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Free Trade as the Primary Force Driving Economic Development - Essay Example

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The author of the following essay "Free Trade as the Primary Force Driving Economic Development" primarily brings out that free trade and its subsequent effects on the economy have been the hotbed of debate for economists in the recent years. …
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Free Trade as the Primary Force Driving Economic Development
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Download file to see previous pages The theoretical literature available assumes certain conditions such as perfect employment which is not seen commonly in the real world. As a result, many of the theoretical assumptions come into conflict with empirical evidence. The theory may suggest that the reduction of barriers to trade can promote the welfare and economic progress, but evidence proves it otherwise. This paper presents the argument on the effects of free trade on the global economy and progress. The paper discusses the topic with supporting evidence from theories and empirical evidence. The tentative line of argumentation From a theoretical point of view: The characteristic rationale for the free trade originated in the 19th century when David Ricardo proposed the theory of comparative advantage. The theory of comparative advantage assumes that when a country exploits its factors of endowments and specializes in the production of certain goods, it can gain benefits from trading these goods. After Ricardo, a number of theorists built upon the theory and hence the Pure Theory of Trade came into limelight. Comparative advantage promoted that when countries are able to specialize, they can acquire a lower opportunity cost in the production of goods. The late 19th century saw the British increasing trade across the borders during the Great Famine in Ireland. It was then that the effects of free trade manifested itself with increasing income disparity. The uneven and disproportionate income distribution caused one million Irish to die of hunger and disease. Even Adam Smith, who is considered to be the father of free-market economics, contended that trade restrictions are incumbent in certain sectors like defense and navigation. The theory of comparative advantage does not provide the welfare benefits that it promises, particularly to developing countries. The theory necessitates perfect employment and if it is not present, as is the case usually, the country is worse off from trade liberalization due to a large number of workers who are displaced (Costantini 1999). From an empirical point of view: One way of analyzing the effects of free trade on progress and economic development is through the North American Free Trade Agreement. The Agreement created a watershed in the global trade policy, primarily because of the widespread level of free trade that it created (Kose, Meredith, Towe & International Monetary Fund 2004). The postulations of the Agreement have been a contentious subject. The proponents of NAFTA contend that it has caused the Canada, Mexico and the US to increase employment, whereas the opponents argued that it would cause a loss of jobs in the US with workers moving towards Canada and Mexico. In one of the popular negotiation rounds of the Agreement, the Presidential Candidate H Ross Perot claimed that the reduction of trade barriers would cause the colossal sucking of jobs in the US to Mexico. Over the past 15 years, economists have developed contradicting opinions regarding the profitability of NAFTA to the signatories. Many economists contend that NAFTA has had a meager influence on the US economy (Brezina 2011). However, the opponents of NAFTA argue that the economy of the country is at the receiving end of the trade policies; this relationship has not proved to be beneficial. The NAFTA has created a disproportionate economic balance, with the investors gaining more from the Agreement as compared to advantages the workers and environment derived. ...Download file to see next pages Read More
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