Arguments for and against Free Trade for Developing Countries - Essay Example

Explain in detail the arguments for and against free trade for developing countries. What policy would you recommend? The emergence of globalization has promoted the activities of international trade and has allowed the companies to attract investment from across borders. However, the overall impact of international trade especially in case of developing countries has been debatable. The favorable arguments for free trade posit the fact that free trade has been effective to eradicate poverty. Institutions like World Bank, International Monetary Fund are in favor of this argument. But, on the other side, free trade has been criticized with respect to environmental issues. It has been held responsible for continuous changes in climate (Hassoun). However, free trade is not considered as a fair one for developing countries. Opponents claim that the developing countries would stand nowhere with respect to competition from their foreign counterparts. Such countries cannot rely on free trade for economic growth. But, at the same time, it is also true that changes in policy framework brought about by international trade have facilitated increased flow of investment for developing countries (Bhagwati, Woods and Datta). Thus, free trade has not been able to ensure overall economic growth to developing countries although it contains merits of injecting efficiency in production and delivering enormous gains. The present paper tends to address this issue by citing arguments for and against free trade. Free trade was promoted with emergence of globalization with the motive of creating global markets. It was thought that free trade would help to remove the inequalities between developed nations and less developed countries of Asia and Africa and bring them under one roof by integrating the markets of each nation. Several international institutions like GATT and NAFTA have extended their active support to this cause. WTO has also given developing countries the right to interfere actively in established trade agreements (Van Den Cate). Still there remains a question on the achievement of free trade with respect to economic well being of these less developed nations. Arguments for Free Trade The economy of today’s world is considered as a component of free trade. Its major achievements lie in integrating the markets of both developed and less developed countries. The supply demand mechanism has been simplified with introduction of free markets under trade. Promoting the notion of sustained growth of the economy free trade has often been referred as ‘the engine of growth’. Free markets have effectively utilized the available resources for developing countries and have enabled their optimal allocation. Free markets have mainly advocated for privatization. The ineffiencies, that prevailed in the public sector, have been eliminated with the impact of such privatization. It has also helped to plug in the loopholes remaining in the public sectors, particularly for developing countries. Overall economic globalization brought about by free trade has written stories for success and advancement of human beings. They have been able to reap the benefits of financial gains due to free trade (Shah). The developing countries are likely to incur more losses if they resort towards adopting policies of protection against free trade. In that case they would miss out the opportunities for importing advanced technical knowhow that would help them in development of domestic industries. Thus, trade control measures will restrict the amount of output that can be yielded by adopting the mechanism of free trade (Bhagwati, 34). Unfair competition in world markets faced by less developed countries could not be cited as a valid argument against free trade. Retaliation measures from other countries will totally diminish those potential gains that could be achieved through trade restrictions by developing countries (Bhagwati, 30-33). Free trade contains the advantage of increasing the marginal productivity with respect to capital for developing countries. This in turn will increase the amount of productive investment for developing countries (Bhagwati, 35-36). The most important argument for free trade is production according to the nation’s comparative advantage. This will surely help the less developed nations to enjoy the advantages of economies of scale. The country can also buy the desired goods and services at a comparatively lower cost. Trade helps the countries to specialize in producing a particular commodity. Under free trade a country does not have to take the pain of producing all the commodities. This in turn lowers the cost of production and usage of fewer resources for the purpose of production. Instability in pricing has also been removed with the advent of free trade through fixation of international prices. Moreover, free trade helps to stabilize the markets of less developed nations. Free trade also facilitates expansion of national markets as they do not remain confined to home countries anymore (Caballero, Quieti and Maetz). Economists have supported the argument of free trade for developing countries due to the fact that free trade helps the countries to achieve technological progress. The nature of change in technology that is found for developing countries acts in favor of policies directed towards free trade. Export subsidies tend to strengthen the argument for free trade. The trade and free exchange between developed and less developed nations has higher chances of leading towards economic development (Helleiner, 93). Moreover, protectionist policies are not suitable for small countries or developing countries because they involve high production costs. Formation of trade groups or unions has made free trade more lucrative with the phenomenon of trade creation and trade diversion where member