of this protection, their
farmers can export food products at low prices (because they have received subsidies from
their respective governments).
To anticipate this, agriculture-based countries should not produce the same food
produced by the US and EU. Because if the products are the same, then they cannot compete.
As an alternative, farmers from developing countries should produce and increase their
production that has the potential and is not the same as the products produced by the US and
EU.
5.4.
Trade Methods in Transporting Goods:
In international trade, transportation is an important element, especially Freight
Transport, the physical process of transporting commodities and merchandise and cargo. The
term freight originally referred to transportation by sea but in American English, the term has
been expanded to refer to transportation by land or air (International English: "carriage" from
the word "carry" but meaning "train") as well. Another now popular word to replace barand
transportation is "Logistics", a term borrowed from military circles, also used in the same
sense.
The method of transporting goods is done using :
5.4.1.
Land Road
Shipping goods by "land" is by road (truck) and rail transportation. Generally, land
transportation is used, after air and sea transportation, which is generally called cargo
(Cargo), which is transportation after the goods arrive at the airport or at the port. Cargo is the
transportation of goods from the airport or port to their destination. This is because the place
of production is not always near the airport or port, so cargo is needed. The second reason is
that in some countries, the country's coastline is limited, making it impossible to build
factories in all coastal areas.
Land transportation is usually more affordable than air, but more expensive than sea,
especially in developing countries, which have limited roads (infrastructure), so if done by
road, it becomes inefficient. As for shipping goods by truck (road), it is used to reach the
destination, which is known as door to door shipment. The more formal term for door and
door shipment is multimodal transport. For the transportation of bulk goods, trucks and
trains are often used, after arriving by sea and airport shipping.
5.4.2.
Air delivery
Shipping goods by air has the advantage that it takes less time. Transporting
perishable goods is generally done by air shipment, for example fresh flowers, fresh fruit. Air
shipping activities, in large quantities, use cargo airlines, which are airplanes specialized in
transporting goods only. The advantage of cargo airplanes is that they can transport goods
quickly but the cost is the most expensive. Some of the leading companies in air freight
forwarding deliver goods with their airlines (specialized cargo aircraft), such as Fedex, TNT,
etc., while passenger airlines use the luggage compartment of passenger aircraft.
5.4.3.
Sea Road:
Sea roads are one of the international trade routes, which according to Sembiring
(2017) sea transportation is one of the indispensable transportation to support global trade and
economy, and ships are the mainstay of transportation that is very important for sea routes.
Quoting Suptiyanto's statement by Sembiring (2017), dependence on sea transportation modes
continues to grow to this day because ships have their own characteristics. He explained, first,
ships are the most efficient because they can transport large quantities. Second, ships are safe
because shipping regulations are always upgraded for ship safety. Third, it is more
environmentally friendly where regulations are increasingly strict in regulating pollution and
the use of environmentally friendly fuels. It is important to note that almost 90% of the
volume of international trade is carried out using sea lanes and ships as transportation. This
continues to increase partly due to industrial growth and the occurrence of free trade, as
described by Sembiring (2017), 90% of international trade volume uses ships and this is
superior because of the growth of new industries such as shipping Indonesian coal to China,
wider free trade, increased consumer demand and because of technological advances that
make transactions easier.
This statement is in line with that stated by IMO (2020), that maritime transportation is very
important for economy world economy because more than 90% of world trade is conducted
by sea and it is by far the most cost-effective way to move bulk goods and raw materials
around the world (IMO, 2020). The IMO (International Maritime Organization) is a
specialized agency of the United Nations responsible for the safety and security of shipping
and the prevention of marine and atmospheric pollution by ships. IMO's work supports the
UN's Sustainable Development Goals. The IMO and the Sustainable Development Goals call
for action by all countries to eradicate poverty and achieve sustainable development by 2030
worldwide - and the SDGs are seen as an opportunity to change the world for the better and
leave no one behind. As part of the United Nations family, IMO is actively working towards
the 2030 Agenda for Sustainable Development and its associated SDGs. Indeed, most
elements of the 2030 Agenda will only be realized with a sustainable transport sector that
supports world trade and facilitates the global economy. IMO's Technical Cooperation
Committee has formally endorsed the link between the Organization's technical assistance
work and the SDGs. The Sustainable Development Goals provide a blueprint for the transition
to a planetary 35 a healthier and fairer world - for present and future generations. With
concrete targets, IMO's goals are to end poverty and hunger, expand access to health,
education, justice and employment, promote inclusive and sustainable economic growth,
while protecting our planet from environmental degradation. In line with the SDG Strategy
the World Maritime Theme 2020 "Sustainable shipping for a sustainable planet" is poised to
further raise awareness of the UN Sustainable Development Goals. As a specialized agency of
the United Nations, IMO is the global standard-setting authority for the safety, security and
environmental performance of international shipping. Its main role is to create a regulatory
framework for the shipping industry that is fair and effective, universally adopted and
universally implemented. In other words, its role is to create a level playing field so that ship
