Introduction Income growth in the world Source: UNCTAD, 2017.

Introduction

Free
trade is a recent phenomenon that occupy lots of discussion in today’s world
among economists, and even policy makers. Some international institutions such
as IMF, World Bank, and Unite Nations believed that free trade is catalyst for
rapid economic development of all nations regardless of their rung of
development. Others such as Joseph Wade, Stiglitz, Bello, etc. on the contrary,
argue that free trade is anti-growth to nations especially to the least and
developing countries.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

This
report intends to provide discussion of free trade and why it is considered so
important by the international organizations. 
It also examines some free trade policies and evaluate their impact on
the developing countries. This work is divided into four sections after this introduction.
Section two focuses on free trade and why it is considered important. Section
three deals with free trade theories, while section four deals with Doha Round,
and free trade policies namely: TRIMs, TRIPs, and GATS and evaluation of their
consequences on developing countries. 

 

Free trade and why it is considered
important

Free
trade is typically free movement of goods and services across international boundaries
without restrictions imposed by government laws.  Free trade enables workers to shop at
affordable consumption of goods, permit employers to buy new equipment’s and
technologies for their workers so the goods they produce is of good advanced
value. Goods produced for exports, creates employment and income for domestic
employees, increasing economic growth of the country (Carbaugh, 2009).

Free
trade proponents such as Bhagwati, (2002) argued that free trade increases the world
total income (see figure 1) leading to reduction in unemployment and poverty
around the world. However, in addition to providing an economy with better job
avenues, free trade also enables an economy to mutually correlate with others,
leading to increased global peace (Grossman
& Krueger, 1991).

 

 

 

 

Figure 1:
Income growth in the world

Source:
UNCTAD, 2017.

Others
however, argue that free trade is anti-growth. For example, Krugman’s trade liberalism
arguments against free trade is firstly the idea of the strategic trade policy.
This argument stems from the idea that in a world of imperfect competition and
increasing returns, fortunate firms returns can be higher than that of their
competitors. In a situation where there are sufficient internal and external
economies of scale for an industry to operate and have enough/normal returns
and this is only possible with just one firm in that market, any other firm
entering the market may lead to losses for both firms. A government can
increase its country national income by imposing restrictions such as import
restrictions or export subsidies and ensure that the fortunate firm that
secures excess returns at the international market competition is domestic
instead of foreign. Krugman further argued that a government policy such as
investment in research and development (R) contribute in few firms to dominate the market and have control over the
price of the product.  This is the
reason why Krugman claims government policy plays the same role as the term
strategic trade policy (Krugman, 1987).

Protectionism
is another alternative view to trade liberalism; it’s a situation where a
country’s government, labour unions or domestic industries discourages imports
of goods or services from another nation into their domestic market to secure
their economic wellbeing (Carbaugh,2009). This means, the country solely relies
on import substitute goods or services (self-reliance on domestic goods and
services) which protects their infant industry from external shocks (price
volatility, technological development) at the international market (Bhagwati, 2002).
Bhagwati further comments that protectionism improve an economy welfare.

Free trade theories

Free
trade theories evolved through time right from Adam Smith to David Ricardo and
down to neoclassical such as Hecsher-Ohlin. These theories are summarized as
follows:  

