ST.

MICHAEL’S COLLEGE
GRADUATE SCHOOL: MBA

BA 203

Activity No. 1 (Final Term)

CASE STUDY: The Growth of Free Trade in Asia

Questions:
1. What is a free trade area?

A free trade area is a collection of nations that have voluntarily decided to reduce or do

away with trade restrictions. Although the terms of the agreement and the ensuing

dimensions of free trade are prone to politics and international relations, free trade areas

tend to encourage free trade and the international division of labor. Free trade zones have

advantages, disadvantages, defenders, and opponents. Participating states must establish

the regulations governing the free trade area's operation in order for it to take form. Free

trade regions benefit consumers by increasing their access to cheaper and/or higher quality

foreign items and by lowering prices as governments lower or do away with tariffs.

A significantly larger market of prospective buyers or suppliers is available to producers.

Additionally, free trade zones can promote national economic growth, raising the standard

of life for a portion of the people. Some investments in secured human and physical capital

will depreciate or become fully sinking expenses. With more competition, producers might

struggle. The six founding members of the Association of South East Asian Nations (ASEAN)

and China were both included in the creation of a new free trade zone at the beginning of

2010.
 These nations are Singapore, Malaysia, the Philippines, Brunei, Indonesia, and Thailand.

90% of imported goods are to be eliminated. With over 1.9 billion people, this agreement

established the greatest trade region on earth. Despite unquestionable progress, there have

also been worries from South East Asia that employment will be lost and that some

industries are not prepared to compete with China. A group of nations that share similar

views and agree to lower trade restrictions, like tariffs and quotas, create a free trade area.

It promotes trade between the member nations on a global scale.

As production shifts to areas where comparative advantage or home market effects make

those industries less expensive to run and more efficient overall, employees in some

countries and industries will lose their employment and experience concomitant problems.

2. Outline the potential advantages and disadvantages of joining this area for the member

countries.

The advantages include increased availability of inexpensive, high-quality goods, lower

overall pricing, increased production efficiency and innovation, raised living standards, and

overall economic growth. A free trade area has the advantage of encouraging competition,

which raises a nation's efficiency as a result, enabling it to compete on an equal footing with

its rivals. Then, goods and services are of higher quality at a lesser price.

When there is fierce rivalry, nations will typically manufacture the items or products they

are best at producing. Utilizing resources effectively means maximizing profit.

Monopolies are also destroyed when there is free trade and tariffs and quotas are removed

because more players can enter the market.

 Prices will undoubtedly decrease in the presence of competition, particularly on a global

scale, giving customers more purchasing power.

Consumers now have access to a wider range of affordable goods as imports become more

affordable.

Despite the numerous benefits that a free trade area brings about, there are also some

related drawbacks. It can lead to the migration of jobs to countries with lower production

costs, hinder the development of emerging industries, cause an economy to become overly

dependent on a small number of products, put national security at risk if a nation depends

too heavily on the importation of a key resource, and result in lower environmental

standards in order to compete with fewer strict nations.

Domestic producers frequently have the freedom to imitate imported goods and sell them

as imitations without worrying about facing legal ramifications when imports are freely

traded. Therefore, exporting enterprises are not protected unless the FTA has measures for

intellectual property laws and enforcement.

A free trade area may also encourage the outsourcing of jobs from poorer nations. Due to

the absence of labor protection regulations in many nations, employees may be compelled

to work in unsanitary and poor environments.

3. What factors determine the extent to which industries within a country gain or lose?

There are many factors that influence the amount of profit from international trading. The

rate at which a commodity from one country is exchanged for a commodity from another is

referred to as the terms of commerce. The size of a country's trade profit is most strongly

influenced by the terms of trade. The benefits of trade may be greater when the terms are
more favorable. Unfavorable trade terms do not necessarily mean that a country does not

profit from trade. It simply suggests that such a country receives a smaller proportion of the

overall gains from trade. The size of a country's gain from trade decreases the closer its

terms of trade are to the local exchange ratio of two commodities, and vice versa.

Another is the gains from international trade are significantly influenced by the gap

between the comparative cost ratios of producing two commodities in the two trading

nations. Countries A and B will specialize in their respective goods and profit from trade if

nation A has a comparative cost advantage in the manufacturing of fabric and country B has

a cost advantage in the production of steel. If specialization causes the price of fabric in

country A to fall more than the price of steel in country B, then nation A will benefit more

from trade, and vice versa. Other factor is the elasticity of the other country's demand for

the product of one country is referred to as the reciprocal demand. The latter will offer

higher quantity of steel for one unit of fabric if the demand for cloth (exportable of country

A) in country B is less elastic. The terms of trade will change in favor of country A, and this

nation will get a bigger cut of the overall trade profit. On the other hand, if country A's

demand for steel is less elastic or more fierce, the terms of trade will shift in favor of B,

giving it access to bigger trade gains. A nation is likely to benefit the most from international

commerce if its domestic demand is more elastic than its domestic demand from foreign

consumers.