operators cannot solve their financial problems by simply cutting corners and compromising
on safety, security and environmental performance (IMO, 2020). This approach also
encourages innovation and efficiency in ocean freight. Elaborated further, shipping is a truly
international industry, and can only operate effectively if its own regulations and standards
are agreed, adopted and implemented internationally and IMO is the forum where this process
takes place. According to IMO (2020). international shipping transports more than 80 percent
of global trade to people and communities around the world. Shipping is the most efficient
and cost-effective method of international transportation for most goods; it provides a reliable,
low-cost way to transport goods globally, facilitating trade and helping to create prosperity
among nations and communities. It is no surprise, therefore, that the world depends on a safe
and efficient international shipping industry - and these conditions are provided by the
regulatory framework that is developed and maintained by IMO. IMO measures
cover all aspects of international shipping - including ship design, construction, equipment,
manning, operation and disposal - to ensure that this vital sector remains safe,
environmentally sound, energy efficient and secure. Shipping is an essential component of
any program for future sustainable economic growth. Through the IMO, countries Members
of the Organization (including UN members), civil society and the shipping industry have
worked together to ensure a sustained and strengthened contribution to the Green Economy
and sustainable growth. The promotion of sustainable shipping and sustainable maritime
development is one of IMO's top priorities in the coming years. As part of the United Nations
family, IMO is actively working towards the 2030 Agenda for Sustainable Development and
related SDGs. Indeed, most elements of the 2030 Agenda will only be realized with a
sustainable transport sector that supports world trade and facilitates the global economy.
Energy efficiency, new technologies and innovations, maritime education and training,
maritime security, maritime traffic management and maritime infrastructure development: the
development and implementation, through IMO, of global standards covering these and other
issues will support IMO's commitment to providing the institutional framework necessary for
a green and sustainable global maritime transport system.
It is also mentioned by ICS (2020), that the international shipping industry is
responsible for the transportation of about 90% of world trade. Shipping is the lifeblood of the
global economy because without shipping, intercontinental trade, transportation of large
quantities of raw materials, and import/export of affordable food and manufactured goods
would not be possible (ICS, 2020).
5.4.4.
Intermodal Transportation (Intermodal Frieght Transport):
Intermodal freight transport involves transporting goods in intermodal vehicles (often
referred to as intermodal), i.e. using various transportation modes, which include all
transportation services. This method reduces cargo handling, thereby improving safety,
reducing damage and loss, and enabling faster delivery of goods. This method calculates the
overall transportation of goods, from the cost of shipping, trucking or rail, until the goods
reach their destination. Reduced trucking costs are the main benefit for using intermodal
transportation. This method is used in order to compensate for the reduction in time for
transportation over shorter distances, for example via toll roads, and the goods are not
unloaded and therefore more secure. In other words, intermodal freight transportation refers to
shipments that are involves more than one capital (transportation). More specifically it usually
refers to the use of containers for easy transfer from ships, trains, planes and trucks. The use
of inter-modal transportation is generally used to ensure the goods arrive at the place in a safe
state. Thus, intermodal transportation is the cooperation of land and air or sea transportation
to deliver goods abroad. Intermodal freight transportation needs to plan routes and carry out
delivery services from one factory to the receiving door (CML, 2020). It is further explained
that international shipping should be fully integrated between air, road, rail and sea
transportation.
5.6
Effects of Free Trade:
Free trade has both positive and negative effects or impacts. The following will be
detailed by Teeboom (2019) on the positive and negative impacts of free trade.
5.6.1.
Negative effects:
In the agreement that has been agreed, there is still a risk of violating NAFTA, namely
the United States - Canada - Mexico agreement. The agreement states that there is an
agreement not to impose import tariffs on goods entering the US from Canada and Mexico,
and vice versa. However, what often happens is that the US violates the agreement by
imposing import duties on Canada and Mexico. This happens because Donald Trump feels
that US SMEs are being pushed out of position because many products from Canada and
Mexico are cheaper than the US. If imports of these goods are not given tariffs, then the
products of US SMEs will be difficult to sell. Knowing this, President Trump immediately
imposed import tariffs so that the price of Canadian and Mexican products became expensive
in the US market. Knowing President Trump imposed import tariffs, Canada responded by
imposing import tariffs on goods entering from the USA. However, Mexico, a smaller
country, did not have the courage to react to this treatment. As a result, Mexico only
complained, and President Trump still did not change it, until then the NAFTA agreement
was stalled and was still waiting for a new agreement. President Trump is not satisfied with
the results of NAFTA, which has been in effect since 1994. This is because NAFTA has made
the US experience a trade deficit. This means, With the existence of NAFTA, many Mexican
products were exported to America without being subject to tariffs, making Mexican goods
entering the US market cheap and this threatened the existence of US-produced goods and of
course the subsequent consequences had an impact on the survival of US SMEs that could not
compete. Then came the USMCA, a new agreement that replaced NAFTA. USMCA stands
for United States, Mexico and Canada, which replaces NAFTA.
