Free Trade in Developing Countries

In the recent decades, free trade has become a widely discussed topic among economists.

By definition, free trade, also called laissez-fair, is a policy which restricts government into international trade with other countries by discriminating against imports by charging tariffs, or interfering with exports through subsidies.

Different studies about free trade provide conflicting information on the issue and every argument for or against free trade seems to attract counterarguments from the opposing side of the discussion.

At the moment, the principle, most common and accepted perspective is that free trade is integral to a favorable and beneficial growth of the global economy. Supporters of free trade are adamant that it is a mutually advantageous situation for trading countries. They state that it allows different nations to concentrate on their core competitive advantages (which are usually defined through cost or differentiation advantage) and, as a result, potentially maximize the total value of products and services produced in their economies, leading to income growth for the countries’ populations (Free Trade, n.d.).

The ideal scenario, suggested by a British economist David Ricardo over two centuries ago, is that different nations would be able to fully exploit their products’ and services’ comparative advantage as the result of free trade. Naturally, this requires as few import and export barriers to be present as possible. However, most of these benefits depend on two even countries trading. When one of the countries in question is a developing country, the issue becomes much more complicated.

A developing country also called an underdeveloped country, is a nation which currently holds a less developed industrial base, a lower level of economic resources, and a lower Human Development Index, as statistic which encompasses life expectancy, quality of education and income levels.

While there is data that shows an increase in the life standards in some of the developing nations, at the same time there is conflicting data that shows that this improvement is limited to only certain layers of population, while there rest either remain in their prior conditions, or may even be in a worse situation as a result of foreign economies, goods and services creating a presence in their local markets.

Thus, we are faced with a situation in which free trade is supposed to be the engine of growth and a source of strength for the global economy, but firms in developing countries do not seem to benefit from this growth.

It is important to evaluate this estimation from all perspectives to determine how accurate it is.

Benefits of the free trade for developing countries

The influence of free trade on underdeveloped countries is, as was mentioned, a much-disputed topic. A lot of the researched downsides have been claimed to not even be the direct result of the free trade. Proponents of free trade support their statements with the fact that the growth of wage inequality in developing countries has not been utterly correlating with the expansion of global commerce into these countries.

The decline of manufacturing jobs in some of the countries has been explained through a shift of the economy towards jobs with higher skill demand (White 2016). It is also postulated that by engaging in free trade developing countries can gain access to a greater amount of economic resources, beyond the limits imposed by their geographical, social, and population situation. For example, the underdeveloped countries often are deprived of sufficient labor, capital and natural resources, and free trade agreements can provide smaller nations access to these resources. They also allow states to import goods and services which are not readily available to the businesses and the citizens.

Thanks to globalization, the costs for these imported commodities would be much lower that the cost of producing them within the country. Some of the developing countries possess valuable resources but don’t have the financial strengths and technological advantages needed to convert them into consumer products. Export of these resources allows the nations to make a significant profit, potentially freeing up money to improve the local industry, something they would be unable to do without the free trade.

Additionally, as a consequence of free trade, it is said that developing nations can improve their relationships with more developed countries, providing them various benefits in the global political scene, such as support, protection, financial aid to the developing economies, etc. While the other benefits can help the developing countries improve their economies, this unintended consequence can provide them with the know-how on governing them (Vitez, n.d.)

Disadvantages of the free trade for developing countries

All of these arguments carry the promise of a bright and prosperous future for any country that joins the global market and involves itself with the international free trade pacts. But the opponents of free trade have numerous, equally valid, causes for distrust and suspicion to this practice in the world market.

While it is true that by involving themselves with the free trade the underdeveloped countries gain access to the global market, but it the benefits from this depend very much on the state of theirs economies, and just how much competitive advantage it can muster against the products and services of the developed countries. If the county has an industry that is underdeveloped and new, it may struggle against foreign competition, with the main risk being that if the industry is not invested into, it may go into decline, and eventually be completely substituted with outside businesses. This way an underdeveloped country can become a slave economy to the developed nations, as a distribution market or a raw resource provider.

The same can be applied to an already declining economy (post-Soviet Union economies in the 90s, for example)(Arguments against free trade, n.d.). Protection and restoration of such economies would require large investments before they are efficient enough to compete in the global market, and in most cases can be achieved through economic reform and, as recent history has shown, protectionism and local favorism.

