Understanding Free Trade: Concept, Working, And Implications

Free Trade and Its Concept in Economics

The concept of “Free Trade” in economics, refers to the free market policy which is often adopted by different economies, in the international scenario, where there exists no barrier or hurdle in exporting the commodities or services produced in one economy to its trading partners and importing the goods and services from the trading partner countries. This type of policy infrastructure, adopted by different countries are also known as “laissez-faire” or “trade liberalization” policy (Erikson, 2014). In the contemporary global scenario, with increased mobilization of resources and greater connectivity of the international economies, many of the countries across the global have established Free Trade Agreements with different countries for the purpose of efficient development of their economies and an overall greater economic welfare of their residents, the logic behind the same being discussed in the following section (Anderson & Yotov, 2016).

The basic economic notion behind the working of free trade is that the existence of free trade between two particular economies help in experiencing efficiency in production of commodities and services, by establishing specialization and economies of scale in the production, thereby helping both the economies to experience faster economic growth in the long run (Dragusanu, Giovannucci & Nunn, 2014). The basic working notion behind the same lies in the economic assumptions of scarcity of resources required for production and the need for the producers to allocate these scarce resources efficiently so as to maximise the production of goods and services. Taking queue to these assumptions, the economists in favour of free trade puts forward the argument that not all resources are present equally in all the economies of the world and the ratio of usage of different resources of production are also not same for the different commodities and services which are consumed across the world (Rios, McConnell and Brue, 2013).

In the absence of free trade, however, the countries need to produce all the goods and services which their residents require, irrespective of how much efficiency they can maintain in resource allocation and production. In the presence of free trade, however, the countries can concentrate on producing those goods and services which require the resources which are abundant in their economy and then exchange the same with those commodities or services the production of which require the resources which are not abundantly present with them.

There have been many arguments put forward by the economists over the years, in favour of facilitation of free trade among different countries. The most popular of these arguments is the argument of the “Comparative Advantage” in trade, as had been put forward by David Ricardo. The term comparative advantage, refers to the ability of a nation to produce a commodity or service at a lower opportunity cost than another nation (Costinot & Donaldson, 2012). The term opportunity cost of production of one commodity, refers to the amount of other commodities which needs to be sacrificed for the production of one unit of the former commodity.  According to Ricardo, if the countries concentrate in producing those commodities only in which they have lesser opportunity cost then they can produce the same much more cost efficiently, thereby being able to sell the same at prices much lower in the countries where the opportunity cost of production of the same commodity is high (Schumacher, 2013). This one hand increases the economic abundance of the concerned country due to increased production and sales of their product and on the other hand help the same to buy those commodities from other countries, whose opportunity cost of production is high in the concerned economy. This also leads to increase in the diversity of products in the countries and increase in the knowledge and skills of the workers, by encouraging specialization as well as division of labour in the country (Villareal & Fergusson, 2017). However, for the countries to enjoy this productive efficiency and higher economic abundance, as well as specialization in the labour force, it is important to facilitate free trade between the country and different other countries, who can be potential importers of their goods and services and exporters of the commodities which they need.

Basic Economic Notion behind Free Trade

Thus, from the above discussion, it can be asserted that free trade works in the global economic scenario, by facilitating increased and efficient production of goods and services in different countries, thereby increasing the economic welfare of the nations as a whole and also contributing in building more skilled labour force and specialization in the economy by promoting division of labour. The global productive efficiency as well as global output of goods and services also increase under the domain of free trade. Free trade agreements also facilitate greater mobility of not only goods and services but also greater mobility of productive resources and technological innovations across the globe.

