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Free Trade and Poor Countries - Essay Example

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Let us first discuss about what free trade is. Free trade is a trade policy which allows traders to transact without interference from government and government-imposed prices. The policy permits the trading partners to attain mutual gains with goods and services produced according to the law of comparative advantage…
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Free Trade and Poor Countries
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"Free Trade and Poor Countries"

Download file to see previous pages This is an ideal situation where each country would be able to export those goods at cheap rates which are difficult to be manufactured there. However, when taxes are levied, a country A might import goods from country B and make them available in the local markets at cheap rates; but country A cannot export any goods to country B as B might have levied high tariffs for export. When high taxes are in practice, the development of one country might prosper who have the ability to produce more and export it around but do not need any imports. On the other hand, trade of developing countries looking for trade outside gets hampered. It has been observed that the average income of developing countries has been more for countries with lower trade barriers.
Even though free trade gives trading opportunities to developing countries, it is not alone sufficient for development. The Department for International Development (DIFD) in UK believes that the least developed countries (LDCs) should even reform their internal trade institutions and develop stable economic situation. Also, if free trade is allowed then the local manufactures of developing countries suffer loss as their goods do not find a marker due to imported good being available at same prices. Therefore, LDCs need to create market incentives so as to gain the local market space in their home markets.
Let us refer to a case study related to free trade.
In January 1994, Mexico and US entered North American Free Trade Agreement (NAFTA). Mexico did not benefit at all from this agreement as its markets went into the hands of US without any gains falling in Mexico's hands. This happened because US did not open their markets as it would lead to more competition and less profit for US. They preferred to buy into nations in the form of investment. Similarly, Canada also signed FTA with US in 1988. Since then more than 10,000 companies have been taken over by US corporations.
"Over 85 per cent of Canada's exports now go to the US, and about 70 per cent of Canada's international trade is handled by US corporations," was said by David Orchard of Canada. As a result, Canada is the most foreign-owned developed nation. Thus we can say that free trade is alone not sufficient for development of any nation.
At present what the poor countries want is not foreign goods in their market only. More than that, they need opportunities to export their products in the outside market. Since most poor countries have abundance of labor-intensive products and agricultural products, they need markets where they can export these without facing too much competition and high tariffs.
The developing or least developed countries find it difficult to expand their world trade mainly because of the tariffs applicable in most parts of the world. Average tariffs on LDCs have been reduced marginally. However, still the average tariff on agricultural products is as high as 40%. With such tariffs applicable in most countries, LDCs are finding it difficult to expand their trade in these countries. Apart from tariffs, there are also non-tariff barriers which affect LDCs more. There might be quotas which can restrict a country to trade in a developed country. Health and safety hazards also play a role. Since LDCs have labor oriented products, the products ...Download file to see next pagesRead More
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