The same thing happened with Indonesia and the USA. Until now, the agreement has
been unilateral. The United States dropped Indonesia from the list of Developing Countries
on February 24, 2020, while Indonesia's classification in the ranks of Developing Countries
will get priorities that can be utilized, such as: low tariffs if Indonesian products enter the US
market. However, if the classification of Developing Countries is crossed out, and included in
Developed Countries, many priorities or special treatments will be lost. Because the
treatment of developed countries is certainly different from developing countries. The main
thing about the change in country status is that higher tariffs are imposed on goods sent to the
USA. Indonesia is no longer entitled to receive the Generalized System of Preferences (GSP),
which is a US government program to encourage the economic development of developing
countries listed in the import duty tariff relief facility, so that the product can compete in the
US market (CNBC, 2020). Furthermore, it is said that Indonesia is not alone. Albania,
Argentina, Armenia, Brazil, Bulgaria, China, Colombia, Costa Rica, Georgia, Hong Kong,
India, Kazakhstan, Kyrgyz Republic, Malaysia, Moldova, Montenegro, North Macedonia,
Romania, Singapore, South Africa, South Korea, Thailand, Ukraine, and Vietnam were also
excluded from the list of Developing Countries. This is because the determination of
developing countries is outdated because it was made in 1988 (CNBC Indonesia, 2020).
However, country classifications have been put in place for analytical purposes, and WESP
(World Situation Economic and Prospects) classifies all countries in the world into one of
three broad categories: advanced economies, transition economies and developing
economies (UN, 2020). The WESP is the UN's flagship publication on expected trends in the
global economy, produced annually by the United Nations. UN Department of Economic and
Social Affairs (DESA), UN Conference on Trade and Development (UNCTAD) and five UN regional
commissions.
The composition of these groupings is intended to reflect the underlying economic
conditions of the country. Some countries (particularly economies in transition) have
characteristics that could place them in more than one category; however, for the purposes of
analysis, the groupings have been made mutually exclusive. Within each broad category,
some subgroups are defined based on geographic location or ad hoc criteria, such as the
"major developed economies" subgroup, which is based on membership of the Group of
Seven.The Group of Seven (G7) is an international intergovernmental economic organization
consisting of seven of the world's advanced IMF economies: (1)Canada, (2)France, (3)
Germany, (4) Italy, (5) Japan,
(6) the United Kingdom, and (7) the United States (IMF, 2017). From the G& category, it is
clear that Indonesia is not categorized as a developed country, because Indonesia is not
included in the G7.
The geographical regions for developing economies are as follows: Africa, East Asia,
South Asia, West Asia, and Latin America and the Caribbean. In the analysis section, a
distinction is made between fuel exporters and fuel importers from among economies in
transition and developing countries. An economy is classified as a fuel exporter if the share of
fuel exports in its total merchandise exports is greater than 20 percent and the level of fuel
exports is at least 20 percent higher than the country's fuel imports. These criteria are derived
from the share of fuel exports in the total value of world trade in goods. Fuels include coal, oil
and natural gas
. For the rest of the analysis, countries have been classified based on their level of
development as measured by gross national income per capita (GNI). Thus, countries have
been grouped as high-income, upper-middle-income, lower-middle-income and low-
income. To maintain compatibility with similar classifications used elsewhere, the GNI per
capita threshold levels are those set by the World Bank. Countries with less than $1,035 GNI
per capita are classified as low-income countries, countries with between $1,036 and $4,085
as high-income. lower-middle-income, countries with between $4,086 and $12,615 as low-
income upper-middle-income countries, and countries with incomes of more than $12,615 as
developed countries. GNI per capita in dollars is calculated using the World Bank Atlas method. The
list of least developed countries (LDCs) is decided by the UN Economic and Social Council and,
finally, by the General Assembly, based on recommendations made by the Committee on
Development Policy. The basic criteria for inclusion require that certain thresholds be met with regard
to GNI per capita, the human assets index and the economic vulnerability index.
The World Bank (2020) noted that Indonesia's GNI was USD 3,840 in 2018, which
means that Indonesia is not yet a developed country. But the USA has removed Indonesia
from developing countries into the category of developed countries (CNBC Indonesia, 2020).