Although there remain substantial arguments in favour of free trade across countries, however, not all nations encourage complete free trade policies in their domains. There remains logical reasoning behind such policies also. One of the primary argument against that of the implementation of free trade policies is that free trade often hampers the growth of the domestic industries. In the presence free trade, the foreign bigger companies, already experiencing cost efficiency and economies of scale in their production processes, infiltrate the economies with their lower priced products, which gain higher share of markets and clienteles abruptly. This in turn hampers the growth of the domestic companies operating in the same industry as they face immense competition (Irwin,2015). The halt in the growth of the domestic industries hamper the long run economic growth and welfare of the population by reducing job creation, production and income of the people in general.

To avoid such conditions, many economies implement protectionist policies in their domain of international relations. These protectionist policies include imposition of tariffs or tax on imports of the commodities from other countries. This, by increasing the price of the foreign products, increases the demand for the domestic commodities. The protectionist policies also include imposition of quotas on imports, thereby restricting the quantity of import of goods and services from other countries and benefiting the domestic counterparts by increasing their potential market and clientele (Francois & Manchin, 2013).

These policies taken by the economies in the global scenario, with the objective of providing the domestic industries a fair ground to increase their production and economies of scale, act as primary hurdles in the aspects of facilitation of free trade across the countries, which have mixed implications on the economy of the country in the long run. On one hand, imposing hurdle on free trade may help in developing the domestic industries and on the other hand prevents the country from achieving the fruits of free trade which include specialization, division of labour and inflow of technological innovations and other factors of production and a diversified basket of goods and services in the countries concerned (Patterson, 2015).

Argument of Comparative Advantage in Trade

As has been discussed in the above sections, the phenomenon of Free Trade has gained immense importance over the years, with the increase in the integration and inclusiveness of the global economic scenario and with the increase in connectivity between the nations across the world. The nations, in the contemporary global economic framework are far more interlinked and dependent on each other considerably in socio-political, economic and technological aspects. This also indicates towards the importance and significance of free trade in the global economic scenario. There have been various arguments put forward by the economists across the globe, supporting the needs and positive implications of free trade in the countries. The primary arguments, in this aspects are discussed as follows:

1. a) Establishment of Specialization-One of the primary arguments in favour of free trade in the countries, is that the imposition of free trade policies in different countries help the concerned countries in specializing in the production of those commodities and services in which the country enjoys comparative advantage and lower opportunity costs compared to its trading partners. This leads to increase in the division of labour in the production activities across countries, thereby helping the labours to specialize in specific productive activities (Mingst & Arreguín-Toft, 2013). This increase in the specialization and skill of the labours in the countries help in optimum and more efficient usage of the productive resources in the country, thereby helping the country to experience economies of scale in production.
2. b) Increased all round prosperity-The presence of unrestricted trade among the economies across the globe, increases the efficiency and specialization of the labours of the countries in producing different commodities and services in large scale, owing to economies of scale which the countries enjoy due to the increased global markets and production. The prices of the commodities also fall due to productive efficiencies enjoyed by the trading countries and increase in the global output amount of different commodities produced. All these factors together contribute in increasing the standard of living of the people across the globe. Thus, by increasing production, consumption and economic prosperity of the global population, the free trade policies help considerably in increasing the all-round global prosperity (Birol, 2012).
3. c) Increase in competitiveness-The implementation of free trade in the economy, contributes in increasing the competition in the production activities in different economies. Under the threat of intense foreign competition from the big multinationals under free trade, the domestic producers constantly work on increasing their productive efficiency, which is also facilitated by the inflow of global technological innovations. The presence of free trade also prevents domestic monopolies to crop up, thereby helping the customers by decreasing the exploitative powers of the domestic producers and increasing the varieties and options in the hands of the customers in a country.
4. d) Inflow and greater access to goods and services as well as resources-The presence of free trade, enables the countries to get the goods and services, which the countries cannot produce efficiently, thereby increasing the access of the customers to a diversified commodity bundles and services (Yang & Martinez-Zarzoso, 2014). It also helps in the inflow of technological innovations and also productive resources from different parts of the world, thereby increasing the overall accessibility and benefits of not only the consumers but also producers in a country.
5. e) Increased international cooperation-Free trade categorically helps in improving not only the economic and commercial ties among different nations across the globe but also contributes in building up robust socio-political and overall ties among the trading partners, thereby increasing  the cooperation of the economies in the international scenario, which not only contributes in economic progress but also helps in increasing the political stability and social integration among the countries.

