Impact of Free Trade on Developed and Developing Countries - Essay Example

Impact of Free Trade on developed and Developing Countries Among the results of increased interconnectedness of sis improved level of trade which is informed by the concept of free trade carried out between different trade partners. Even as this trade continues to be beneficial due to increased income for a country, there have been concerns about how these benefits are shared especially in relations to the balance of power held by developed countries against that of developing countries during negotiations. The basis of International Relations is to protect the interests of a country with foreign trade being an important avenue for a country to establish its superiority based on volume of trade and income generated to the economy. Consequently, there has been increased research into the role played by international trade on wealth creation in different countries based on whether they from the category of developed or developing countries. The concept of free trade is informed by the neoclassical assumption concerning trade liberalization which asserts that nations are most likely act in a manner that is most likely to guarantee protection of their interests especially since they are in the best position to make an assessment of their needs and the options available for them to achieve such needs (Rapley, 2007). Therefore countries that take advantage of their resources will improve the incomes for the citizens through a process of resource redistribution that is based on the laws of comparative advantage in addition to other gains from trade with international trade partners which is thought to be key driver of competitiveness, flow of new knowledge and superior rate of capital accretion. Giving international markets a free access into the local markets of a country creates an economical environment based on a rational market structure as the accrued benefits from opening up the market for free trade are reflected by the resultant scale of economies and economies of scope that arise in wider markets. Advocates of free international trade claim markets in developing countries which are yet to adopt neoliberal approach to trade are characterized by narrow options for trading of available goods and services as well as lack of competition to local businesses which then translate into creation of oligopoly and inefficiency within the local markets. The creation of inefficiencies and oligopoly markets is as a result of domestic firms in protectionist economy might assuming certain powers that might not be present when international players are introduced to compete with local firms. Middlebrook and Zepeda (2003) gives an example of the Mexican market where liberalization has led to increased competition on local forms which have been forced to improve the level of performance in terms of quality of output in order to compete with imported goods and services. The result of this rationalization of domestic market was that local firms were forced to improve to such extend that they became export competitive as a result of the realization that they needed to look to export markets to develop a scale that would make them to competitive (Middlebrook and Zepeda, 2003). For any given country, economic development depends upon their balance of trade which involves getting a positive difference between the returns from export and expenditure resulting from imports of goods and services. Consequently, countries that benefit from free internal trade are those that have effectively improved the level of returns from export into international markets. This is possible only when such countries undertake to significantly reform key areas of their economy especially in matters regarding levies on exports, tax concessions, reforming of tariffs to reduce the export biases to ensure production for export match production for local markets, establish export processing zones (EPZs) and regulation of foreign direct investment (Thirlwall and Pacheco-López, 2008). These measures have been instrumental in turning around round the economies of countries such as China and India that have recorded rapid economic development since the 1980s. However, trade liberalization is not the only catalyst for faster economic development as it must be undertaking in context of other changes in political, economic and social environment of a country for it to be beneficial. Developing countries that have introduced free trade regimes but are yet to enjoy improved levels of economic development should assess other causal factors that are outside the controls but influence their balance of trade on the international arena. Panagariya (2003) notes international trade should be conceived in the background of the country’s macroeconomic and political stability if it is to bring meaningful benefit to the country. Accordingly, the question of benefit of free trade to developing countries should be assessed based on prevailing conditions in such countries since countries that have stable political environments will attract increased levels of international trade due to guaranteed stability for business. On the other hand, countries with unstable political environment will have low levels of investments due to insecurity making trade partners to avoid investing in such markets as experienced in the case of Côte dIvoire where introduction of free trade failed to have the desired impact on the country’s economy due to security concerns during the during 1980’ and 1990s (Panagariya, 2003). Even as proponents of free international trade claim both developing and developed countries have equal chances of gaining from openness in their markets, there are a number of practices which indicates the skewed platform on which countries operate. Developed countries have an advantage over developing countries as a result of the subsidies offered to producers which ensures developing nations do not benefit from free trade because their products are not competitive in the international markets due to their high prices that also correspond to their costs of production (Panagariya, 2003). Wade (2002) given an example using the case of European Union where every cow has been subsidized to the tune of 2.50 US Dollar per year with wheat farmers earning almost half of their expenses from the subsidies which negatively affects developing countries whose products do not enjoy the same level of subsidies. The consequence of such subsidies is that countries such as Argentina have had to default on their debts as they because it impossible for them to export enough to facilitate repayment schedules. Consequently, it is argued that for international trade to benefit developing countries there should be a removal of the quotas on foreign important as well as subsidies to domestic producers to increase the global prices of the products making it possible for developing countries to benefit from improved access to international trade. Linked to the issue of subsidies resulting in low costs of production is the dumping of products whose cost of production is lower than their selling price into markets in developing countries (Panagariya, 2003). While developed countries have introduced measure to protect domestic markets from dumping of products that might negatively affect locally produced goods, developing countries have always face difficulties when attempting to come up with such measures. An example of such antidumping policies initiated by developed countries includes the use of Multi Fiber Agreement (MFA) under the WTO rules which imposed quotas on the important of apparel and textiles therefore protecting their young industries until they matured and were ready to face competition. The use of measures such as the MFA was instrumental in strengthening the textile and apparel industries in developed countries but would face strong opposition if they were to be attempted by developing countries. Although such protectionist approaches as MFA have since been made illegal by WTO they have already strengthened these industries in developed countries with existing tariffs and quotas also still playing such roles by making goods from developed countries more competitive in the international markets. Failure of free international trade on a global scale to guarantee equal benefits for all the trade partners has seen different countries introduce