How Realistic Is Free Trade in the Real World?

1 January 2017

Nowadays, virtually almost every country in the world has once engaged in trade activities due to the obvious benefit it can bring. Besides, free trade activities are also being encouraged in all over the world. However, along with these benefits, free trade in fact brings plenty problems, especially for the developing countries. This paper will discuss the advantages and disadvantages of free trade in developing countries, and provide a pessimistic point of view in the global growth and development in the future.

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It is nothing but a simple activity that involves two or more countries engaging in the exchange of goods and services. Such exchanges of goods or services can be between two parties or several parties. Based on trade, people in many countries could have a great number of opportunities to select a wide range of products and services originated from every country around the world. Additionally, it improves not only the terms of trade but also the economic health of each country.

Most academic economists agree and accept the obvious theory that trade benefits both parties involved in the transaction. Trade is a concept that exists largely due to the differences in the cost of production of some tradable commodity in the various locations (Zaidi, Kadiwala). Nevertheless, a few countries do not believe in the benefits of trade, they keep pursuing conservative policy and isolate itself from global integration such as North Korea. Along with Trade, there is another term which needs to be clarified: “Free Trade”.

According to Athony Carter, Free trade refers to the right to sell goods and services around the world without any hindrance. With free trade the only thing determining the price of items will be supply and demand factors. As well as goods and services, free trade can also refer to the ability of labor to move freely around the world. The main aim of free trade is to carry out development to improve the human welfare. With free trade, the production will have the lowest cost and the consumption will have the cheapest price.

Hence, there are enormous benefits of free trade such as increase in economic growth, competitive advantage, economics of scale, etc. However, along with these benefits, free trade in fact brings plenty problems, especially for the developing countries (M. Suparmoko 2002). Although developing countries have become more integrated significantly into the trade world recently, their integration is still not in right directions, has failed to provide many of the expected benefits.

Competing perspectives about the role and impact of trade in developing countries Admittedly, Free trade is an issue of great importance for those in business and consumers around the world. The issue of free trade is a highly contentious one, and both sides of the debate can provide persuasive arguments for their position (Anthony Carter). The existence of free trade around the world is hindered in many different ways. Most countries will have tariffs on at least some imports, and this tax can make these good less competitive.

The usual reason why a government will impose this type of tax is that they want to protect local industry or dissuade people from purchasing certain products – the governments also use tariffs to raise funds. Of course there are also a lot of limitations on the free movement of labor (Anthony Carter). Fundamentally, there are three main schools of thought which will approve for the both sides of the debate; Neoclassical approach, Structuralists, and Dependency Theory. This essay will apply the three theories mentioned above in order to demonstrate the two arguments for and against Free trade in developing countries.

While Neoclassical theory suggests that all free trade is eventually mutually beneficial to everyone welfare, Dependency Theory advocates argue that free trade is a destructive force and a threat to the Developing World or the Least Developed Countries. Structuralists make their position in the middle ground and acknowledge that while there are gains from free trade to be made for the Least Developed Countries and Developed Countries alike, free trade is potentially harmful to developing economies and needs to be managed appropriately (James Lawrie).

Neoclassical Theory: Basically, Neoclassical principals can be traced back to the three models: Adam Smith’s Absolute advantage theory, David Ricardo’s theory of Comparative advantage and Hecksher-Ohlin model as well. Adam Smith explained that all trade is mutually beneficial through Absolute advantage and David Ricardo’s theory of Comparative Advantage. These ideas were effectively built upon by the Hecksher-Ohlin model.

The H-O model explains how free trade between nations enhances a populations welfare by allowing a nation to employ its various factors of production (land, labour & capital), more effectively (James Lawrie). According to James Lawrie, The H-O model assumes that through the combination of specialization in the production process and free trade between nations, the participating nations can raise their consumption beyond their domestic Production Possibility Frontier, thus increasing the overall welfare of said nations populations.

This happens due to the fact that specialization in goods that a nation has comparative advantage in means that this nation can produce them at a lower opportunity cost than that of its trading partners. According to Neoclassical theory, the LDC’s (least developing countries) should specialized labors intensive goods. Because these countries have high abundance of cheap labour more than other factors endowment. These countries can use labour intensive goods to exchange and traded capital intensives goods from developed countrie, typically Western nations.

Both of two countries also mutually benefits from trade. In addition, another supporting argument of the H-O model, for LDC’s adopting free trade, is the predicted effects of Factor Price Equalisation. The costs of the abundant factor within a nation should rise as demand for this factor increases. As a result, the wages for workers will gradually rise, eventually leading to domestic and international equality. H-O model such as the tool to help LDCs to apply export orientated industrialisation (EOI) as a means for development (James Lawrie).

Nevertheless, in practice, H-O model has neglected several crucial factors, such as: improved resource allocation” due to the price mechanism, “access to better technologies, inputs and intermediate goods”, “economies of scale and scope” and “greater domestic competition” as benefits of a free and open market place. 2. Dependency Theory In contrast with the Neoclassical theory, Dependency Theory provide a number of convincing arguments against Free trade in developing countries. One bvious criticism is that Neoclassical theory has been built and developed almost entirely by Western economists who have a bias towards every problem from a western point of view.

