Influence of Foreign Trade on Developing Countries - Example

Influence of Foreign Trade on Developing Countries. Trade Liberalisation. 19th January Outline Introduction Characteristics of free trade Advantages of foreign trade for developing countries Risks of foreign trade for developing countries Practices of foreign trade liberalization Free trade zones Trade policy of China Trade policy of Tanzania Government policies against trade liberalization Conclusion Introduction Foreign trade represents international exchange of goods and services between different countries, and is an important characteristic of globalization processes in the world. In many countries foreign trade makes significant contribution to Gross Domestic Product, and thus it comes out as an accelerator to countries economy all over the world (Office of the United States Trade Representative 2008, The World Bank 2004). The role of developing countries in foreign trade increases with every year, which makes them equal right players in globalization processes. As globalization is often presented as a result of growing investments, migration between countries and increasing liberalization of foreign trade (Griswold 2000, The World Bank 2004), the role of foreign trade in development of the countries is obvious and appreciable. Liberalization of trade became a popular strategy among the countries after the World War II. The United States of America contributed to foundation of General Agreement on Tariffs and Trade in 1947, which was signed by 23 countries and became the first most important multilateral agreement on trade in the world. It was replaced by the Uruguay Round Agreements in 1994, according to which the World Trade Organization was established (Irwin n.d.). Characteristics of free trade Trade plays important role in development of the countries. Foreign trade can be free (liberalized) and non-free (limited by quotas, tariffs, and other restrictions). According to Adam Smith, free trade between different countries brings benefits to all of them, as nations will specialize on producing and selling goods, which they can produce with lower costs and better than other nations (Smith). Free trade means that countries can sell products to each other without paying tariffs, having certain quotas for export, licensing or standardizing the products etc. (Irwin n.d.). The main approaches, which countries can follow while transferring to free trade, are unilateral, bilateral and multilateral. The unilateral approach means that a single country removes barriers for domestic producers to sell products, not waiting for other countries to follow its example. The government of a country allows its producers to sell the goods without paying tariffs or passing additional certification or licensing, and makes the country itself open to foreign trade. The bilateral approach foresees agreements on reduction of trade barriers between two countries. A country can have several bilateral agreements with different countries, which set special conditions of trade between them, and thus increase efficiency and give advantages of free foreign trade only to these two countries. The multilateral approach deals with many countries, who make an agreement together for reducing trade barriers between all of them. This agreement allows them to increase competition, specialize on production of products, which they can produce best of all, strengthen relations between themselves, develop economies and increase overall welfare of their population (Balassa n.d., Irwin n.d.). The main characteristics of free foreign trade are (Griswold 2000, European Commission 2012, Irwin n.d.): trade of goods and services without tariffs, taxes, quotas etc.; absence of special conditions and policies, which give certain countries or companies advantages over their competitors; free access to information, which is circulating on the markets; restriction of monopolies and oligopolies activities; existence of special organizations and/or agreements, which regulate trade between countries and contribute to its liberalization. The World Trade Organization is the most well-known organization today, which is aimed at liberalization of foreign trade and issues multilateral trade agreements (The World Trade Organization n.d.). Advantages of foreign trade for developing countries The advantages of foreign trade for developing countries are considerable. European Commission distinguished 10 main advantages, which every developing country will experience while increasing import and export of goods and services (European Commission 2012). 1. The first advantage consists in providing commercial opportunities and increasing investments, which contribute to promoting development and reducing poverty in the countries. 2. Foreign trade increases competitiveness of local producers, encouraging them to reduce input costs and improve value chain of their products, and investing in the companies. 3. Foreign trade helps local producers of developing countries to increase and improve their production possibilities by developing and suggesting new products to the new available foreign markets. 4. Foreign trade contributes to international exchange of technologies, innovations, and research and development programs and experience, which stimulates development of innovations in developing countries. 5. Foreign trade helps local producers of developing countries to spread out their business connections to foreign countries and overcome the barriers to access to the foreign markets. 6. Foreign trade guarantees benefits to consumers from developing countries, providing them with goods and services of new origins, and thus encouraging competition of local producers and contributing to bringing down the prices of goods and services. 7. Foreign trade contributes to advance of local standards (which deal with products quality, environmental protection, use of labour resources) and introduction of new international standards with proved safety and efficiency. 8. Foreign trade assists in reduction of government spending by providing new sources of products and intensifying competition for state procurement. 9. Foreign trade creates useful and valuable exchange between countries and individuals, and thus improves peaceful and stable relations between them. 10. Foreign trade helps to increase economic sectors productivity, create new jobs, improve labour conditions, increase wages, and thus improve welfare of the population in developing countries. Generally, a country, which takes part in liberalized foreign trade, gets an opportunity to specialize in products, which it can produce best of all with minimum costs, and thus takes part in international division of labour (The World Bank 2004). Risks of foreign trade for developing countries Foreign trade brings not only benefits to developing countries, but is also associated with certain risks. The greatest risk, with which countries can meet, is increasing competition. From one side, competition makes local producers improve their production processes and introduce innovations. From another side, local producers may not be able to compete with foreign strong competitors, and have to leave the market. The capital and labour force cannot be easily transferred to other industries for different reasons, and increasing unemployment and decrease in GDP will slow economic development of any country (The World Bank 2004). Practices of foreign trade liberalization Foreign trade liberalization foresees minimum governmental intrusion into foreign trade, which develops according to free market demand and supply forces. There are a lot of practices of foreign trade liberalization by different countries, which reveal each countrys strategy and measures towards making foreign trade free and getting benefits from it. Free trade zones One of the measures for trade liberalization is creation of free trade zones. Free trade zones usually possess such features, as advantageous location, orientation to export, flexible orders and regulations, existence of incentives (lower taxes, and/or exemption or deferment from paying taxes and tariffs), improved infrastructure, absence of bureaucracy in transactions. The main benefits, which country gets from creating free trade zones, are increase of foreign investments into the area, technological and know-how transfer, rise of employment, increase of income. The profitability of creating of free trade zones can be proved by the change in the quantity of the zones and employment of people, who work there. Thus, in 1975 there were only 25 free trade zones, which gave jobs to 800 thousand people. 