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Saturday, November 16, 2013

Free Trade Agreements can Foster Economic Hubs

Free trade agreements are a common economic method of increasing trade. Free trade agreements work best where lower value imports are used to create higher value exports. Global hubs  often work with regional hubs in an international supply chain that continues to develop products for exportation to world markets. Effective economic hubs use intellectual capital to create value that cannot be easily copied by other countries.

According to Chong and Hur (2008) each hub has access through trade agreements to the spokes but the spokes only have access to the hub. This means that the hub can sell more products and services than the spokes can themselves. This advantage gives them preferred trading and profitability standards. It also creates a value chain with the highest hub realizing the most benefits.

Because hubs are central locations, they also can have an advantage in investments (Wonnacott, 1996). Those who seek to maximize their investment opportunities will invest their money through the purchasing of stocks or starting businesses within the hub (i.e. supply chain). They are aware that this is the fastest place for them to grow their capital. This in turn spurs additional economic growth in the area and develops opportunities for product development.

A problem occurs when two mega hubs are not competing on the same assumptions. For example, Chinese tariffs on U.S. made automotive products are designed to protect Chinese budding suppliers (Jian, 2008). When this occurs, one country has an advantage as they are willing to sell their products without tariffs to the U.S. but will not accept American products. The free trade cycle is broken.

In order for the mega hubs to operate correctly individual components of production should be purchased at a lower price and then assembled with intellectual labor into higher value products that are sold on the market. If these products are built else ware and sold primarily within the U.S. there is no export advantage, revenue, or growth. A decline occurs because the consumer culture is soaking up the value locally instead of properly exporting.

Hubs should be creators of wealth. They should use both imported and locally generated resources to develop them into higher value products for export. When this does not occur, it is likely that the export gain will turn into an import loss. Those hubs that export products will grow while those that only distribute imported products are likely to decline. It is the total value of the flow that determines growth or decline in regional development.

Chong, S. & Hur, J. (2008). Small hubs, large spokes and overlapping free trade agreements. World Economy, 31 (2).

Jain, Y. (2008). Wto rips china’s tariffs on imported auto parts. Automotive News, 82 (6295).

Wonnacott, R. J. (1996a), ‘Free-Trade Agreements: For Better or Worse?’, American Economic

Review, 86, 2, 62–66.

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