Page 84 - Introduction to Business

58 PART 1 The Nature of Contemporary Business

free trade regime A system in which are sold to other countries. In a free trade regime, imports and exports of goods or
imports and exports of goods or services take place voluntarily (without government coercion or support), based on
services take place voluntarily, without a system of open markets. Countries gain from free trade, since it leads them to spe-
government restrictions and based on a
principle of free markets cialize in the production of goods and services in which they perform compara-
tively well. Also, at the firm level, some companies may choose to go overseas as
producers rather than as exporters of goods and services. We need to ask ourselves:
What are the benefits of trade? Unless there is concrete evidence that trade benefits
consumers, businesses will not participate in international trade. International
trade benefits consumers in three major ways by providing
• A greater amount of choice in the availability of goods and services
• Lower prices for goods and services consumed
• Higher living standards

Greater Amount of Choice. When a country opens up to international trade,
domestic firms (as well as individuals and governments) are allowed to import raw
materials (oil, natural gas, coffee beans, etc.), semifinished products (silicon chips,
auto parts, etc.), and final goods (cars, stereos, DVD players, camcorders, apparel,
etc.) as well as use services (foreign air carriers, insurance, business processing,
etc.) from abroad. This increases the choice that domestic consumers have, and
they can decide whether to purchase a purely domestic good or an international
product. The increase in choice enhances consumer satisfaction and welfare. Just
take a look at the items that you own like clothes, shoes, TVs, CD players, cars, etc.
Where were all those products made? If you set aside all those goods that were pro-
duced overseas, what are you left with? How satisfied will you be without those
imports? As you can see, many products that we consume on a day-to-day basis are
produced in other countries, and we purchase them voluntarily because of their
perceived or real value to us.

Lower Prices to the Consumer. Because of imports, the level of competi-
tion in the domestic market increases. For example, the competition that U.S. car
manufacturers like Ford and General Motors face domestically increases with the
number of cars imported from firms like Toyota, Honda, Nissan, Hyundai, BMW,
Mercedes Benz, VW, and so on, from abroad. Imports benefit consumers in two
major ways. First, the increased number of suppliers raises the level of domestic
competition, and this helps keep a lid on price increases. Second, increased com-
petition leads to better quality products. From a producer’s point of view, open
trade allows domestic firms to penetrate foreign markets through exports. As
domestic firms expand production, manufacturing efficiency and profits increase.

Higher Living Standards. International trade raises people’s living standards
primarily because of increased choice and lower prices that we just discussed. On a
relative (with respect to a case without international trade) basis all consumers
(both in the exporting and importing countries) will be better off; that is, trade is
better than no trade. This fact is based on the assumption that all countries practice
free market and open trade systems, and governments do not hinder international
commerce. Domestic firms will increase production to meet overseas demand,
thereby generating new jobs as well as higher wages at home. All these factors will
improve the overall quality of life and standard of living in countries that practice
open trade. However, for countries to gain from trade, all trade partners must hon-
estly practice open trade. Otherwise, some countries will gain at the expense of oth-
ers. Citizens in countries that do not practice open trade are generally worse off
than those in countries that do have open trade systems. All you need to do is to

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