According
to Carbaugh (2005), Adam Smith was a
great supporter of free trade on the basis that free trade boosted the
international division of labour. Smith illustrated that a country can
concentrate in producing goods with less cost, and with less labour intensive.
Smith view was such that, the cost of producing a good for country A in free
trade and country B not involve in free trade is their different productivities
which could either be based on natural (climate, mineral wealth and soil) and
acquired advantages (techniques and special skills). Country A with the both
determinants of production (natural and acquired advantage) in producing a
good, the country will produce at lower costs and supply more as compared to
country B.  Smith concept of cost
originates from the Labour Theory of Value which assumes that in a nation,
labour is the only factor of production and it produces just same quality goods
and the cost of producing a good is determined by the number of labour needed
to produce the good. For example, in the USA less labour is used to produce a
yard of clothes as compared to the UK and therefore cost of production is
lower. But Smith principle of trading was the principle of Absolute advantage;
that is when country A and country B producing good A and B respectively are
involve in international trade and specialisation they will benefit from
absolute cost advantage because it uses less labour to produce one unit of the
goods respectively. Smith adds that if all countries specialise in producing a
good where it is more efficient in producing than another country, the world
will benefit from specialisation since it utilises his resources effectively, a
country will export goods which it produces at lower costs and imports those
goods it produces at higher costs (absolute cost disadvantages). One weakness
of Smith’s theory is that trade cannot occur where a country has absolute
advantage in everything. For this reason, Ricardo took the Smith’s theory to
another level.

David Ricardo
contradicts Adam Smith view adding that what of a situation where country A is
efficient in producing both good as compared to country B. Ricardo then
developed a principle to prove that country A and country B can be mutually
beneficial even when one country has more absolute cost advantage in producing
both goods. Ricardo also stretches on the Supply side but unlike Smith who
underlines the absolute advantage in a country as compared to another, He
stresses on the relative (comparative) cost differences thus known as the
principle of comparative advantage. According to Bhagwati
(1994), this principle shows that
even if a country had absolute cost disadvantages in producing both goods, both
countries can still be beneficial; that is, a less efficient country can export
and specialise in goods in which it has least absolute disadvantages while the
more efficient country can also specialise in and export the same good where it
absolute advantage is greatest. Ricardo further explain the principle of
comparative advantage with a simple model based on the below assumptions:


The world with two countries use a single input to manufacture two commodities.


Every nation labour is the only input, each nation has fixed endowment of
labour, its labour is fully utilised and homogeneous.

Another
important theory is the factor- endowment theory also known as the Heckscher-Ohlin theory. As explained by
Leamer et al (1995), factor endowment
emphasises that a country resource endowment is the key determining factor of
that country comparative advantage and this theory relies on the idea that,
given two countries with same taste, preferences (demand) and same inputs productivities, the difference in their relative
abundance of resources is the determinants of their trading pattern and
relative price level. In a country with abundant capital, capital is relatively
cheaper and it can export the capital intensive product while in a country with
abundant labour, labour is relatively cheaper and exports the labour-intensive
product.

 

The Doha Round and Free trade
negotiations

The
Doha Round was agreed 16 years ago with the aim of sustaining the development
of poor countries. It is an assembly where developing countries can ask for
justice in international trade. After the Uruguay Round negotiation for the
World Trade Organisation to encourage trade liberalism was a failure. Developing
countries came to see that the outcome of the previous attempt was not in their
favour. Despite developing countries view, decisions taken during that round
for all countries engage in trade were taken without most countries
concern/participation or interest shown in the agreements. Developing countries
were obliged to yield to the agreements blindly for developed countries
advantage. Therefore, the failure of this previous Uruguay Round.

The
main purpose of WTO is to negotiate free trade, dispute settlement system, and facilitate free flow of
cross-border activities. However, looking at developing countries, policies
introduced at Uruguay were not for their interests, so they decided to
renegotiate those policies that are for their interest such agricultural
issues, TRIPs, TRIMs, and GATS. A summary discussion of these issues is
presented below:

Agriculture

According to Matthews (2005) view on agriculture, the three-main pillar in the negotiation are
market access, domestic subsidies and export competition. Issues, such as
special and differential treatment on special/tropical products. Developing
countries (DCs) had the flexibility to assign products as special products
(SPs) based on the principles of livelihood security, food security and rural
development needs and DCs insisted these SPs should entail some tariff
discounts. But they were limited to a suitable number of products to be
assigned and, negotiations on how this number can be determined is
postponed.  An extension or provision of
quota-free and duty-free market access by
developing and developed countries for goods coming
from less developing countries (LDCs). But, according to Anania (2005) no
figures were given to show how the laws would be
made functional. Therefore, this negotiation is a mirage for developing
countries retaliation.  Also, in most
developing countries farmers noticed that only wealthy agri-corporations and
farmers received farm support (Baldwin, 2016).

