Benefits Accruing from Free Trade
The first benefit that accrues from free trade is the encouragement of economic interdependence among trading countries. Due to the scarcity of resources, a country will specialize in producing those goods and services it has a comparative advantage in and importing those goods it cannot produce from other countries. Free trade allows free movement of goods in the global market, thus increasing utility to global consumers. Free trade also contributes to the development of poor countries by allowing them to export their products without incurring tariffs, thus generating high returns for use in development. Also, countries benefit from the inflow of expertise and latest technology to help them in development of local industries and creation of jobs; they also benefit from low-cost imports that are affordable to local people (Goldstein, 2009).
The European Union has been very active in promoting free trade since its inception. One of the changes that took place was the establishment of a unitary market trading system that eliminated or reduced tariffs and encouraged the development of member countries. Other changes took place in stages, with the European Monetary System being created first to regulate price stability and an exchange rate of currencies among member countries. However, the major change was the introduction of a single currency, Euro, backed by a single monetary policy, and fixed foreign exchange rate applicable to all members.
International Organizations that Promote Free Trade
Several international organizations promote free trade, among them, being the World Trade Organization (WTO), International Monetary Fund (IMF), and World Bank. The WTO works closely with member countries to ensure that there is a smooth flow of business in the global market. It draws regulations and procedures that provide a fair trading field among all countries, thus eliminating chances of exploitation of poor countries by rich countries. Also, WTO seeks to ensure that there are fairness and justice in trade practices for all nations and eliminate discriminatory policies for domestic and foreign companies within nations. However, the reality on the ground shows criticisms being leveled against WTO for yielding to pressures of Multinational Corporations while ignoring the plight of developing nations in matters related to environmental conservation, genetically modified foods, and intellectual property rights.
The IMF is tasked with the responsibility of expanding and improving international trade in addition to offering financial services to global economies. In doing so, IMF supports member countries financial guidelines, technical assistance, and training to empower their trading capabilities in the global market. Like the IMF, World Bank regulates global markets by requiring member countries to promote foreign investments and deregulate their economies. Therefore, these organizations have been instrumental in integrating and deregulating markets across the globe (Campbell, MacKinnon, & Stevens, 2011).
Expansion to Global Market: General Motors
General Motors is one of the US companies that are present in the global market. Being one of the largest automobile companies in the US, GM has expanded its operations to almost every country in the world. There are several reasons that have contributed to the internationalization of GM, among them being competition in the domestic market and opportunities for sustainable profits in the global market. The US automobile market is very competitive due to the presence of many local and foreign car manufacturers, thus eroding firms’ profitability (Ireland, Hoskisson, & Hitt, 2008). The adverse economic downturns and uncertainty in domestic market lifecycle have forced General Motors to diversify its operations by expanding to the international market where there are growing demand and favorable conditions, especially in emerging markets of China, Far East Asia, and South America.
GM has been using various global ventures that have allowed it to penetrate globathe l market; these include strategic alliances, joint ventures, and franchises. These ventures have allowed GM to expand its technical capabilities and competences, leading to the increased and improved capacity that is competitive in the global market. Moreover, the company has been influenced by the opportunity to reduce costs, especially in emerging markets where labor costs are low. Also, the liberalization of trade has created a favorable trading environment and increased market potential for companies to exploit.
Outsourcing of Production
Outsourcing involves contracting another firm to perform roles or tasks that could have been done internally, mainly to reduce costs. As the CEO of ABC Dress Shift Corporation, I would outsource production by first identifying the most competent manufacturer. However, to remain in control of the supply chain and avoid losing visibility and pricing control of inputs, I will only outsource the assembly/processing section of production. This would leave me with the responsibility of purchasing inputs from suppliers and then selling them to the manufacturer for processing. This will also mean that finished products will meet quality standards, as the manufacturer will not have access to low-quality inputs. I will also handle sales and distribution.
There are benefits that accrue from outsourcing production. First, the firm will save potential costs related to wages and production overheads. Also, the space occupied by the production plant would be used for other viable business. In addition to a small and manageable workforce, the firm will have an opportunity to concentrate on other important areas of business such as administration, customer service, and marketing. The firm will eliminate costs related to research and development, thus providing goods to customers at a relatively lower price than competitors do. Finally, the firm will eliminate the risk of becoming inefficient or replacing equipment when new technology comes in and affects the firm’s competitiveness (McIvor, 2005).
Campbell, P., MacKinnon, A., & Stevens, C. (2011). An Introduction to Global Studies. MA, USA: John Wiley & Sons.
Goldstein, N. (2009). Globalization and Free Trade. NY, USA: Infobase Publishing.
Ireland, D., Hoskisson, R., & Hitt, M. (2008). Understanding Business Strategy: Concepts and Cases. OH, USA: Cengage Learning.
McIvor, R. (2005). The Outsourcing Process: Strategies for Evaluation and Management. Cambridge, England: Cambridge University Press.