The Chinese economy was stagnating before the massive commercial reform carried out in 1979, and was severely revitalized in the following years by introducing policies restrictive of foreign companies. Despite criticism from the United States of America and other countries involved in the free trade market, these policies are the reason for the steady growth of a number of developing economies, in particular Brazil, Russia, India, and China, grouped under the moniker BRICs by global economists, and South Korea, Egypt, Indonesia, Vietnam, the Philippines, Mexico, Pakistan, Iran, Turkey, Bangladesh, and Nigeria as the Next Eleven.

While some of them achieved growth by involving themselves in free trade, the most successful companies in the list use similar strategies of support for local businesses and controlled market. Despite the global disapproval, it has been projected that these countries have the potential to overshadow the current leaders of the world market, and may define the global economic landscape in the following fifty years. (Eghbal 2008).

Most of the developing countries engaged in the free trade have to rely on the production of goods available from the cultivation of raw materials, and which don’t require a manufacturing process. These are products developed in agriculture, fishing, resource extraction (mining) and forestry. However, despite the comparable advantage they have in these products, the prices can fluctuate severely on environmental factors. In addition, the demand for these types of products will not increase with the countries’ economic growth, potentially leading to stagnation.

Outside of industries developing primary products, the principle advantage the developing countries’ industries can have are lower prices. As a result, many businesses attempting to gain a foothold in the global market will strive to decrease the productions costs as much as possible, in order to maximize profits without raising the prices to where the product cannot compete with its completion. This results in decreasing salaries, adverse working conditions, use of forced labor, and abuse of human rights.

However, the World Trade Organization does impose any regulative punishment on the countries with such questionable tactics, and its stance is that a manufacturer’s handling of employees is not a sufficient reason to restrict importation of products produced this way, reinforcing the system.

Finally, the exploitation of the resource base of developing countries has led to environmental damage, amplified by both the developing countries and the foreign businesses they are hosting ignoring the environmental standards due to the high costs they impose. Again, World Trade Organization has been noted for not restricting imports of products based on lack of adherence to environmental standards.

Reflection

It is clear there are numerous issues preventing the developing countries from fully benefiting from free trade and the participation in the global market. The developed countries benefit much more from this relationship and are at an advantage when dealing with underdeveloped countries, whose economies they can flood with their products, at the expense of local businesses, and from whom they can draw on raw resources.

Free trade alone cannot support the developing countries’ economic development, needs to be regulated with industry and economy reforms and an extensive policy package which will, on the one hand, maximize its benefits from increased international trade, and, on the other, will direct the costs into economic improvement. Sequencing and timing of such reforms can be crucial to their success (OECD 2008).

Failure to do so can result in the local businesses and industries being completely overtaken by foreigners and their imports, with the most advanced sectors of the underdeveloped economies being destroyed as the result. This can result in a state of perpetual poverty, and has happed in Nigeria, Sierra Leone, Zambia, Uganda, and a number of other countries on the Ivory Coast (Fletcher 2011).

Conclusion

Free trade promises numerous benefits to developing countries, and may be vital to growth and development of their economies, and, as a result, of their life standards. However, despite free trade being based on the idea of minimal government influence upon import and export, to successfully benefit from it the countries require very effective reforms and policies to be implemented by the government, and its attentive involvement throughout the transformative process.

Despite encouragement from the principal players in the global market, the developing countries benefit from free trade much more if they enter it relatively late in their development, and continue to provide support and protection to their local businesses. This would allow them to maintain and develop their medium and high technology industries, and would assure them a solid future and equal share in the global free trade market once they are prepared to enter it fully.

Reference List

Arguments against free trade n.d. Web.

Eghbal, M 2008, The Next 11 Emerging Economies. Web.

Fletcher, I 2011, Free Trade Isn’t Helping World Poverty. Web.

Free Trade n.d. Web.

OECD 2008, ‘Making Trade Work for Developing Countries ‘, Organisation for Economic Co-Operation and Development, pp. 1-7. Web.

Vitez, O n.d., The Benefits of Free Trade for Developing Countries. Web.

White, GB 2016, What Economists Got Wrong About Free Trade. Web.