IntroductionFreetrade is a recent phenomenon that occupy lots of discussion in today’s worldamong economists, and even policy makers.
Some international institutions suchas IMF, World Bank, and Unite Nations believed that free trade is catalyst forrapid economic development of all nations regardless of their rung ofdevelopment. Others such as Joseph Wade, Stiglitz, Bello, etc. on the contrary,argue that free trade is anti-growth to nations especially to the least anddeveloping countries.
Thisreport intends to provide discussion of free trade and why it is considered soimportant by the international organizations. It also examines some free trade policies and evaluate their impact onthe developing countries. This work is divided into four sections after this introduction.Section two focuses on free trade and why it is considered important. Sectionthree deals with free trade theories, while section four deals with Doha Round,and free trade policies namely: TRIMs, TRIPs, and GATS and evaluation of theirconsequences on developing countries. Free trade and why it is consideredimportantFreetrade is typically free movement of goods and services across international boundarieswithout restrictions imposed by government laws. Free trade enables workers to shop ataffordable consumption of goods, permit employers to buy new equipment’s andtechnologies for their workers so the goods they produce is of good advancedvalue.
Goods produced for exports, creates employment and income for domesticemployees, increasing economic growth of the country (Carbaugh, 2009). Freetrade proponents such as Bhagwati, (2002) argued that free trade increases the worldtotal income (see figure 1) leading to reduction in unemployment and povertyaround the world. However, in addition to providing an economy with better jobavenues, 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 worldSource:UNCTAD, 2017. Othershowever, argue that free trade is anti-growth. For example, Krugman’s trade liberalismarguments 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 andincreasing returns, fortunate firms returns can be higher than that of theircompetitors. In a situation where there are sufficient internal and externaleconomies of scale for an industry to operate and have enough/normal returnsand this is only possible with just one firm in that market, any other firmentering the market may lead to losses for both firms.
A government canincrease its country national income by imposing restrictions such as importrestrictions or export subsidies and ensure that the fortunate firm thatsecures excess returns at the international market competition is domesticinstead of foreign. Krugman further argued that a government policy such asinvestment in research and development (R) contribute in few firms to dominate the market and have control over theprice of the product. This is thereason why Krugman claims government policy plays the same role as the termstrategic trade policy (Krugman, 1987).
Protectionismis another alternative view to trade liberalism; it’s a situation where acountry’s government, labour unions or domestic industries discourages importsof goods or services from another nation into their domestic market to securetheir economic wellbeing (Carbaugh,2009). This means, the country solely relieson import substitute goods or services (self-reliance on domestic goods andservices) which protects their infant industry from external shocks (pricevolatility, technological development) at the international market (Bhagwati, 2002).Bhagwati further comments that protectionism improve an economy welfare.Free trade theoriesFreetrade theories evolved through time right from Adam Smith to David Ricardo anddown to neoclassical such as Hecsher-Ohlin. These theories are summarized asfollows: Accordingto Carbaugh (2005), Adam Smith was agreat supporter of free trade on the basis that free trade boosted theinternational division of labour.
Smith illustrated that a country canconcentrate 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 freetrade and country B not involve in free trade is their different productivitieswhich could either be based on natural (climate, mineral wealth and soil) andacquired advantages (techniques and special skills). Country A with the bothdeterminants of production (natural and acquired advantage) in producing agood, the country will produce at lower costs and supply more as compared tocountry B. Smith concept of costoriginates 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 goodsand the cost of producing a good is determined by the number of labour neededto produce the good. For example, in the USA less labour is used to produce ayard of clothes as compared to the UK and therefore cost of production islower.
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 areinvolve in international trade and specialisation they will benefit fromabsolute cost advantage because it uses less labour to produce one unit of thegoods respectively. Smith adds that if all countries specialise in producing agood where it is more efficient in producing than another country, the worldwill benefit from specialisation since it utilises his resources effectively, acountry will export goods which it produces at lower costs and imports thosegoods it produces at higher costs (absolute cost disadvantages). One weaknessof Smith’s theory is that trade cannot occur where a country has absoluteadvantage in everything. For this reason, Ricardo took the Smith’s theory toanother level. David Ricardocontradicts Adam Smith view adding that what of a situation where country A isefficient in producing both good as compared to country B. Ricardo thendeveloped a principle to prove that country A and country B can be mutuallybeneficial even when one country has more absolute cost advantage in producingboth goods. Ricardo also stretches on the Supply side but unlike Smith whounderlines the absolute advantage in a country as compared to another, Hestresses on the relative (comparative) cost differences thus known as theprinciple of comparative advantage. According to Bhagwati(1994), this principle shows thateven if a country had absolute cost disadvantages in producing both goods, bothcountries can still be beneficial; that is, a less efficient country can exportand specialise in goods in which it has least absolute disadvantages while themore efficient country can also specialise in and export the same good where itabsolute advantage is greatest.