 Latin
American countries for example stressed on the complete liberalisation of
tropical goods and crops; but for Europe and less developing countries like
African countries, Caribbean and Pacific, their demand is a threat to
long-standing preferences in goods like bananas and sugar. Also, Cotton is
recognised as a special product and was mentioned by west Africans who export
cotton, they were against the assistance and border measures cotton producers
in developed countries received because it led to significant fall in
international market prices. Thus, they want complete ban of cotton subsidies
at an immediate date set and to be compensated financially for the damages it
caused (Matthews, 2005). Almost all
developing countries have insignificant ‘defensive interest’ on export
subsidies and therefore asked for its abolition. The Framework agreement
allowed DCs to constantly provide export subsidies for transport and marketing
under the agreement on agriculture for a period still to be negotiated. But some
of these DCs want the type of export subsidies to be expanded and the
exemptions of the subsidies agreement ‘which allows DCs with a per capita GNP
less than $1000 to provide export subsidies, as well as longer phase-out
periods for other developing countries’ (Matthews, 2005).

According
to Madeley (2016), It is important to note that most developing countries were
very active in the Doha Round as compared to the previous. The New Round was
intended to be concluded within 3 years, but it has been continuously prolonged
and suspended repeatedly and the US is suspected of no longer being interested
in the Doha talks. It is obvious that subsidies on agricultural products like
fishing and farming has reduced the prices of these products in the
international market in favour of countries like the USA that will buy at very
low costs, since almost all less developed countries like all sub-Saharan
countries except for Nigeria main source of income for the development is export
of agricultural products will be forced to lower their products prices, most
times each country produced just one product for example sugar from Jamaica,
coffee from Ecuador cocoa from Ghana and others (Siddiqui,1995).

Madeley
adds that despite that the issues surrounding world trade negotiations are very
complex, the developing countries, want the negotiations to proceed on talks to
address subjects surrounding non-tariff barriers and the commitments on tariff
reductions. Developing countries like China, South Africa, India and others
want to proceed the unfinished laws on special and differential treatment seen
as an important subject in the Doha agenda.

 

Trade-Related Intellectual Property
Rights (TRIPs) and its Impacts on Developing Countries

The Doha Statement on TRIPS and Public Health approved by the WTO
in 2001 comprises a global consensus concerning
the flexible implementation and interpretation of the TRIPS treaty, counting
the enforced ‘licensing of patented medicines’ (NI, 2015).

It
was launched for the protection of intellectual property rights (IPRs), like
trademarks, industrial designs, patents and copyrights. Strong protection of
IPRs to promote increased income of foreign direct investment(FDI), increase
trade in IPRs and ease information and technology transfer to developing
countries, thus inspiring domestic innovation capacity, (Natsuda
& Thoburn, 2014). Most developing countries
were worried of further large out flow of fees to the developed countries
together with higher monopoly rents on products like pharmaceuticals products, since
most people in developing countries cannot afford for medicines (Milner et al, 2002).

An example is the response to many developing countries on health
crisis for HIV/AIDS, where the WTO committee concluded how the world Intellectual
property regime will support the access to affordable medicines. The
declaration provides DCs with strong flexibility and leverage when implementing
and interpreting their TRIPS requirements. But India giving away necessary
licences for cancer drugs caused tension with pharmaceutical companies and forced
their countries to protest (NI, 2015).   

Protectionism
under the TRIPs played a major role in some developing countries. China as a
developing country was interested in getting advanced technology and high-level
of information from developed countries but this was possible only if china
will adopt new policies on protection and exploitation of IPR by opening the
economy to the outside world (Milner et al, 2002).
After getting access to the advanced techniques and information china needed,
they noticed their exports were very insignificant to their import on
technology. Even though technology export has been developing rapidly it had
weak IPR protection and therefore need for new laws and also regulations to
protect their indigenous inventors and IPR holders. To get a stronger IPR
protection China decided to do intensive research on IPR protection rights
while building their domestic technology companies to become great competitors
in the world market. Despite the pressure they had from the USA and EU to join
the WTO (Natsuda & Thoburn, 2014).