Thus, from the above discussion it can be asserted that there remains considerable reasons and arguments in favour of implementation of free trade in the economies.

The presence of different assertions regarding the positive implications of free trade, are countered by several arguments, which talk against the imposition of free trade policies in the countries. The main arguments which exist in the contemporary global economic and commercial scenario, regarding the negative implications of free trade policies are discussed as follows:

1. a) Disadvantages of the developing countries-One of the primary and most widely acknowledged arguments against free trade is that the same can be advantageous for the already developed countries with efficiencies in the production of goods and services, the same may not be always true for the backward or the low developing countries. With unequal distribution of powers, efficiencies and advantages enjoyed by the developed and the developing countries, the imposition of free trade relationships between them often result in exploitation of the human and non-human resources of the developing countries by the developed countries, which increases the already existing miseries of the poor populations of the low developed countries. One of the primary examples of such exploitation due to the imposition of colonial and imperialistic rules of the United Kingdom is the situation which India faced for two centuries prior to 1947 (Hutchins, 2015).
2. b) Destruction of the domestic industries-The most economically viable argument against that of free trade is that in many instances the imposition of such policies hinders the growth of the domestic industries by forcing them to face unfair global competitors. With the imposition of free trade policies, the big foreign producers of goods and services infiltrate in the economies, with their cost efficient productive activities and low priced high quality products, which help them in attracting more customers of the domestic economy (Siles-Brügge, 2014). This in turn creates unfair competition for the domestic producers of the same goods and services, especially those who do not enjoy economies of scale. These companies, by facing stiff competition and price war often leave markets, thereby destroying the domestic economic growth.
3. c) Perpetual Inefficiencies-Due to the imposition of free trade policies across the countries, the industries in which the countries enjoy comparative advantages, develop significantly thereby leading to specialization of labour and the development of skills in these commodities or services. This in turn, leads to the development of those industries only, often at the cost of development of other industries. This industry specific development, in turn, hampers all round development in the economy as the initially inefficient industries, which may have scopes of future expansion and economies of scale, remain perpetually neglected. Thus, the imposition of free trade often rules out the possibility of overall development of the economy as a whole, by facilitating sector specific development.
4. d) Over dependence on trading partners-The imposition of free trade policies across different economies in the global scenario, may facilitate in improving the international cooperation and tie ups between these economies. However, the free trade scenario also leads to constant integration of the economies which in turn often leads to overdependence of the economies on one another. This in turn makes these partner economies more vulnerable to one another’s economic as well as socio-political fluctuations.  In an increasingly integrated environment, when one of the partner economies experiences economic depression, recession, political instability and other tensions, then the economy as well as its productive as well as commercial activities are hampered significantly, which considerably affects the trading relations of the country with other countries, thereby affecting the economies of the trading countries too (Jaffee, 2014). One of the most prominent examples in this aspect is the Great Depression of the 1930s as well as the Sub-Prime Mortgage Crisis of 2008, both of which originating in the economy of the USA had considerable negative and long term impacts on almost all the economies across the globe, thereby indicating towards the negative implications of presence of free trade across different countries.

Thus, from the above discussion it can be seen that there exits considerable number of vital arguments against the implementation of free trade policies in the countries in the global economic scenario, especially those in those countries which are developing or are at lower developed state.

The global economic scenario, over the last few decades, has experienced considerable dynamics and integration as well as inclusiveness, owing to the international phenomena like Globalization and trade liberalisations. With time more and more countries have started implementing free trade policies coming out of their inhibitions regarding the drawbacks of free trade policy infrastructure. With the benefits of free trade environment, which includes greater competitiveness, greater productive efficiencies, better utilization of scarce productive resources and inflow of technological innovations and productive resources, along with that of varieties of commodities and services, increasing the options as well as economic abundance of the customers as well as the producers.