It turns out that this information comes from the Office of the United States Trade
Representative at the World Trade Organization or WTO which removed Indonesia from the
list of developing countries since Monday, February 10, 2020 (Liputan6, 2020). Thus,
Indonesia is considered a developed country regarding global trade, so it is not about the
ability as a developed country. Apart from Indonesia, including China, Brazil, India, and
South Africa were removed from the list of developing countries. These countries are
categorized as developed countries according to the WTO (Liputan6, 2020). According to
Finance Minister Sri Mulyani Indrawati, the US decision to exclude Indonesia from the list of
developing countries did not have a major impact on trade; because the US decision was more
specific to additional import duties on Indonesian goods (Liputan6, 2020). This is also a risk
if one day Indonesia is categorized as a truly developed country, there will be other stricter
restrictions.
The reason the US took some steps was because it needed to protect its local
products. President Trump felt that the NAFTA agreement with Mexico caused many car
factories and parts factories to close. This resulted in as much as 5% of the industrial and
trade sector having to close its operations and resulted in a number of employee layoffs. This
is because car factories and their spare parts cannot compete with the price of cars produced
by Mexico. Therefore, if President Trump cares about local US products and restoring the
existence of US car factories, then NAFTA must be terminated according to Trump.
Therefore, Trump then froze NAFTA in 2018, arguing to protect the factories of SME parts
and car companies through protectionism. Similarly, Trump's attitude of limiting developed
countries to Indonesia, China, Thailand, and others, which were previously categorized as
developing countries. By changing the boundaries of developing countries to developed
countries, it means that the US can take action to impose tariffs on products it exports, which
it did not originally impose. As a result of this policy change, products imported by the US
will have higher prices due to the added tariffs. By adding tariffs, products become relatively
more expensive in the US market. This means that products that become more expensive will
have a decreased demand, which means that there will be less exports in the future.
Another negative effect is child slavery or the employment of minors for little or
sometimes no pay. This happens a lot in poor countries where they find it too costly to
employ adults because adults earn a standard wage. By employing children, business owners
will be able to reduce the cost of their business by paying less labor. As a result, child labor,
child slavery and the violation of international laws against the employment of minors can
occur.
Another negative effect is that it worsens the environment. Many businesses do not
pay attention to the environment because they only prioritize exporting their products and
making profits. In fact, the products produced pollute and even damage the environment.
Therefore, countries that care about the environment refuse to import products that are
produced by damaging the environment. For example, palm oil was once "banned" from
entering the European market because there was an opinion that palm oil production was
destroying forests in Kalimantan. As is known, the tropical forests in Kalimantan are
categorized as the lungs of the world that can provide oxygen to the world. With the cutting
down of many trees to make way for oil palm plantations, many orangutans who could not
live in the forests before were harmed, then the European Union once banned CPO (crude
palm oil) or palm oil from entering the European market.
Another effect is price dumping. Producers of products who want their products to
sell, they give relatively low prices to countries that import them. This price is even below the
production price because the exporting country has excess production. As a result of the
dumping price, other countries want to import it (because it is cheap). This condition makes
for an unhealthy trade because it imposes unfair trade.
5.6.2.
Positive Effects of Free Trade:
The development of science, including economics, has brought about major changes in
human thinking. Adam Smith brought about this change in thinking, that free trade can help
markets operate economically efficiently (Teeboom, 2019). He explained that free trade
encourages producers to make the "right" things and to set the "right" prices for their goods.
The end result is that producers earn a reasonable profit; consumers do not overpay for goods,
and a huge amount of new wealth is generated and widely distributed around the world. An
example of this happening is explained by Teeboom (2019) that for example, if producers in
Bangladesh can make good quality running shoes at half the cost of producers in the US, then
free trade policies will naturally shift more production of these goods to Bangladesh, thus
creating jobs and wealth in that country and lowering the cost of running shoes for customers
in the US and elsewhere in the world. So the benefits of free trade can help:
(1)
Poor countries like Bangladesh are helped by orders or orders for shoes from the US, so
that workers in Bangladesh get jobs that support their national economy.
(2)
Consumers of running shoes in the US can get cheaper running shoes than if they were
produced in the US (because if they were produced in the US, the price of the shoes
would be higher due to higher labor costs).
(3)
Consumers of running shoes in other countries can also enjoy running shoes at a lower
price with good quality as well (because they are ordered by the United States.
(4)
The US can benefit from ordering running shoes from Bangladesh, to sell to other
countries at a price that is sufficiently profitable for the US.
Free trade is meant to remove unfair barriers to global trade and to boost economies in both
developed and developing countries (Teeboom, 2019). He continued, but free trade can - and
has - produced many negative effects, in particular miserable working conditions (due to
employers driving down labor costs), job losses (due to cancelled orders), economic damage
in some countries (due to exchange rates), and global environmental damage (due to massive
exploitation: e.g. coal in Indonesia shipped to China, sand shipments by Freeport). However,
the World Trade Organization (WTO) continues to advocate for free trade that is not
restrictive and does little harm to some national economies and millions of workers.