measures such as formation of trading blocs that are perceived as taking care of the interests of countries that have been disadvantaged by free trade on a global scale (Rodrik, 2001). The trading blocs follow a concept of regionalism instead of globalism and provide developing countries with a chance to come together and form a bloc through which they can gain competitive advantage over developed countries by improving their bargaining powers when doing business with non-member states. Scholte (2005) supports this approach taken by developing countries arguing that among reasons for the increased gap in terms of wealth creation accrued in developed countries and that of third world countries is that the concept of free market as envisioned by proponents of globalization has not been implemented as have been envisioned. The author notes majority of world population have not enjoy the benefit of globalization given that it is only the wealthy individuals with access to offshore accounts who control the economy while the poor are mainly consumers of goods and services without claiming ownership of financial profits resulting from globalization. Rodrik’s (2001) assertion is part of the continued debate over free trade based on regionalism as opposed to globalism with a number of researchers claiming that countries that are forming regional blocs are reacting to the failures of global free trade (Hurrell, 2007). Regionalism is conceptualized as providing the most suitable and practical solutions for state and non-state actors in developing countries to escape the challenges and pressure involved in the capitalist oriented global competition while also providing a framework for such countries to take part in an increasingly well regulated and managed business environment. However, there are some who agree that states are increasingly operating on a regionalism basis but they go ahead to argue that this does not amply a direct challenge on globalism, rather, cooperation within particular regions is part of the necessary groundwork for an open international economy (Telo, 2007). Regionalism in this case is playing a complimentary role to globalization as it creates a ground for countries to cooperate on a regional basis before using their bloc to improve their bargaining power on the global scale. While the benefits of free international trade has been skewed to benefit developed countries, international institutions such as the World Bank, IMF and WTO have been accused of disadvantaging developing countries by propagating neoliberal ideals which calls for open markets with open competition without paying attention to special interests held by developing countries. While insisting on creating a level ground for international trade these institutions have instead created imbalanced trade between developed and developing countries since developed countries have a higher bargaining power than developing countries (Hirst, Thompson, Bromley, 2009). The advantage that developed countries have over developing countries is due to high level of technology used in production, low asking price for output and the presence of variety of outputs for trading which ranges from primary goods to those manufactured. Consequently, the biggest volume of wealth involved in international trade will flow amongst industrialized countries with developing countries gaining a small fraction of the global trade especially when they possess important raw materials. The disparities in wealth creation resulting from international trade is proven by the statistics presented by Scholte (2005) were exports from developing world represented only 0.4 percent and imports 0.6 percent of the total transaction in 1997. This is approximately 40% decline when the figures are compared with those of export and import from 1980 to 1997. The researcher argues that although more recent data indicates developing countries have exported more goods to the developed states, most of the goods are primary commodities that fetch low prices in the global market (Scholte, 2005). It has also been argued that developing countries have been disadvantaged by concepts such as the Structural Adjustment Programs (SAPs) which dictate the way countries organize their internal institutions. Using SAPs the international Monetary Fund (IMF) and the World Bank have forced developing countries to give up part of their national autonomy by being asked to implement de-regulation, liberalization, privatization policies. Many researchers who are against international trade have argued that this interference into internal matters of a country presents serious intrusion as countries are supposed to be left to construct internal institutions based on their own economic, social and political profile. Further opposition to the introduction of SAPs has been due to the implication it has in a country since many are forced to abandon the welfare state as due to closing down of domestic programs such as health services, education, and environmental protection measures. The result of such moves in developing countries has down downsizing human resource in public service resulting in high unemployment levels (Maswood, 2008). Those left without employment further sink into poverty especially since the private sector in these countries lack the capacity to absorb the high number of unemployed due to high costs of capital for operating businesses that result from high interest rates from banks influenced by IMF policies. When barriers to foreign trade are eliminated, domestic markets in developing countries are left vulnerable to subsidized and therefore low priced goods that enter their markets from developed countries destroying local industries whose output cannot compete with the low priced imports. However, international institutions such as the World Bank have been quick to reject arguments from those against SAPs by arguing that the effects of these policies should be perceived on a long-term basis since most of the targeted economic benefits especially in developing countries might take some time to be experienced by the citizens. Based on the argument presented by the World Bank, efficiency in government operations resulting from implementation of their policies should guarantee future prosperity as state systems adjust to their new economic environment. Further, lack of economic progress and negative effects in countries that have implemented SAPs have been attributed to externalities such as corruption in specific countries. Studies done in some of the developing countries where SAPs have been implemented have indicated the negative impact of corruption on public finances. In the case of Tanzanian, results indicated bribes received by public officers from different sectors of the economy such as the judiciary, police, tax services, and lands department amounted to about 62 percent of official public budget in these sectors. Similar studies conducted in other countries have indicated the high level of wastage such as in Philippines where the Commission on Audit presented an annual figure of almost 4 billion dollars being diverted from the public coffers due to public sector corruption (World Bank, 2004). From the foregoing exploration of free international trade, there are a number of patient issues that determines the accrued befits based on whether a country belong dot the category of developed or developing countries. Although a number of researchers have argued that international trade favors the developed countries, there is also evidence indicating developing countries are also to blame for lack of progress even after accepting to liberalize their markets. Failure of developing countries to record faster economic development has been blamed on external factors such as political instability and corruption. However, it is also evident that liberalization has had negative implications on domestic industries in developing countries especially since governments in developed countries provide favorable environment for production of quality commodities by offering incentives such as subsidies. In conclusion, developing countries must rethink their strategies in international trade if they are to record positive results. This might include eradicating wastage and forming of regional blocs which will increase their bargaining power when dealing with the developed countries. 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