For instance, in the past, the British Empire and its colonies achieved growth through exporting, but the same conditions are not in common nowadays. As well as this, according to this theory, LDC’s and Developing countries do not have access to technological advance originated from Developed countries, typically, Western countries and United States of America.

Take Cambodia as an illustration for this point of view, this country has a automobile-making industry, which means they can manufacture automobile; however, these cars are produced under old-fashioned technology. It represents the fact that, they can produce as many cars as they want, but these cars can not keep up to the latest advanced technology prevailing in the world. Besides, there are other several factors which can have negative impact on LDC’s and Devloping countries if they engage in free trade activities.

For example, the Developed countries would also benefit from a greater deal of political and economic muscle when negotiating terms of trade (James Lewris). In addition, Dependency Theory finds free trade cause unequal exchange and uneven development, arguing that without extensive state support the dual economy will only widen. MNC’s are of particular concern to Dependency Theory for this reason as they repatriate the profits made by their activities in foreign countries – much like BP drilling for oil in the Niger Delta.

Dependency Theory discovers a “trickle up effect”, which means, money flowing from poor countries to the richer Developed countries. Moreover, Dependency asserts that Developing nations has to suffer from environmental damage caused through such operations and workers from Developing countries endure a lowering of health and safety standards, whereby nations must lower regulations and standards to remain their competitive position (James Lewris). 3. Structuralists theory: After examining the two schools of thought mentioned above, this paper will deliver the last theory, which is considered to be developed in the middle of the two theories.

It is not in favor of every benefit coming from free trade, but it is not against entire free trade. It suggests that import substitution industrialization (ISI) is the stepping stone simple manufactured goods; the next step is developed to export orientated industrialization (EOI). It believes that free trade is good but free trade needs to be processed and managed in a proper manner. IV- Why we might be pessimistic about the prospects for global growth and development in the future? According to Wenglert & Rosen (2000), the research shows that people tend to be more pessimistic from their views on the world status.

Political and social instability, climate change, frequent financial crises, natural resources exhaustion, between countries and widening income inequalities are significantly serious problems that the world are facing. A number of academic researchers attempt to find out the causes of these concerns in order to establish the most effective solutions. However, the facts and figures originated in every study appear to be far from expectation. First of all, significant problems facing the world today are climate change and alternative energy.

High speed of industrialization and urbanization has raised environmental pollution and the degradation of natural resources. Natural disasters are seen more often and more destructive with more floods, less rain due to global climate change which caused by environment pollution. According to World Resources Institutes, in 2000, the world emitted more than 9,000 million tons of CO2 but it is estimated to increase by 57% to over 14,000 million tons by 2025. Air pollution and greenhouse gas make global temperature changes to rise and ice cracking in North Pole together with sea-level rising are disappointing results of global warming.

This graph will demonstrate the considerable rise in sea level from 1870 to 2010. Climate change has led to increasing natural disasters in many countries which have killed millions of people and caused huge amounts of economic losses for this decade: earthquake in China, Chile and the most recent case is in Japan, tsunami in Thailand, Indonesia and so on.

Simultaneously, the current pattern of unsustainable use of natural resources has seriously threatened the growth prospects in the future. Price of energy products such as oil, gas, coal etc. ecomes higher and higher. It means industrial products, mainly from developed countries, more expensive and people in developing countries fail to afford. Besides, social issues have become increasingly complicated and resulted in a wide range of serious concerns for not only related countries but also the world as a whole. For instance, we should take into account hunger, poverty, health care, and education as major problems. In the twentieth century, the world population has grown drastically (from 1. 6 billion by 1950 to 6 billion by 2000).

Most of the increase was in developing and poor countries, creating severe constraints on their growth and development because more people require more provision of primary goods and public services (World Bank, 2010b). Moreover, “poverty itself is a barrier to development” because of limited capacity of credit and insurance markets (Rodrik, 2009b). Additionally, poverty usually comes together with poor healthcare, limited access to education, widening inequalities of living standards and social, even political instability.

Furthermore, economic and financial crisis happens more frequently, threatening global growth and development. Since the early 1990s, the world has witnessed a series of financial and economic crises such as in Thailand, Korea, Turkey, Argentina (Salvatore, International Economics), and most recently in the five high-income EU countries (Greece, Ireland, Italy, Portugal and Spain) in 2010. The reason of the most recent fiscal crisis is attributed to the very high government deficits and debt levels (115% of GDP in Greece in 2009).

Severely, the crisis has caused great volatility in global financial and commodity markets. The steep decline in stock markets worldwide have shown market nervousness concerning the uncertainty of developments in Europe. Fortunately, it is reported that developing countries have not been affected much by the crisis as they are still growing with great expansion of industrial production and trade. Lastly, failure of Doha Round is a clear evidence for pessimistic futures of global growth and development.

Large countries attempt to persuade developing countries to open their economies but they still want to keep their own benefits and do not want to share their wealth. The conflict benefit between developing countries and developed countries made Doha round stopped. Doha agenda is ill – conceived from the start. V – Conclusion: In brief, the expected result of free trade is very good in theory, but in reality it can be a tragedy of the developing countries. Free trade or globalization can be possible if countries do not establish their overriding goal as protecting themselves, so in fact real free trade may be a myth. In ddition, with many risks and serious issues mentioned above, the global growth and development will encounter a slowdown process or even non-existence in the future if unexpected incidents take place continuously.

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