countries can reap the advantages of free trade within unions. Asian countries like Japan, South Korea as well as Taiwan have benefitted enormously from free trade (Helleiner, 91). Free trade has been helpful in generating higher wages for workers. The consumers of a country emerge as gainers because they have the option or choices of consumption of a greater variety with respect to goods and services (MacKenzie, 177). They are also assured of lowest possible prices of high quality goods and services. Producers are also at a gain because they get wider markets to sell their commodities or services. International supply chains which are an outcome of free trade have helped in maintaining peace in markets (MacKenzie, 135). Case study in favor of free trade argument We cite the case example of trade relations between the United States and Brazil to show how free trade has proved beneficial for developing countries. Both the countries are producing computer chips and sugar, while Brazil produces sugar at a much lower cost and thus, enjoys comparative advantage in production of sugar. United States can also concentrate only on production of computer chips and import sugar from Brazil. 50 kg of sugar is obtained in exchange of one standard chip in the United States. The quantity is 100 kg in case of Brazil. This reduces the cost of production for the United States. Such a specialization in production of a particular good obviously generates efficiency. Thus, both the countries are reaping the advantages of free trade with favorable terms of trade. International trade concerned with continuous purchase and sell of sugar will be beneficial for a developing country like Brazil. Trade has also benefitted both the countries by expanding the markets for their products (Caballero, Quieti and Maetz). . Arguments against free trade Free trade has concentrated so much on industrial development that it has ignored the environmental issues. Moreover the benefits of free trade are known to be biased towards the developed nations. The infrastructure of developed nations has been more favorable to free trade than those of less developed nations. Unlike developed nations, developing countries lack environmental groups containing sufficient amount of funds. Free trade has also been criticized for fuelling unemployment. With free trade, employers are commonly firing out workers from industries. The agreement for free trade also has neglected issues regarding the employer’s safety and his job security. Free trade has also adversely affected the worker as well as his family’s health with a rising number of unemployment (Stellman, 20.13). Free trade causes harm to macroeconomic stability of developing countries. Inflation, which is common to developing countries, is coupled with another crisis, i.e. more borrowing to improve infrastructure for free trade. It once develops the urgency to promote exports so that it can repay the loans. Thus, these countries suffer devaluation with respect to currencies. In the advent of free trade the speculative activities have increased for developing countries in capital markets resulting in capital flights. Overall, such a phenomenon produces macroeconomic instability. Environmental issues in developing countries lead to import of certain environmental services. However, increased imports of such services prove disastrous for the country’s economy under free trade (Nader, 129). Free trade adversely effects the environment by increasing waste substances from production. The technological progress developed with advent of free trade neglects environment largely and creates scope for deregulating environment. The ongoing changes in climate are mainly an outcome of such negligence of environment (Hassoun). With advent of free trade which facilitates cross border investments developing countries are encouraged to maintain lower standards of environment. This is done to attract a particular industry. Such lower environmental standards in turn will result in low standards of regulation for the country. This is very harmful for developing countries in terms of overall growth and well being, because the country will then have no incentive to control pollution. Thus, the country claims a spot in the bottom level in terms of overall development, although it may not experience detoriation in the country’s standard of living (Hassoun). Free trade has not always benefitted all countries because it does not give the assurance of economic growth. Under the impact of free trade many developing countries are confined in producing only one or two products. This cannot be termed good for the economy. A lot of uncertainty and extremes are involved with the notion of free trade. It can either lead to betterment of the country or generate detrimental conditions for the developing country (Bhagwati, Woods and Datta). Job security is deeply hurt with the advent of free trade. Trade leads to development which does not compensate for loss of jobs. Such a scenario of widespread unemployment is more common for developing countries. Free trade can be termed as unfair trade when looked upon the conditions imposed by WTO on developed countries. Clearly these institutions have discriminated between developed and less developed nations. Moreover, the flow of capital that is observed under free trade is considered as irrational. It encourages more speculation for the developing countries and also disrupts the stability of their economies (Trapp, 102). Instead of peace, it generates more turmoil and confusions with countries fiercely competing against each other (Trapp, 101). Trade has produced gains, but the distribution of gains has not been uniform. Some countries have benefitted a lot and become more powerful, while others, particularly the less developed ones, have remained in the bottom level and also under the control of powerful ones. Trade has become a useful