In this context, various international authorities, bodies and global regimes have been established over the years, who primarily work in the domain of facilitating free trade across the globe as a whole and member nations in particular and also try to rule out any kind of practices or phenomena existing in these countries, which act as hurdles in the way of facilitation of free trade (Cohn, 2017). The most important global regimes in these aspects are as follows:

1. a) GATT-The General Agreement on Tariff and Trade, signed in Geneva on 30^thOctober, 1947, though not being a proper regime working to promote free trade, is still significant as one of the foremost of its kind of legal agreement, signed by so many nations across the globe with the objectives of eliminating trade barriers across the member countries in order to facilitate free trade. Though with time the GATT was substituted by the WTO, the original text of GATT (1947) is still into existence and has been modified considerably in GATT (1994) (Rausser, 2012).
2. b) World Trade Organization-One of the most important global regimes in the aspect of promotion of free trade across the globe is the World Trade Organization. The regime officially came into existence on January 1, 1995, with 123 member countries across the globe. The organization came as a successor of the previously signed international trade agreement GATT (General Agreement on Tariffs and Trade) and is currently the largest global economic organization. The primary function of the World Trade Organization is to regulate and facilitate international trade and commercial activities between the different member countries (Wilkinson, 2013). The functions of the WTO include the following:

• Regulation of the trading activities of different member countries in the global framework
• Regulation of flow of goods and services as well as intellectual properties among the member countries
• Facilitating the creation of an environment for easy negotiation of trade agreements and for the member countries to solve any kind of disputes arising in the domain of trade and commercial activities
• To ensure that the member countries are abiding by the norms and regulations created by the organization such that a free trade facilitating global environment is maintained

Advantages of Free Trade

Over the years the regime has helped in creating considerable free trade facilitating situations across the countries in the international commercial and economic scenario and has played key roles in dispute resolutions among the different countries from time to time.

1. c) International Monetary Fund-Another crucial organization in the global framework, which works in the domain of facilitating free trade among the global economies is that of the International Monetary Fund, which was formed in 1945, at the famous Bretton Woods Conference. Starting with the membership of only 29 countries in 1945, the IMF now has 189member countries under its regulatory framework. The main functions of the international regime are as follows:

• Securing the financial stability of the member countries
• Facilitation of international trade and transfer of financial as well as productive resources among the member countries
• To work towards the eradication of poverty by facilitating trade and productive efficiencies
• Managing the difficulties regarding the balance of payment anomalies in the member countries thereby averting international financial crisis arising in trading activities (Paloni & Zanardi, 2012)

1. d) World Bank-The World Bank, also plays crucial roles in the facilitating international trade and commercial activities, by monitoring the monetary stabilities of the economies and smoothening lending activities across the globe for the purpose of investments and other economic and social welfare activities.

The regimes, discussed above play vital roles in facilitating free trade and commercial activities in the contemporary global economic scenario.

As can be seen from the above discussions, there exists several theoretical frameworks arguing in favour of implementation of free trade across the countries, with the primary and most widely used theory being that of the theory of Comparative Advantage as has been put forward by David Ricardo. Keeping this assertion into consideration, the situation of the economy of the United States of America can be analysed.

The country, known to be one of the most powerful and stable economies in the global scenario over the years, has sufficient labour as well as capital resources. The country had always been performing well in terms of manufacturing of basic goods and services. However, the comparative advantage of the USA, as per the assumptions of the Ricardo’s theory has been in the production of the technologically advanced products as well as services. This is primarily because the production of high tech products as well as services require efficient technologically innovative infrastructures as well as high abundancy of capital resources as the production process of such products are capital intensive, which has been one of the advantages of the capital resources rich country.  

