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Free Trade For Developing Countries - Essay Example

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Free trade has remained one of the most debated topics since the 18th century. On one end of the spectrum are supporters of free trade who justify it on economic, moral and social grounds. On the other end, however, are critics who claim that free trade is not justified on economic and socio-political grounds…
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Free Trade For Developing Countries
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"Free Trade For Developing Countries"

Download file to see previous pages Before delving into the arguments concerning free trade in developing countries, it is important to define what exactly free trade is. Free trade refers to unrestricted international trade. In other words, it is trade free from barriers such as subsidies, tariffs, quotas as well as NTB’s (Non-Tariff Barriers) (Neale, 2010). Thus, free trade is based on the principles of free markets and prices under free trade are determined by demand and supply. Furthermore, the principles of Comparative Advantage, as laid down by David Ricardo, govern free trade (Victor, 2002). Free trade assumes perfect information between buyers and sellers and free movement of labor and capital. The arguments that tilt in favor of free trade for developing countries are based on economic, social and moral grounds. This is best illustrated by the case of Jordan and U.S. Jordan is categorized as a developing nation with a limited local market and surrounded by various other developing economies, thus limiting opportunities for its market growth (Victor, 2002). Without exports, there is limited potential for market growth for the country. However, if it enters into free trade agreements with developed nations such as the U.S, it can enjoy access to a much larger market which shall lead to greater utilization of the Jordan’s potential source of comparative advantage than without trade where resources would lay idle (Victor, 2002). To this end, free trade encourages a fuller utilization of a developing country’s resources than would otherwise be possible. Research conducted by Frankel and Romer are suggestive of the fact that free trade brings about a rise in income or GDP whether it is within the region nor international (Victor, 2002). Countries that have large domestic markets tend to support large interregional trade, and thus have higher income levels compared to small countries. These researchers have justified free trade for developing countries on the grounds that the “exports” component of trade proves to be an engine of growth for the country (Victor, 2002). By gaining access to foreign markets, such countries can benefit from increased efficiency due to optimal size of the plant and gains from economies of scale that cannot be reaped from their local markets (Victor, 2002). The theory pertaining to international trade suggests that specialization ought to be done by countries in which they have a comparative advantage compared to their partners in trade. The Factor-Endowment theory proposed by the Heckscher-Ohlin (H-O) model incorporates the theory of comparative advantage (Victor, 2002). However, a potential disadvantage of this model is that it simplistically assumes that all countries have similar production technologies as well as similar customer tastes and preferences (Victor, 2002). Although true for nations at the same level of economic development or those enjoying similar cultural, religious affiliations, this assumption does not hold true for majority of the cases (Victor, 2002). The assumptions certainly do not hold true for trade between developed and developing nations. In case of developing countries, the concept of free markets is often aborted when forces such as corruption, bribery, uncertainty, lack of transparency and lack of opportunities can hamper productivity (Victor, 2002). However, to this end the H-O model, which forms the basis of free trade, has been reformed to ...Download file to see next pagesRead More
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