5.2. Effects on Protectionism:
The international economic battle that President Donald J. Trump is waging against China is a
complete example of free trade versus protectionism. Trump argues that US trading partners
have been taking unfair advantage of the open markets that have been offered for decades. He
says that other countries deliberately dump goods into the US market that are unfairly priced
due to lower labor costs and their respective governments' assistance to businesses in those
countries.
Therefore, Trump started imposing tariffs - which are basically taxes on foreign goods
imported in this country - and threatened to impose higher and higher tariffs (due to the large
number of goods exported to the US). Tariffs will raise the price of foreign goods entering the
US. The companies that ship the goods have to pass on the cost to consumers and that cost is
realized by the import tariffs imposed by the US.
China and other countries exporting products to the US are certainly complaining
about the tariffs imposed by the US and they argue that the imposition of the tariffs is not a
good idea.
The tariffs will hamper world trade and cause prices of goods and services to rise. They say
that free trade is trade unhindered by tariffs - and that it is the best way forward. They argue
that the world market should not be restricted by tariffs, which will streamline the global
economy.
Free trade means no high tariff barriers, and goods can pass through borders
unhindered by any restrictions. Conversely, protectionism is also needed by a country to keep
their economy running well. But if tariffs are imposed, then the flow of goods flowing into a
country will certainly slow down. Trump's threat to impose tariffs on some US trading
partners is a classic example of protectionism. So Trump intends to protect US domestic
businesses in order to get a better market.
Trump's argument for protectionism (although he certainly doesn't call it that) seems
to be correct. Mentioned by Teeboom (2019), "The Wall Street Journal" noted that the US has
a $375 billion trade deficit with China. In June 2018, the Trump administration engaged in
heated negotiations with China to find a solution to that $200 billion deficit by forcing China
to open its markets. China exports a lot of its products to the U.S. but China puts a lot of
restrictions on the goods that U.S. companies want to export.
The US has actually tried before by imposing heavy tariffs on European trading
partners. The result: The Great Depression occurred in the early 1930s. Back then, the Smoot-
Hawley tariffs were imposed in the US, triggering "the most famous case of protectionism in
history," says Bruce Bartlett, writing in "The Fiscal Times." (Teewoo, 2019). It is elaborated
that Congress passed the Smoot- Hawley act in 1930, and the results were disastrous: i.e. the
prices of imported goods went up 5 percent and then Europe retaliated by sharply restricting
US exports to Europe. What happened then was that world trade shrank, leaving many
countries unable to pay their debts at the same time World War I was going on. Then the
Economists debate the overall impact of Smoot's protectionist measures-Hawley, but the late
economist Jude Wanniski called it a major cause of depression (Teeboom, 2019).
The Great Depression then inspired the introduction of free trade, by reducing barriers,
especially tariffs on imported goods.
Teewood (2020) quotes Donald J. Bordeaux (senior fellow at the FA Hayek Program
for Advanced Studies in Philosophy, Politics, and Economics) and Nita Ghei (director of
policy editing at the Mercatus Center at George Mason University), that free trade is good for
the global economy and increases prosperity for Americans - and citizens of all participating
countries - by allowing consumers to buy more, better-quality products at lower costs. It
promotes economic growth, improved efficiency, increased innovation, and greater fairness
that accompanies a rules-based system. The benefit of these conditions is that overall trade
increases, especially exports and imports. But it also brings an important note that foreign
trade restrictions often harm American consumers and producers. If the US enforces
Protectionism, it means limiting the choices Americans can buy, and raising the prices of
everything from clothing and groceries to the raw materials manufacturers use to make
everyday products. This is the opinion of Bordeaux and Ghei (Teeboom, 2019). On the other
hand, free trade tends to increase trade deficits in some countries to potentially catastrophic
levels. The United States has widening trade deficits with almost every country it trades with.
Teeboom (2019) notes the statement of "The New York Times." which quoted President
Trump, that "We're losing, over the last few years, $800 billion a year" - when the deficit was
"only" $375 billion. According to Teeboom (2019), every dollar in the trade deficit, generally
fueled by free trade, means dollars are taken away from U.S. workers and, instead, those
dollars move to workers abroad. The result is job losses in the US like any other country, with
much lower labor costs and often with businesses supported by government assistance to gain
employment. Under these conditions, Teeboom (2019) asks the question: which is more
important: free trade or free trade protectionism? There is no easy answer, he continued.