This in turn, has led to increase in the production of capital intensive products and services in the country over the years, thereby leading to reduction in the basic manufacturing activities in the country. The country, with the years, has outsourced these basic manufacturing activities to the labour resource rich and capital deficit developing countries like India, China, Malaysia and Taiwan, thereby strengthening the capital resource intense high tech commodities and service sectors in the country itself (Pearce II, 2014). The strategy of outsourcing the basic manufacturing activities to the low cost cheap labour supplying developing countries and concentrating on high tech service sectors was proving to be beneficial for the USA, till the economic crisis of 2008 hit the country.  

The crisis, which originated as a sub-prime mortgage crisis in the country, arose mainly due to the burst of a capital investment bubble especially in the real estate sector of the country. This in turn affected the high tech capital intensive service sectors of the country, thereby bringing the economy of the country to a standstill bringing in long term recession in the country. Unemployment rose significantly with the service sector production reducing tremendously. In this scenario, the policy of abandoning the basic manufacturing capabilities of the country had been questioned.

Disadvantages of Free Trade

Due to outsourcing of the basic manufacturing activities, practiced by the USA over the years, these industries did not grow efficiently in the country, thereby aggravating the unemployment problems’ severity in the economy during and post the economic crisis of 2008. The policy infrastructure of the country faced immense backlash from the critics, in the ground that when the crisis started and people started losing employment and economic welfare, the presence of manufacturing industries could have provided buffering to the economic and employment scenario, by providing a chance to the work force to get absorbed in these industries. By outsourcing their basic manufacturing to other countries, the USA lost the support system of the economy in times of the crisis (Pisano & Shih, 2012).

The global economy, over the years, have seen countries taking free trade policies as well as protectionist trade policies according to their conveniences and needs of their economies. Although almost all of the major global economies have been open economies or have resorted to free trades with time and increased integration and inclusion of different economic traits in the international framework, one of the global economies known for its adherence to protectionist policies for centuries is that of the economy of China (Kee, Neagu & Nicita, 2013). The government of China, especially before 1978, had been seen to be implementing protectionist policies in their trade frameworks for protecting their domestic industries and facilitating the development of economies of scale of these industries, by securing the same from the unfair foreign competitions of the already production efficient multinational businesses.

The protectionist trade policy framework, taken by the government of the country had been more of the sort of import substitution as well as export promotion mixture. On one hand the country has over the years, implemented restrictions on their imports through tariffs and quotas and on the other hand the country has also tried to promote exports of the goods and services produced by the domestic businesses across the globe, in order to facilitate their growth and economies of scale. However, with time and with free trade being implemented more expansively in more economies across the globe, China also changed their policies, but did not completely forego protectionism from their external relations framework. China resorted to partially liberate the economy, by opening only those sectors for the foreign investors were inflow of foreign credits as well as technological innovations have been necessary, which mainly included the labour intensive basic manufacturing units, thereby facilitating the inflow of necessary technological innovations in the economy without threatening the other industries and their development and gaining of economies of scale. Thus, the protectionist and semi-liberal trade policies of China contributed to the economic progress of the country with time (Zhang & He, 2014).

Trade Barriers and Protectionist Policies

However, in the recent scenario, the country has been increasingly liberating its economy and trade sectors. The country currently increased its domestic purchase access and is the largest economy when measured in terms of purchasing power parity in the international scenario. The country has committed in making its markets duty free and quota free. The rank of the country has also increased in the Enabling Trade Index, from 63 to 61 in the recent periods and it is the only country in among the top 10 most populous ones in the world to rank in the first half of the concerned index. With the accession of the country to the WTO in 2001 and with the reduction of the average tariff to 4.5 percent by 2014, it can be asserted that the country has been slowly opening up its trade scenarios with time (Haley & Haley, 2013).