equipment to gain control for the developed nations like United States. Under such control developing countries like India, China and Philippines have to accept the standards of employment that are set by the United States. Their products have often been prohibited in international markets citing claims of child labor. This has dragged the countries into a miserable state (Van Den Cate). Case study against free trade argument The economic structures of developing countries are such that they cannot reap the benefits of free trade like the developed nations. The case examples of the 1970s and 1980 during trade liberalization show that those countries which did not go for integration for free trade during that time emerged as gainers (p.752). The argument of free trade leading to growth can be considered as a myth. It is true that world output increases under free trade, but the distributions have largely been uneven. If the case of Mexico is taken, then it is found that a large number of unemployed workers migrate to the United States in search of jobs. They work in USA. The wage of unskilled workers in the USA exceeds that in case of Mexico. As they produce for the USA world output increases, but the United States emerges as the sole beneficiaries of such a hike. Hence it is true that free trade has mostly favored developed countries (Karl E, 754). Moreover it is found that developing countries like Papua, New Guinea and Solomon Islands have suffered from deficits in trade although they have been members of WTO. Due to being more prone to natural disasters they have failed to show much improvement under the influence of free trade (Scollay). Policy recommendations Before implementing trade policies the country must always ensure that it has collected data from a reliable source. This is essential to develop a good model that can highlight properly the impact of policy changes. Regarding to developing countries, they need to stick to policies of protection for some time to achieve economic development. Such protectionist measures are important for these countries in order to allow their industries to grow and be able to compete with their foreign counterparts. Moreover, when considering the free trade agreements the country needs to explore the possibilities of both multilateral and bilateral trade agreements to ensure that they have enough bargaining strength for trade related agreements. Multilateral trade agreement gives the opportunity to developing country to have more countries as trading partners. For bilateral trade agreements developing countries will have a scope to increase their market size. They will also follow a more balanced approach when negotiating power. As trade cannot totally ensure economic growth, the country also needs to develop other policies that will help them to achieve growth. Improved taxation may help the developing country to grow by raising adequate tax revenue. It has been found for developing countries like Kenya that free trade has been unable to alleviate poverty. 50 percent of the population is found to be below the poverty line. Under such circumstances it is important that the government also implements policies that may help to eradicate poverty (Polaski and Zepada). The developing countries also need better management of their adjustment costs that arise due to free trade. They also need to make extensive use of Special Products Safeguard Mechanism that is permitted under free trade. Maintaining transparency for negotiations in trade is very important for these countries. Utilizing the benefits of free trade they should look for more opportunities to expand the markets for their products. Above all, the developing countries should focus on achieving the policy goals for economic development (Chandra, Manurung, Pambudi and Pakpahan). In the wake of recent financial crisis in 2008, measures also need to be taken to expand the international markets for automobiles. This could be done with the help of bilateral trade agreements. Hence, for developing countries it is suggested that they should go on injecting more strength to their regional integration. They also require better managerial skills to become more competitive in international markets in the era of free trade. Preparation also needs to be made for efficient handling the booms in the business cycles. Governmental policies in developing countries need to be directed towards financial consolidation. The countries desperately need to restore the confidence of shareholders and stakeholders (Wad). Conclusion The emergence of free trade has paved way for technological progress and has significantly increased the world output. For developing countries it has increased the size of the markets for their commodities. Under the notion of free trade and comparative advantage, the countries have specialized in production of particular commodity which in turn has injected efficiency in the production system. Favorable terms of trade have allowed the countries to gain from trade. But the distribution of such gains has been uneven. As it is evident from the case studies, developed nations have emerged as the major beneficiaries. International Institutions like WTO have also discriminated between the developed and less developed nations under free trade agreements. For developing countries economic growth has not been ensured and poverty eradication has also not been performed with the advent of free trade. Rising environmental issues also have been a matter of concern. Under such circumstances, the paper suggests that the developing countries should additionally consider poverty eradication policies with trade policies. They should try out either bilateral or multilateral trade agreements. Overall, developing nations need to concentrate more on achieving developmental policy goals. References: Bhagwati, Jagdish N. 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