Ricardo further explain the principle ofcomparative 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 oflabour, its labour is fully utilised and homogeneous.Anotherimportant theory is the factor- endowment theory also known as the Heckscher-Ohlin theory.
As explained byLeamer et al (1995), factor endowmentemphasises that a country resource endowment is the key determining factor ofthat 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 relativeabundance of resources is the determinants of their trading pattern andrelative price level. In a country with abundant capital, capital is relativelycheaper and it can export the capital intensive product while in a country withabundant labour, labour is relatively cheaper and exports the labour-intensiveproduct. The Doha Round and Free tradenegotiationsTheDoha Round was agreed 16 years ago with the aim of sustaining the developmentof poor countries. It is an assembly where developing countries can ask forjustice in international trade. After the Uruguay Round negotiation for theWorld Trade Organisation to encourage trade liberalism was a failure. Developingcountries came to see that the outcome of the previous attempt was not in theirfavour.
Despite developing countries view, decisions taken during that roundfor all countries engage in trade were taken without most countriesconcern/participation or interest shown in the agreements. Developing countrieswere obliged to yield to the agreements blindly for developed countriesadvantage. Therefore, the failure of this previous Uruguay Round.Themain purpose of WTO is to negotiate free trade, dispute settlement system, and facilitate free flow ofcross-border activities.
However, looking at developing countries, policiesintroduced at Uruguay were not for their interests, so they decided torenegotiate those policies that are for their interest such agriculturalissues, TRIPs, TRIMs, and GATS. A summary discussion of these issues ispresented below: AgricultureAccording to Matthews (2005) view on agriculture, the three-main pillar in the negotiation aremarket access, domestic subsidies and export competition. Issues, such asspecial and differential treatment on special/tropical products. Developingcountries (DCs) had the flexibility to assign products as special products(SPs) based on the principles of livelihood security, food security and ruraldevelopment needs and DCs insisted these SPs should entail some tariffdiscounts.
But they were limited to a suitable number of products to beassigned and, negotiations on how this number can be determined ispostponed. An extension or provision ofquota-free and duty-free market access bydeveloping and developed countries for goods comingfrom less developing countries (LDCs). But, according to Anania (2005) nofigures were given to show how the laws would bemade functional. Therefore, this negotiation is a mirage for developingcountries retaliation.
Also, in mostdeveloping countries farmers noticed that only wealthy agri-corporations andfarmers received farm support (Baldwin, 2016). LatinAmerican countries for example stressed on the complete liberalisation oftropical goods and crops; but for Europe and less developing countries likeAfrican countries, Caribbean and Pacific, their demand is a threat tolong-standing preferences in goods like bananas and sugar. Also, Cotton isrecognised as a special product and was mentioned by west Africans who exportcotton, they were against the assistance and border measures cotton producersin developed countries received because it led to significant fall ininternational market prices. Thus, they want complete ban of cotton subsidiesat an immediate date set and to be compensated financially for the damages itcaused (Matthews, 2005). Almost alldeveloping countries have insignificant ‘defensive interest’ on exportsubsidies and therefore asked for its abolition. The Framework agreementallowed DCs to constantly provide export subsidies for transport and marketingunder the agreement on agriculture for a period still to be negotiated.
But someof these DCs want the type of export subsidies to be expanded and theexemptions of the subsidies agreement ‘which allows DCs with a per capita GNPless than $1000 to provide export subsidies, as well as longer phase-outperiods for other developing countries’ (Matthews, 2005).Accordingto Madeley (2016), It is important to note that most developing countries werevery active in the Doha Round as compared to the previous. The New Round wasintended to be concluded within 3 years, but it has been continuously prolongedand suspended repeatedly and the US is suspected of no longer being interestedin the Doha talks.
It is obvious that subsidies on agricultural products likefishing and farming has reduced the prices of these products in theinternational market in favour of countries like the USA that will buy at verylow costs, since almost all less developed countries like all sub-Saharancountries except for Nigeria main source of income for the development is exportof agricultural products will be forced to lower their products prices, mosttimes each country produced just one product for example sugar from Jamaica,coffee from Ecuador cocoa from Ghana and others (Siddiqui,1995). Madeleyadds that despite that the issues surrounding world trade negotiations are verycomplex, the developing countries, want the negotiations to proceed on talks toaddress subjects surrounding non-tariff barriers and the commitments on tariffreductions. Developing countries like China, South Africa, India and otherswant to proceed the unfinished laws on special and differential treatment seenas an important subject in the Doha agenda. Trade-Related Intellectual PropertyRights (TRIPs) and its Impacts on Developing CountriesThe Doha Statement on TRIPS and Public Health approved by the WTOin 2001 comprises a global consensus concerningthe flexible implementation and interpretation of the TRIPS treaty, countingthe enforced ‘licensing of patented medicines’ (NI, 2015).Itwas launched for the protection of intellectual property rights (IPRs), liketrademarks, industrial designs, patents and copyrights. Strong protection ofIPRs to promote increased income of foreign direct investment(FDI), increasetrade in IPRs and ease information and technology transfer to developingcountries, thus inspiring domestic innovation capacity, (Natsuda& Thoburn, 2014). Most developing countrieswere worried of further large out flow of fees to the developed countriestogether with higher monopoly rents on products like pharmaceuticals products, sincemost people in developing countries cannot afford for medicines (Milner et al, 2002).An example is the response to many developing countries on healthcrisis for HIV/AIDS, where the WTO committee concluded how the world Intellectualproperty regime will support the access to affordable medicines.