The currency exchange rate for a particular currency refers to the rate at which one unit of the concerned currency is exchanged for another currency of another country. This, thus, refers to the value of the currency of one country in relation to the currency of another country. The currency exchange rates of different countries have considerable implications on the export import dynamics and trade scenarios of the countries, thereby having considerable significance on the economic and commercial scenario of the countries.

Over the years, the exchange rates of the currencies of the countries had been determined by different process which have changed with time. In the previous periods (In 1910s), the currency exchange rates were established in different countries following the Gold Standard, in which the value of the domestic currency of a country was determined by the amount of gold reserves the country used to have. This system was followed by the gold-exchange standards in the 1930s. However, both the methods became obsolete with time and with most of the countries maintaining a managed float in their currency valuations, with the values varying every day (Cooper, 2014). In the contemporary periods, the international currency exchange rates are established by managed floating exchange rates, where the values of the domestic currencies are affected by the economic actions of the monetary authorities of the countries themselves. The values of the currencies in domestic economies are also determined by the supply and demand forces in the money market. This means, the demand of the currency of a country, in relation to the supply of the same, determines the value of the currency in the international market.

Global Significance of Free Trade

However, apart from the above mentioned crucial determinants of the currency exchange rates, the factors like the dynamics in the interest rates, inflation, economic growth dynamics, trade and commercial activities and the unemployment scenario in the countries also contribute in establishing the currency exchange rates. Some countries also peg their exchange rates, which are maintained over time by the government of the countries. The emerging economies often do this in order to bring stability in their financial and commercial domains. However, for pegging the rate of currency exchange, the countries need to maintain large currency reserves, which help in controlling the supply and demand of the currencies in the international framework (Frieden, 2014).

The government of a country often strengthens or weakens the value of the domestic currency of the country with respects to other countries in the international scenario. While currency devaluation is done to facilitates exports of the goods and services produced by a country, shrinks trade deficits and also help in reducing the cost of payments of interests on the government debts, the increase in the value of local currency facilitates imports and attracts investments in the country.

There are various steps which the contemporary monetary authorities of different countries to strengthen or weaken the values of their local currency compared to other currencies, which are as follows:

1. a)  Interest Rates- The primary tool in the hands of the government of a country for changing the values of the domestic currencies is the rate of interest prevailing in the domestic economies. When the government needs to increase the value of the same, the interest rate is increased, which increases the returns on the bonds and other securities of the government, thereby attracting investments from all parts of the world. This increases the demand for domestic currencies for the purpose of buying such assets, which in turn appreciates the value of the same. On the other hand, reverse policy is taken to weaken the domestic currency in the international money market (Klein & Shambaugh, 2012).
2. b) Monetary Policies-The monetary authorities of a country also monitors and controls its exchange rates with the help of the monetary policies. When the government needs to devaluate its domestic currency, it takes expansionary monetary policies, thereby injecting more liquidity in the money markets increasing supply of money, thereby decreasing the value of the same compared to other countries and vice versa.
3. c) Currency Intervention-In this process the Central Bank or the monetary authority of a country sells or purchases its own currency in the foreign exchange market in order to manipulate the value of the same in the international financial markets scenario. This method, being one of the newest methods adopted by the contemporary governments in the global framework, is increasingly becoming popular with most of the prominent economies resorting to the implementation of the same, which primarily include economies like Japan. The Bank of Japan, in the recent period, has been observed to intervene in the currency market in order to prevent excessive appreciation of their currency, which could have hampered their trade and productive prospects and efficiencies (Jin & Choi, 2013).

Currency intervention can be of two types:

Sterilized Transactions- Here, the exchange rates are influenced without selling changing the monetary base of the country.

Non-sterilized Transactions-  In this method simple transactions of bonds of foreign currency bonds are involved which do not offset transactions.

One of the global economies, known for the immense and abrupt economic growth and industrial and commercial prospects starting from 1950s through 1980s is the economy of Japan, whose exemplary economic success is widely known as the economic miracle of Japan in the international economic framework. One of the major reasons behind this huge economic success of the country can be attributed to the robust economic framework and the efficient export driven policy framework followed by the government of the country during that period of time.