 

TRIMs (Trade-Related Investment
Measures) and its Impacts on developing countries

It
consists of tightened restrictions/controls countries had to introduce on
foreign investors/companies operating in their territory that resulted to
misrepresentation of trade, Milner et al (2002). This
included tax holidays, subsidies, investments incentives and as well
restrictions on foreign equity participation, and other requirements as job
creation of local content and workers, foreign and export exchange generation.
This was aimed to maximise the potential benefits of domestic countries and
thereby promote development. In the year 2000s when Developing countries had to
implement the TRIMs, they resisted because they viewed this as a threat to
their own national laws over foreign direct investment, especially to the agro-foods
or automotive industry (Natsuda & Thoburn, 2014).

Amsden
and Hikino (2000), argues that Countries like Taiwan, India, China and Korea
set up biotechnology, targeted industries and science parks by granting tax
incentives, special loans and subsidies to compete with more developed
countries.

General Agreements on Trade in Services (GATS) and
its Impacts on
developing countries

The
GATS set of rules in the service sector are similar to those operating to trade
in goods. Trade in services operates to several economic activities like
finance, insurance, advertising banking, education, telecommunications, etc.,
an example is the Most-Favoured Nation (MFN) rule and the principle of
non-discrimination where every country will accept to consider service
providers of other countries with the same consideration and treatment with
services arriving from another country. But countries have the right to decline
commitments to any specific sector of their choice (Sharma
& K. 2012).

According
to Mishra et al, looking at the educational sector, in many developing
countries like Japan, Brazil etc. private education is the highest enrolment
for higher education. in Malaysia foreign universities can
set up their branches only via invitation but there are more private sectors as
compared to India, (Mishra et al, 2009). Mattoo
(2000) adds that,
developing countries had to open their domestic service market so their demand
for labour mobility can be maintained. Also, developing countries are likely to
gain a lot from a telecommunication experience, exporters in developing
countries can report rigid obstacles to their exports in overseas markets.

 

Conclusion

As
a conclusion to this paper, despite the advantages of free trade, authors like
Adam smith, David Ricardo and Heckscher-Ohlin. that free trade is a process that has the potential to integrate a
nation into economic growth, it is obvious that since poor countries have been
under colonial rules liberalisation to free trade resulted to economic
inter-dependence, increase environmental problems, famine ( production of food
in poor countries are mainly for exportation), poor nations remain captives of
international finance capital that leaving labour utilisation stagnant,
unemployment and poverty indifferent. The poor are poorer and the rich are
richer every day.

It
is unbelievable that a treaty is said to develop the vulnerable by encouraging
them to produce only cash crops for the west consumption and die of hunger. An example,
according to Siddiqui (1995), is a research proving that many poor countries
have dangerous shortage of protein in their diets when most cultivate crops such
as pineapples, peanuts, palm oil etc. with important source of proteins. To
conclude on this, it is clear that ‘free trade’ is similar to that period of
slavery where slaves worked in plantations, mines, etc. for their master’s
wellbeing.

 According to Baldwin, (2016) WTO
is widely seen as having lots of downfalls and failures, looking at the Doha
Round, most developing countries did not implement barriers to services,
investment and etc. through the Round.

A
recommendation for vulnerable countries like African countries is since the
west has proven to have no consideration for them, it’s to protest and set an
African committee without any western contribution or interventions that will
aim at developing their respective countries development in technology, finance
services and etc. moreover a nation can always survive from technology but
never from food. It is difficult to think the western will afford to let go
billions of financial services customers and an increase in tea prices. Nevertheless,
despite everything slavery was abolished.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

x

Hi!
I'm Santiago!

Would you like to get a custom essay? How about receiving a customized one?

Check it out