How Free Trade Became the Building Block of Global Supply Chain
Trade Facilitation and Global Supply Chains: The Role of FTA Trade Facilitation Rules in Promoting Global Supply Chains
Free trade has been the backbone of world economies since its ideological conception in 1817 by David Ricardo, a renowned economist (Ricardo, 1891). It is a key driving force in promoting international supply chain management by advocating barrier-free trade across borders. Its adoption requires the elimination of tariffs, prohibitions, and quotas that impede the exchange of goods and services across the international borders.
Free trade has been fueled by capitalism ideology in fostering trade liberation, and its preference is due to its promotion of market access. Its positive implications for supply chain management are due to the streamlinization of the flow of trade goods and services. Furthermore, free trade is beneficial in opening market opportunities through the expansion of international supply chain management for signatories countries.
New Zealand is one of the countries that participate in free trade as a signatory of ASEAN that establishes free trade agreement by reducing tariff and non-tariff barriers (“New Zealand Government,” 2019). In this paper, I will provide a supporting argument of the interminable good outcomes of free trade in consideration of its impact on supply chain management.
Economies of scale
Free trade allows countries to benefit from economies of scale through specialization in certain goods to increase supply chain savings. Specialization leads to production efficiency resulting in large scale production, which lowers the average costs of production (Suranovic, 2010).
Benefits are particularly realized in industries that require huge investments with high fixed costs of production due to increased availability of resources, shared knowledge and technology, and consolidation of the supply chain. Countries endowed with certain raw materials can funnel their energy and investment in manufacturing-related products.
This increases the efficiency in manufacturing due to cumulative efforts in directing the investments in production and processing of the available raw materials. An example of this scenario; New Zealand can specialize in agricultural raw material by investing and supporting farming activities to boost the production of agricultural products.
Companies get to benefit from external economies of scale from long-run average costs as a result of industry expansion. Therefore, economies of scale lead to lower prices of consumer goods and increased quality of the products made. Consequently, the countries can utilize free trade infrastructures to supplement the international supply chain management for an increase in exports to foreign countries.
Furthermore, countries can accrue benefits from free trade by utilizing their competitive advantage to enhance economies of scale. Countries can focus on trading goods and services where they have a comparative advantage. Despite some countries producing large amounts of raw materials that are unavailable in other countries, lack of critical technologies and complementary resources may prevent them from manufacturing finished products from the raw materials.
In this case, countries with a comparative advantage of having manufacturing technologies can utilize free trade infrastructures to import raw materials from those who lack technology. Both importing and exporting countries benefit from economies of scale due to one country specializing in the production of raw materials, while the other focuses on the manufacturing of finished products.
Free trade will enable exporting and importing with reduced trade barriers between the two countries. This is an added advantage in integrating the international supply chain management.
Offshoring and diversification of business risk
Free trade allows companies to relocate some supply chain activities in different countries. Relocation helps companies to transfer their business activity to different countries to reduce operation and production costs. This is particularly done to utilize cheap labor in developing countries. While controversial, offshoring creates employment opportunities in developing countries as well as benefiting multinational organizations.
Companies can gain cost advantages due to low production costs and also increase sales volume due to market expansion in the host country. Furthermore, companies diversify risks by having multiple suppliers in different countries. This gives the company a higher negotiating power when dealing with its existing suppliers (Edwards, 2018). Moreover, firms diversify their business risks by avoiding complete dependence on one country.
Multi sourcing of business operations is useful in mitigating concentration risk (Palugod, & Palugod, 2011). The risks can be political, economic, or disasters. Political upheavals can impact firms adversely. Some of the economic risks are sanctions, trade wars, and financial crises. Disasters such as the earthquake in Japan can lead to the destruction of the company’s resources. Hence, there is a need to venture to multiple countries to diversify business risks as well as gain more market opportunities.
Outsourcing of valuable skills at low cost would offer comparative advantage to organizations. Organizations gain a competitive advantage over their rivals as a result of entering foreign countries. Once the companies relocate some of its business operations in different countries, it’s set up logistics and then integrate the supply chain within the constraints of free trade. This allows unrestrained movement of finished manufactured goods from offshore territories to the ‘home’ country and other foreign markets.
Networks of Global Supply Chain
Free trade allows the integration of global supply chains to enhance trading activities. This is done to lower trading costs as well as removing barriers to trade. Developed trade infrastructures enable efficient flow of trade goods and services across the international borders within a diverse network of global supply chains.
Free trade facilitates trade by increasing participation in the global value chain network. This enables member countries and their firms to be involved in an international production network. Goods produced moves from one country to another based on consumer demand. This integrated approach in the global supply chain has led to improved performance of logistics and trading infrastructures.
The information sharing, as well as cooperation in trading activities, has lead to a reduction of cost for shipping trade goods and increased access to global trade. The integration of these networks provides access to broader product markets, subsidized financing opportunities, investment, and cheap labor and raw materials.
Free trade has enabled and increased participation in the global supply chain for trade facilitation (Lee, 2014). Trading firms are able to integrate their supply chain with global supply chain networks for a smooth flow of goods from production sites to market across international borders.