The primary policy taken under the trade promotion strategy of Japan was the devaluation of the domestic currency, which proved to be a robust strategy on part of the government of the country. Following the success of the country, the Four Asian Dragons, Taiwan, Singapore, Hong Kong and South Korea also took similar strategies of export promotion, as a part of their development framework. These strategies mainly included devaluation of the domestic currency and manipulation of the exchange rates of the same in the market. The devalued currency proved to be one of the major driving force of the economic growth of the countries, especially between 1970 and 1990. The share of these countries, especially Taiwan and South Korea in the world’s GDP increased manifold. These four countries, in the mid-1980s, also accounted for nearly 60% of the total manufactured exports from all the developing countries in the then international trade scenario (Palley, 2012). The increase in the exports, in turn, facilitated immense industrial development in these four countries. In South Korea, between 1960 and1989, the share of the agricultural sector in the GDP decreased from 37% to 9% and that in the total employment in the country dropped from 66% to as low as 19%, which was accompanied by almost two times increase in the share of manufacturing sector in the GDP of the country. The situations were similar in the other three countries, with the industrial sector players experiencing economies of scale and continuous increase in the global demand for their cost efficient product, much of which can be attributed to the currency devaluation in these countries.

International Regimes for Facilitating Free Trade

China has been one of the success stories in the global economic scenario, in terms of robust and fast economic growth and expansion of the industrial sectors of the country. The country, in the recent periods, has emerged as one of the predominant economies in the world, with the economic growth variables functioning better than that of many of the developed countries. Much of the prosperity and immense economic progress of the country can be attributed to the immense growth of the industrial sector which again was clubbed by the robust export promotion strategies taken by the government in the last few decades.

The country, over the years have promoted exports of the goods and services produced within the economy, which primarily consists of manufactured goods, thereby increasing the number of customers of these industries, not only in the domestic boundaries but also in the global scenario. The export promotional strategy of the country, primarily consists of the policy of a consistently devaluated local currency, in the international foreign exchange market. This maintenance of cheap local currency in the country, however, had not only positive implications but also several negative effects on the economy of the country, which are discussed in the following section.

Of the positive implications of cheap domestic currency in the economic dynamics of China, the primary ones are as follows:

1. a) Exports:

The devaluated currency of the country, makes the goods and services produced in the country appear comparatively cheaper in terms of the other currencies in the global foreign exchange market. This in turn, has increased the demand for those goods and services in the global scenario, thereby helping the domestic industries of China to expand considerably, thereby facilitating the overall economic growth of the country.

1. b) Growth and employment:

Another crucial positive implication of the reduced rate of currency of the country, which can be seen as an extension of the above discussion, is the aspects of facilitation of growth and employment in the country. When the exports of a country increase, due to the presence of cheap domestic currency, the demand for the goods and services produced by the country also increases, as has happened with that of China. This in turn, increases the expansion of the industrial sector, thereby creating greater employment in the economy, which in turn, facilitates the economic wellbeing of greater share of population of the country, thereby contributing positively to its economic growth (Mallaby & Wethington, 2012).

1. c) Special Drawing Rights

One of the primary intension of the country has been to include the domestic currency as a part of the SDR, which is till now, a basket of the national currencies including the US dollar, sterling, yen and pound. The inclusion of the currency of China, in the SDR can help the country to increase its commercial viability and industrial prospects in the global scenario, by facilitating alliance with the other strong economies in the world.

However, apart from positive implications of the cheap domestic currency in the economy of China, there also remains several negative implications of the same on several economic aspects of the country.

Negative implications of cheap currency

1. a) Imports

The devaluation of the currency of the country, though helps China in exporting their goods and services, however, creates problems in the import dynamics of the country. Imports become costlier, which not only decreases the welfare of the consumers but also hinders the productive and cost efficiencies of the domestic producers.