According to The "New York Times", trade is not always a bad thing: "Most economists do
not see trade gaps as money 'lost' to other countries, nor do they worry about trade deficits at
large levels. But that is because trade imbalances are affected by a number of macroeconomic
factors, including the relative growth rates of a number of other countries, the exchange rates
of their currencies, and their savings and investment rates. For example, the trade deficit of
the United States, which occurred in the past during the Great Recession, was because it was
happening when national consumption was faltering" (Teeboom,2019). Elaborated by
Teeboom (2019), that the NYT and its supporterssay that free trade strengthens the world
economy. But others argue that free trade harms the economies of countries like the US.
From a study conducted by David Autor, David Dorn, and Gordon Hanson on the economics
of labor, found that the surge in Chinese imports to the United States "has inflicted large
losses on wages and labor in the domestic market".
However, Teeboom (2019) quoted conservative magazine, "The National Review," as
saying that the North American Free Trade Agreement (NAFTA), only benefited the US,
which added 30 million jobs after NAFTA was enacted in 1992. According to Teeboom
(2019), such arguments are endless, which means the free trade vs protectionism debate will
not fade away anytime soon.
5.6.3
Effects on Guided and Free Economies:
A guided economy is an economy of a country that is always led by the government.
A free and active economy (such as Indonesia), on the other hand, is the opposite of a guided
economy. In a guided economy, the economy is dependent on the government making every
decision, while a free economy allows individual supply and demand to set prices and
production levels (supply). In a guided economy, the level of production is determined by the
decisions of the central government, and it may also set the price of goods for consumers by
the same method. Guided economies enjoyed their greatest implementation during the period
after World War II, when the Union of Soviet Union (EU) was the largest economy in the
world.
The Soviet Union, its vassal states, and many sympathetic countries used an economic
model based on this method. But since the fall of the Soviet Union, the guided economy
model has been rejected by most countries. As of 2010, many countries call themselves
Communist, but they have large, free enterprise sectors with relatively little government
intervention. The free enterprise model is currently the dominant economic model in the
world, although it is implemented with various government interventions that differ from
country to country.
Studying guided and free economies also means studying the nature and causes of
nations' wealth. According to Teeboom (2019), the current guided economy is an application
of communist economic theory, which originated from the publication of Karl Marx and
Friedrich Engels' "Das Kapital: Kritik der poltischen Okonomie" in 1867, which translates to
"Capital: A Critique of Political Economy."
According to Teeboom (2019), a free economic system is the most efficient economic
system in allocating funds to the most productive entities in an economic system. A guided
economy, on the other hand, can be more responsive to political needs, as the government can
easily mandate the production needed. However, the lack of efficiency in a guided economy
will reduce the ability to produce goods with the same amount of natural resources. For
example, under normal conditions, a given area of farmland will be able to maximize its
productive output under a capitalist system, which ensures the availability of necessary
prerequisites such as fertilizers and farm labor. But in a guided economy, this would not be
the case as the normal rules of supply and demand are replaced by government decisions. This
leads to inefficiencies in the farmland's ability to produce, so its maximum output will be
lower than what could be produced under freer economic conditions.
Teeboom (2019) reveals that during the Cold War (World War I), free and guided
economies were both distributed across political boundaries. In North America and Western
Europe, free economies were implemented as "western economies," while Eastern Bloc
countries around the Soviet Union led to "Eastern Bloc economies" becoming shorthand for
"guided economies" and "communism." African countries and Asia participated in various
economic models during this time, and some were based on their key political ties (Teeboom,
2019).
According to Teeboom (2019), neither a purely free economy nor a purely guided
economy has ever existed and most likely never will. So any government regulation can be
said to be enacted because it is to protect the domestic economy, even though it is sometimes
considered to violate the free exchange of goods and services.
If in a completely free economy, it is likely to have an indirect effect on trade. Likewise, in a
guided economy, since everything is regulated by the Government, there will be a black
market and free trade is likely to develop when there are goods that people want but are not
provided by the Government, and government-mandated prices will still fluctuate in response
to local shortages and inefficient distribution.
V. EXPORTS, IMPORTS AND EXCHANGE RATES:
6.1
Meaning of Exports, Imports and Exchange Rates
Exports are products sent from one country to another, imports are goods imported by
one country from another, and exchange rates are the difference in value that occurs when
there is a change in currency from one country to another. Currently, payments for products in
the international market are made in US dollars (USD). In export and import activities, the
USD means of payment is used and will always be related to the exchange rate because the
currency used is USD.