Globalization and Growth of International Trade
Free trade has promoted globalization through increased international trade. Multinational companies have been formed as a result of free trade. The interconnectedness of technological, cultural, and economical has globalized the world (Lamaj, 2015). People in New Zealand can use Apple phones made in the USA to connect with their friends in Australia. Free trade has allowed unrestricted movement of trade goods and services across countries. Capitalism has fueled free trade through the promotion of open, liberal markets with minimal government regulations and trade barriers. This has led to increased foreign investment as well as the expansion of international trade. Companies are stimulated by free trade to invest in their supply chain to participate in international trade
Furthermore, many countries have increased manufacturing output as a result of engaging in free trade. This has led to the rising of per capita income, increased wages, and consequent reduction of poverty levels. Human beings have improved their living standards due to the increased availability of a variety of products and services, which have the highest quality. Besides, human beings can work in countries of their choice and engage in any legal trading business across the world. Countries have made significant civilization advancement in education, health, and energy. As a result of increased investment, a lot of job opportunities have been created. Trade liberalization has spurred innovation and productivity due to the sharing of information and ownership rights. Globalization has integrated the economies into a single world trading system with underlying globalized supply chain infrastructure.
Free trade increases countries’ export. Foreign consumers with preferences for local products may import them using e-commerce platforms due to free trade inducement. Companies with a comparative advantage over foreign companies will export its good, leading to an improvement in economic welfare. Furthermore, the placement of lower tariffs in a country exports allows a higher quantity of exports promoting job creating and economic growth. Besides, free trade increases competition between domestic companies and the ones abroad. These leads firms to cut down costs and increase operational efficiency. Furthermore, due to the free flow of foreign trade goods, it may prevent domestic monopolies for overcharging their goods. This also leads to the production of high-quality consumer products to gain a competitive advantage both in domestic and international markets. Consolidation of supply chain activities to improve efficiency is useful in cutting down costs as well as enhancing the quality of products to have a competitive edge in the international market.
Promotion of bilateral and multilateral trade
Free trade has acted as founding grounds for free trade agreements in the promotion of bilateral and multilateral trade. Trade deals are preceded by free trade negotiations to discuss potential benefits for trading partners. Trading partnerships are useful whereby a country lacks comparative advantage; hence, the need to acquire intermediate goods or raw materials. Also, the countries need a market for manufactured goods; thus, it requires the establishment of trading terms to allow access to the market. The traditions of free trade motivate countries to take advantage of market access in foreign countries (Low, 2003). As result, regionalism and multilateralism sprouts to foster cross regional trade through increased openness and competition. Free trade ideologies call for removal of barriers to entry of intermediate inputs from the supplier’s country as well as market entry of finished products. The trading of intermediate production of input is made feasible by free trade with increased participation in the international supply chain. Optimization of supply chain management should be done to maintain low-cost production and derive profits from manufactured trade goods.
Reduced Landed Costs and COGS
Companies can leverage tariff subsidies and reduced import duties to lower landed costs. Enforcement of free trade practices allows the removal of trade barriers such as tariff and tax duties. This has a subsequent result of maintaining consumer products at a relatively lower cost when being shipped to another country. Furthermore, businesses can lower COGS (Costs of Goods Sold) to support the competitive advantage of the product in the market. Since there are no barriers and extra charges in importing products in a free trade environment, productions cost can be kept relatively low. Businesses can be able to have a cost-effective supply chain to allow reduced shipping cost of finished products and raw materials.
Besides, free trade promotes efficiency in the market and the overall economy (Lamaj, 2015). Free trade eliminates tariffs, which consequently increases market access to foreign companies, thereby forcing domestic industries to cut down operation costs and improve supply chain management. This competitive business environment leads to economic growth as the company innovates and develops to acquire a bigger market share. Moreover, free trade acts as an engine for economic growth. World trade has grown since the adoption of free trade practices. This can be attributed to a few incentives that come from the practice of free trade, such as financial liquidity. Free trade led to development of international monetary system that is used in multilateral free trade (Davidson, 2000). This has been through use of flexible exchange rate with free banking system which allow financial flow thereby, promoting free international capital mobility. Free trade promotes free flow of trade goods and services for consumer consumption. Consumers use currencies in making purchases, thereby ensuring the liquidity of the currency. Furthermore, foreign trade allows foreign currency exchange, which, when rated against another, can be used to determine the economic health and economic status of people. Moreover, free trade results in to use of foreign currency useful in creating demands for goods and services, gaining access to resources, and supporting imports and exports in a country.
Interdependence and Access to Foreign Market
Free trade has fueled the dependence of countries on one another. Most countries produce surplus raw materials; thus, a need to trade them in exchange for those they lack. This leads to the creation of trading relations to allow smooth trade of goods and services with the elimination of custom charges. Trade liberalization opens up the foreign market for trading (Bergsten, 1996). Free trade promotes mobilization of domestic exports for international trade due to substantial reduction of border barriers. Besides, there is the adoption of agile manufacturing methods, to enable deferrals of import duty and elimination of tariffs to reduce manufacturing costs by facilitating leaner processes. Some companies sell assembled products whose parts have been manufactured in multiple countries. Furthermore, there is a liberal regulation of transportation of goods and streamlining of supply chain activities for mutual trade benefits.
Conclusion
Free trade is acritical economic advancement, which allows open and fair-trading practices with reduced barrier tariff and less government regulation. The benefits of free trade are improving economies of scale, market access, offshoring, interdependence, globalization, and lowering production costs. This act as incentives in promoting business activities for overall economic growth. Conclusively, free trade has played a significant role in enhancing international supply chain management. It is beneficial to world economies and individual citizens due to its democratization of trade.
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