Thedeclaration provides DCs with strong flexibility and leverage when implementingand interpreting their TRIPS requirements. But India giving away necessarylicences for cancer drugs caused tension with pharmaceutical companies and forcedtheir countries to protest (NI, 2015). Protectionismunder the TRIPs played a major role in some developing countries. China as adeveloping country was interested in getting advanced technology and high-levelof information from developed countries but this was possible only if chinawill adopt new policies on protection and exploitation of IPR by opening theeconomy 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 ontechnology. Even though technology export has been developing rapidly it hadweak IPR protection and therefore need for new laws and also regulations toprotect their indigenous inventors and IPR holders. To get a stronger IPRprotection China decided to do intensive research on IPR protection rightswhile building their domestic technology companies to become great competitorsin the world market.
Despite the pressure they had from the USA and EU to jointhe WTO (Natsuda & Thoburn, 2014). TRIMs (Trade-Related InvestmentMeasures) and its Impacts on developing countriesItconsists of tightened restrictions/controls countries had to introduce onforeign investors/companies operating in their territory that resulted tomisrepresentation of trade, Milner et al (2002). Thisincluded tax holidays, subsidies, investments incentives and as wellrestrictions on foreign equity participation, and other requirements as jobcreation of local content and workers, foreign and export exchange generation.
This was aimed to maximise the potential benefits of domestic countries andthereby promote development. In the year 2000s when Developing countries had toimplement the TRIMs, they resisted because they viewed this as a threat totheir own national laws over foreign direct investment, especially to the agro-foodsor automotive industry (Natsuda & Thoburn, 2014).Amsdenand Hikino (2000), argues that Countries like Taiwan, India, China and Koreaset up biotechnology, targeted industries and science parks by granting taxincentives, special loans and subsidies to compete with more developedcountries.General Agreements on Trade in Services (GATS) andits Impacts ondeveloping countriesTheGATS set of rules in the service sector are similar to those operating to tradein goods. Trade in services operates to several economic activities likefinance, insurance, advertising banking, education, telecommunications, etc.,an example is the Most-Favoured Nation (MFN) rule and the principle ofnon-discrimination where every country will accept to consider serviceproviders of other countries with the same consideration and treatment withservices arriving from another country. But countries have the right to declinecommitments to any specific sector of their choice (Sharma& K. 2012).
Accordingto Mishra et al, looking at the educational sector, in many developingcountries like Japan, Brazil etc. private education is the highest enrolmentfor higher education. in Malaysia foreign universities canset up their branches only via invitation but there are more private sectors ascompared to India, (Mishra et al, 2009). Mattoo(2000) adds that,developing countries had to open their domestic service market so their demandfor labour mobility can be maintained. Also, developing countries are likely togain a lot from a telecommunication experience, exporters in developingcountries can report rigid obstacles to their exports in overseas markets. ConclusionAsa conclusion to this paper, despite the advantages of free trade, authors likeAdam smith, David Ricardo and Heckscher-Ohlin. that free trade is a process that has the potential to integrate anation into economic growth, it is obvious that since poor countries have beenunder colonial rules liberalisation to free trade resulted to economicinter-dependence, increase environmental problems, famine ( production of foodin poor countries are mainly for exportation), poor nations remain captives ofinternational finance capital that leaving labour utilisation stagnant,unemployment and poverty indifferent.
The poor are poorer and the rich arericher every day. Itis unbelievable that a treaty is said to develop the vulnerable by encouragingthem 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 countrieshave dangerous shortage of protein in their diets when most cultivate crops suchas pineapples, peanuts, palm oil etc. with important source of proteins. Toconclude on this, it is clear that ‘free trade’ is similar to that period ofslavery where slaves worked in plantations, mines, etc.
for their master’swellbeing. According to Baldwin, (2016) WTOis widely seen as having lots of downfalls and failures, looking at the DohaRound, most developing countries did not implement barriers to services,investment and etc. through the Round.
Arecommendation for vulnerable countries like African countries is since thewest has proven to have no consideration for them, it’s to protest and set anAfrican committee without any western contribution or interventions that willaim at developing their respective countries development in technology, financeservices and etc. moreover a nation can always survive from technology butnever from food. It is difficult to think the western will afford to let gobillions of financial services customers and an increase in tea prices. Nevertheless,despite everything slavery was abolished.