6.2
Balance of Payment:
Balance of Payment is the balance of payments that every country has, especially
when it comes to international trade. In the balance of trade, it reveals whether a country is in
a trade deficit or not. A country that imports too many goods from another country, then the
importing country will experience a trade deficit or trade deficit if it does not compensate for
the amount of exports equivalent to the amount of imports. As for a country that exports its
products to other countries and it generates a value from the difference between what it
exports and imports, it is called a net export or nett-export. A country that feels that it has a
deficit in its balance of trade, it will evaluate its trade with the country causing the deficit. For
example, in NAFTA, the US feels that Mexico exports too many goods to the US, while the
US exports few products to Mexico; thus the US has a deficit in its trade balance with
Mexico. The US feels that Mexico is sending too much of its products in relation to its
freedom to export goods to the US due to the NAFTA agreement. As discussed, NAFTA is an
agreement between three countries; the US, Mexico and Canada that pledges to not tariff each
other's goods in and out of the three countries. The US felt that it had unbalanced trade with
Mexico at the time because Mexico was sending so many products to the US, while Mexico
was not importing as many products as Mexico was exporting. As a result, the US felt that
Mexico was unilaterally benefiting from the existence of NAFTA. Therefore, President
Trump then froze NAFTA in 2018 and the risk was, Mexico will no longer be able to send its
products to the US until such time as a new agreement is re-established.
In fact, the US does run a deficit not only with Mexico, but also with other countries.
Hill and Clifford (2016) state that the US imported $3 trillion worth of products from
countries around the world in 2014, consisting of clothing, cars, oil etc. This resulted in the
US running a trade deficit of $722 million in its trade balance (Hill and Clifford, 2016). This
resulted in the US having a trade deficit of $722 million in its balance of trade (Hill and
Clifford, 2016).
The US feels that it has a balanced trade balance with Canada, as in 2016, US and
Canadian exports totaled $600 million.
6.2
Comparative Advantage:
Comparative Advantage is a term in international trade that means when a country
imports a product from another country, it is because it is produced cheaper than the country
produces it. Thus, the country has calculated that by importing it, it has realized that the
imported product is cheaper than if it produced it. Therefore, the country decides to import it
and it can concentrate on products that have a higher comparative advantage than other
countries so that it can export them and gain value from international trade. This is because
the country can produce a product cheaper than other countries, so other countries are
interested in importing it. Thus, the exporting country will gain a comparative advantage,
because it can produce a product cheaper than other countries that make it. For example,
Americans prefer to buy television products made in Malaysia because they are $200 cheaper
than US-made televisions. This is because the labor cost to make a television is cheaper in
Malaysia. The excess value of 200 US dollars can be made to watch a baseball game or go to
a restaurant with family (Hill and Clifford, 2016).
The US often imports products that it considers cheaper to produce by other countries,
such as clothing from Vietnam, Bangladesh, while the US concentrates more on products that
cannot be produced by other countries, such as airplanes, jet turbines, high-tech goods such as
Apple laptops, etc.
However, there have also been cases where the Comparative Advantage was not the
only factor. For example, before 1994, when NAFTA was not yet in effect, cars made in the
United States were considered quite expensive, because primarily, labor costs in the US were
much greater than Mexico. Finally, when NAFTA came into effect in 1994, there was an
agreement for cars to be produced by Mexico. As a result, many US car and parts companies
closed down, resulting in increased unemployment because they could not compete with
Mexican products. When NAFTA was first enacted, in 1994, the situation may not have been
too pronounced in the US economy because in the 1990s, the US economy was progressing so
car manufacturing was left to Mexico, causing no problems. But in 2014, the US ran a deficit
in its balance of payments, resulting in an economic crisis that began to be argued that the
economic crisis was caused by NAFTA, which gave many opportunities to Mexico but not to
the US. Barack Obama, the US president at the time, had already begun to echo the US
mistake of allowing NAFTA to take away some US products and by the time Donald Trump
became president, NAFTA was frozen. Then, the US made its own cars and parts, and
actually the price of cars became more expensive again, because 65% of car parts came from
factories in the US, and while the rest were just made by other countries, for example, seat
belts made in Japan, speedometers made in Germany or China, seats imported from Mexico.
In the end, observers say that cars can cost 400 - 2,200 dollars more made in the United
States. However, this is a relief to President Trump, as unemployment is reduced thanks to car
and parts factories starting operations in America and that means a reduction in
unemployment in the US workforce. In this case, comparative advantage is not used solely to
get products cheaper, but if it can overcome the unemployment rate, then comparative
advantage can be defeated by US government policy.
6.4
Exchange rate:
In every international trade transaction, the US dollar or USD is used. If Americans
buy Chinese products in China's currency, the Yuan, it is said that the Yuan is appreciating.
Conversely, since it is the Americans who exchange US dollars to Yuan, it is said that the US
is depreciating. This is how exchange rates operate in exports and imports related to
international trade. A country that imports products from other countries, then that country is
at risk of depreciating its currency, while the country that exports, experiences an appreciated
exchange rate.
VI. GLOBAL MARKETING MIX:
As is well known, the Marketing Mix is a marketing mix that is well known in
marketing science and when used in international business, it is referred to as the global
marketing mix.