1. b) Technology inflow

As it becomes difficult for China to import goods and services due to the presence of cheap domestic currency, the trade relations of the country with other global economies are also hampered significantly. With the restriction in the level of imports of goods and services, owing to affordability issue, not only the import of productive resources and goods and services are hampered, but the inflow of technological innovations from different parts of the world also gets hampered (Yu, Zhang & Zhang, 2017).

1. c) Hostile neighbour policy

The policy of devaluation of the domestic currency of China, which made the exports of the commodities produced by the country cheaper has posed as serious threats to the export of other countries. This has also led to the devaluation of the domestic currencies by many of the other economies, which in turn decreases the trade advantage enjoyed by China to a considerable extent.

1. d) Investment

Due to the presence of cheap currency, lesser number of global investors are attracted, thereby decreasing the inflow of investment in the country.

Thus, from the above discussion, it can be asserted that the policy of cheap domestic currency in China is seen to have both positive as well as negative implications on the overall economic dynamics of the country.

After the second world war, the value of the US dollar increased considerably and the government of the USA also kept the currency strong, with relatively high exchange rate as compared to other countries. The primary reason behind this was to increase the attractiveness of the economy in the global scenario, by making the currency strong and stable. The fact that the US dollar was strong and stable and acted as the numeraire for measuring the values of other currencies, made the country attractive for the investors from all parts of the world. This helped in increasing the inflow of investment in the country over a prolonged period of time, which in turn accrued to the economic prosperity of the country.

However, the increasing inflow of investment in different sector of the USA slowly created investment bubble in the economy, especially in the residential, financial and real estate sectors of the country. The bubble burst in 2008-2009, leading to the creation of an acute sub-prime mortgage crisis in the country, which had immense negative implication not only on the country itself but on the global economic framework. With the investment sector of the country abruptly losing credibility, the value of the currency devaluated significantly (Glick & Leduc, 2013, May). The monetary authority of the USA has not taken any significant step to strengthen the same since then. This is specifically done to increase the exports of the country, thereby boosting the manufacturing sector, which stagnated prior to that. With the objective of increasing the production and expansion of the manufacturing sectors, by increasing imports, which has positive implications on the overall employment generation and economic welfare scenario, the currency of the country has been kept devaluated in the recent periods.

The Euro was introduced in the Eurozone in 2002, as the single currency for all the member countries of the European Union. The primary objective behind the establishment of a single currency in the Eurozone was to facilitates the economic growth of these countries by facilitating free and easy inflow and outflow of cash, productive resources, goods and services as well as trade and commercial activities among the countries falling in the single currency zone. However, in spite of all the advantages the single currency policy proved to have several crucial adverse implications on the concerned economies which can be seen from the following discussion (Lapavitsas, 2012).

The problems of the single currency policy become apparent in the context of the crisis which arose in the PIIGS in 2008-2010. The term PIIGS is an acronym for Portugal, Ireland, Italy, Greece and Spain, which are designated as the most economically weak members of the European Union, which were most adversely affected by the European debt crisis of 2008-2009. The acute financial instability and loss of credibility of the nations’ ability to pay the bondholders, thereby increasing the risk of defaulting of the nations. The crisis even aggravated as the countries were not able to take independent monetary or financial policies due to the presence of the single currency policy, thereby restricting the economies concerned (Goldstein, McCarthy & Orlov, 2017). This in turn questioned the efficiency of the single currency policy as there arose the trade-off maintaining a single currency and attending the individual needs of the member nations. In presence of such economic disparities in the Eurozone, with several economies running smoothly and others like PIIGS facing tremendous economic instability, the sustainability of the single currency policy becomes a question of concern. This problem led to immense problem among the member nations, which in turn can be seen from the recent voting of the UK to leave the EU (Brexit) which the country announced in 2016 and is expected to come to implementation in 2019.

References 

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