Discuss The Advantages And Disadvantages, To The Participating Countries And The Rest Of The World, Of Forming A Free Trade Arrangement. China, Japan And Korea Are Now Undertaking Preliminary Research Into The Formation Of A Free Trade Area. Within China,

With the lowest integrated level in regional economic integration, Free Trade Arrangement (FTA) is applied most frequently, accounting for almost 90% of regional integration. (Hill 2007) Theoretically, all trade barriers both tariffs and non-tariff ones are eliminated in an ideal FTA. However, each member countries are free to determine independent trade policies against nonmember countries. (Hill 2007) Currently, the number of free trade arrangements is proliferating. FTA spread almost all over the world with the European Free Trade Association (EFTA), the North American Free Trade Agreement (NAFTA) and the Association of Southeast Asian Nations (ASEAN) are the most famous trade blocs. Additionally, in the Northeast Asia, China, Japan and Korea are undertaking preliminary research into the formation of a FTA. The formation of those FTA can be viewed as a way of gaining further benefits from free trade and investment during the long-term process of forming a global common market. Yet it has changed the situation of global economy to a certain degree. This essay will explore the benefits and costs of forming a free trade arrangement for both member and nonmember countries, paying particular attention to the economic and political aspects. It continues with an in-depth analysis of gains and losses in terms of industry from the formation of a free trade area with Japan and Korea. Based on the foregoing issues, finally it will recommend that China should support the establishment of this regional integration in general.

Economically speaking, the free trade is a positive-sum game and all participating countries would gain from it ultimately.

To begin with, forming a FTA would benefit the member countries to a great degree. According to traditional international trade theories especially Ricardo’s theory of comparative advantage, with unrestricted free trade countries could specialize in the production of those goods and services that they produce most efficiently, while importing products that can be produced more efficiently in other countries. (Hill 2007) By utilizing of the scarce resources optimally, potential production is greater than it is with restricted trade. (Gilpin 2001) Meanwhile, the New Trade Theory pointed out that free trade could increase the variety of goods available to consumers while the prices of those goods are reduced on average. (Hill 2007)

In addition to these static gains, free trade arrangement also brings dynamics gains in two kinds; both could stimulate economic growth. One is the availability of increased resources such as labour and capital from aboard caused by free trade. For example, between the period of 1989-1994 and the period of 1995-2000, Foreign Direct Investment (FDI) between the NAFTA members tripled. (Porter n.d.) Another gain, which comes from the improved efficiency of using those resources, includes several aspects. Respond to the expanded market, economies of scale could bring into full play. Also, technology transfer occurs under free trade; advanced technology is a crucial factor to promote productivity. In addition, FDI transfer know-how in other aspects such as marketing and management to host countries, which is also likely to stimulate economic growth. Finally, forming a free trade arrangement would enhance the competitiveness within the area; it stimulates producers to promote productivity. As a result, more efficient production would make member countries hold an advantage when compete in the global market.

In the political view, free trade and multinational cooperation that it entails increase the prospects of world peace. Economic cooperation makes member countries especially neighboring states depend on each other closely and indeed a political cooperation is needed further. This will reduce potential conflict between members. (Hill 2007) Moreover, by integrating economies together, member countries would increase bargaining power in the world. (Apeldoorn n.d.)

The debate about free trade is not extinguished. Despite in support with economic and political benefits mentioned above, free trade arrangement is accompanied with some impediments even costs.

The most essential disadvantage of FTA is the potential cost from trade diversion. It occurs when low-cost external suppliers are replaced in favor of suppliers in FTA partner countries. (Hill 2007) Such trade actually does negative effect on the economy’s overall efficiency. In the traditional trade theories view, costs arise form non-optimal allocation of resources. For importing countries, loss exists partially because government impose tariff and the overall wealth fear would be larger when import goods from external low-cost producers.

In addition, when establish a free trade area, certain groups may lose and they are easier to be identified than gainers. (Hill 2007) In the natural course of event, increase in unemployment in some industries is a typical phenomenon. For example, foreign trade in terms of both imports and exports has impacted US employment seriously. Estimated by the Economic Policy Institute, NAFTA resulted in a loss of 879,280 jobs between 1993 and 2002. (Scott 2003)

Furthermore, unfair treatment to member countries might exist due to different development level. Taking Asia-Pacific Economic Cooperation (APEC) as an example, developing countries in this FTA would access to an open market lagged ten years than their developed partners. (APEC 2005)

In political, FTA is a double-edged sword. In opposite with its benefits, member countries would concern their national sovereignty, which might be infringed to a certain degree when form a FTA. According to Hill (2007), these concerns arise from the fact that members should give up some degree of control over trade policy, monetary policy and fiscal policy demanded by close economic integration.

Not only the impacts on the member countries, FTA also affects the rest of the world though the influence might be not so significant as those to the member countries. On the positive side, the trade barriers existed between FTA participating countries and the nonmember countries would stimulate those nonmembers to get into a FTA. These incentives are a good thing for forming a global common market in the long term.

With regard to the disadvantage to nonmember countries, primary one is under trade diversion, internal suppliers won in foreign trade at the expense of nonmember country suppliers, which become less competitive purely because they face a tariff barrier. For example, with NAFTA in place, Mexico’s textiles and apparel exports to the United States duty-free. Even though China could produce these goods more cheaply, the US preferred to import from its FTA partner country Mexico. The apparel export volume of China had decreased