In the global marketing mix, it is known as Standardization or Adaptation to introduce
products from the country of origin and decide on the method to be chosen and used to market
them (Walde, 2016). The Marketing Mix that has been used in the country of origin, whether
it is 4 P, 7 P and others, should be adapted to other countries where the product will be
introduced.
Walde (2016) gives an example, a cake from a company from France (French Cakes
Ltd). will be marketed in other countries, it needs to be standardized and adapted. What needs
to be done in this regard is:
(1)
Internationalization process → is there a connection?
According to Walde (2016), the internationalization process needs to be considered:
•
Choice of region / country and market selection process: namely the need to study in advance
from the home market, where the destination country will be marketed (region as foreign
market), what country (country), and how to enter the country and market conditions,
including ease of transportation to the country, how much is the population? Is the income
level appropriate to spend the product?
•
Choice of entry / mode, factors influencing entry decision: i.e. what are the options to enter
the country? Are there any obstacles in sending the cake from the country of origin? What
factors influence the decision to enter the country?
•
Choice of the global marketing mix of standardization and adaptation; namely, which choices
are made in standardizing and adapting the products to be sold.
(2)
Standardization and Adaptation → what and why is this done?
Standardization that needs to be done in the cake product is for example: whether the cake
recipe has been confirmed in size, weight, delicacy, then in detail can be described as follows:
(a)
Product:
Can the product be marketed as a type of cake (cakes) or desert (dessert) or both, does
the product already have a certain characteristic as a French cake style with a taste from
France? Will it be marketed in frozen form?
(b)
Place:
Will the product be sold in restaurants or cafes, or only to catering businesses, or both?
(c)
Price:
Have you prepared a price list of the products to be sold?
Is there a discount if you purchase a certain volume?
(d)
Promotion:
In terms of promotion, is there a need for personal sales (is it necessary to send experts from
France to streamline the sales force. Maybe personal training is needed?), is it necessary to
conduct trade fairs, or in-store promotions such as the provision of POS (Point of Sales: in-
store promotional sheets), and so on.
(3)
Factors to evaluate how to evaluate? Evaluation is done through 2 sides, namely
Standardization and Adaptation.
If the intended market, say, is marketed to the UK, then there is no need for
standardization because the two countries have some similarities in the Marketing Mix. If it is
different, it needs to be harmonized in terms of degree or level of the product, in order to meet
standardization. However, because the UK and France have equality as developed countries,
the marketing mix does not change, unless there are things that are different, for example, the
product is very different, the distribution channel must be used specifically so that it requires
using a particular organization, then changes in the Marketing Mix are needed.
In launching the sale of the product, standardization is needed so that the product can
reach the real market and it is necessary to conduct a financial study of the company (which
is adjusted to the budget), then how much labor is used, and how long it takes to build a
market in the UK. This is done because it is related to costs in order to minimize operational
costs.
After that, the next step is to evaluate the impact of the standardization choices and
adaptations if necessary. There are factors that must be considered when determining the
standardization and adaptation options chosen:
(1)
Globalization of the market
In evaluating the impact of the implementation of standardization, it is necessary to
evaluate the consumers: do they have similarities in their needs or values, if not, then no
changes are needed. Similarly, the organizational form of customers: does it require
centralized purchasing processes? If yes, then standardization is required.
(2)
Globalization of the Industry
Furthermore, it is necessary to evaluate in industrial globalization: are R&D costs too
high? How about in the worldwide size (worldwide sales), is a high sales result required in the
volume that must be sold? If not, because it is just cake, then it is not necessary.
(3)
Globalization of the competition
Is there a need for standardization in global competition? Since this cake is a product that has
a lot of competition, it is necessary to carry out the necessary standardization.
In anticipation of these three evaluations, then whether it is necessary to take steps to
improve the internal factors in French cake marketing, such as whether the role of
competetive advantage is transferable. If yes, then it is necessary to standardize the internal
factors.
In evaluating factors related to adaptation, the following steps are required:
(1)
Local Market Conditions:
If the customers of the cake are different in: social, economic and political structures; is
a different adaptation needed for the customers? If the cake is a French cake which is different
from the local (English) cake, then no adaptation is needed.
(2)
Local competitive condition:
If local market conditions have differences in competition in the local market, and this Perncis
cake is a product that has competitors globally, then local adaptation is needed.
(3)
Local legal conditions:
Since there is no need for standards in the baking industry or specifically, and since cakes
originating from other countries also do not require a marketing law, there is no need for
adaptation in this regard.
From this evaluation of adaptation with respect to French cakes, it seems that there is
no need for a step in evaluating the internal factors in adaptation, so there is no need for a step
in evaluating the internal factors in adaptation.