32 years later – in 2007 –2 700 free trade zones existed around the world, providing more than 63 million people with jobs (Overview of Free Trade Zones 2012). Trade policy of China China can be one of the best examples to show the influence of foreign trade on economy of the country. Changing the driving force of foreign trade from obligatory planning to the market force made the country open to investments and exchange of goods, services, experience, technologies etc. China became a member of the World Trade organization in 2001. By this time, the country had lowered barriers for market entry, improved its regulations and laws for trade activity, decreased the government intervention into trade regulations and control, reduced the number of licensing procedures, lowered tariffs and quotas for imported and exported goods. Starting from 2004 the Chinese government simplified the procedure of new dealers registration, which led to expand of its markets and increase of its export and import. Due to the trade liberalization measures China became one of the biggest exporters and importers in the world, and the GDP of the country increases every year (Information Office of the State Council of The Peoples Republic of China 2011). Trade policy of Tanzania Tanzania is a developing country, which had been using restricting trade policy up to 1980s. Existence of numerous restrictions in trade led to losses in the countrys economy, as the export processes were not transparent, and there were a lot of mediators in foreign trade. Liberalization of trade in Tanzania started in late 1980s – early 1990s. The main two measures, taken by the government towards free trade, were introduction of a special open license procedure (which granted licenses to all eligible imported goods) and establishment of Own Funds Facility (which granted licenses to importers, who used own holdings while paying for certain imported goods). Tanzania also changed some tariffs and taxes, removed price control for certain types of goods. The trade liberalization measures led to increase of employment in small farmers business and its efficiency, increase of export of the country, and overall growth of Tanzanias economy (Kanaan 2000). Government policies against trade liberalization Statistics of trade liberalization shows not only the increase of GDP in some developing countries, but decrease of many economic indicators in the least developed countries. The period of intensive trade liberalization started in 1980. The same period is characterized by increase of number of those people, who live in poverty, by 50%. About 10% of the world population lives in 49 poorest countries. However these countries give only 0.4% to the total volume of the world trade (Trade liberalisation statistics n.d.). Policy of trade liberalization opens the domestic market of a developing country for international competition. To protect local producers, who may turn out to be uncompetitive compared to foreign rivals, the government of a developing country may suggest certain protectionist measures. These measures are usually temporary and may include introduction of quotas or additional fees for import products, the necessity to licence certain foreign goods or services (The World Bank 2004). Latent protectionism includes the necessity to certify imported products according to national standards or meet other national requirements; setting government procurements for certain goods and services, produced by domestic producers; requirement to include domestic materials and intermediate products in composition of foreign goods (Irwin). Conclusion Liberalization and protectionism are the possible trade policies of developing countries. Nowadays it is very difficult to find pure liberal or protectionist foreign trade policies, as every country tries to combine the elements from both policies, depending on the goals, each country has. However, the process of liberalization of foreign trade gradually replaces the protectionist measures, set up by countries in the past. Liberalization of foreign trade is considered to be one of the efficient instruments of increasing growth for developing countries. Numerous reports and research prove that on the whole liberalization helps to strengthen competition in the country, promotes introduction of innovations, contributes to the development of strong and long-term relations, increases the GDP and overall performance of the developing countries. At the same time, liberalization of foreign trade may lead to the negative results in developing countries economy, as domestic producers may fail to withstand competition with developed foreign corporations with well-known products of high quality. Thus, each government has to decide the level of liberalization and protectionism for its foreign trade policy, depending on economy conditions and preparedness of domestic producers to the changes. References Balassa, Bela n.d. Trade Between Developed and Developing Countries: the Decade Ahead, viewed 19 January 2015, European Commission 2012, 10 Benefits of Trade for Developing Countries, Information, Communication and Civil Society unit – Trade A3, European Commission, Brussels, viewed 17 January 2015, Griswold, Daniel 2000, The Blessings and Challenges of Globalization, CATO Institute, viewed 17 January 2015, Information Office of the State Council of The Peoples Republic of China 2011, Chinas Foreign Trade, Embassy of the Peoples Republic of China in the United States of America, viewed 19 January 2015, Irwin, Douglas A. n.d. International Trade Agreements, The Concise Encyclopedia of Economics, viewed 18 January 2015, Kanaan, Oussama 2000, Tanzanias Experience with Trade Liberalization, Finance and Development, vol. 37, no. 2, viewed 19 January 2015, Office of the United States Trade Representative 2008, Trade Facts. The Benefits of Trade for Developing Countries. USTR, Washington, DC Overview of Free Trade Zones 2012, Western Economic Diversification Canada, viewed 19 January 2015, Smith, Adam. The Wealth of Nations, viewed 19 January 2015, The World Bank 2004, Beyond Economic Growth An Introduction to Sustainable Development. The International Bank for Reconstruction and Development/THE WORLD BANK, Washington, D.C. The World Trade Organization n.d., Understanding the WTO. Who we are, viewed 18 January 2015, Trade liberalisation statistics n.d., World Trade Organisation, viewed 19 January 2015, Read More