Introduction produced for exports, creates employment and income

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.

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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
borders without restrictions imposed by government laws.  Free trade enables workers to shop for the
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 etc.  (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 there was need for new laws and 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 saw 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

 

To conclude this paper,
we will say despite the advantages of free trade according to authors like Adam
smith etc. 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 countries remain captives of
international finance capital that leaving labour utilisation stagnant,
unemployment and poverty untouched. 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 products 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 on plantations, mines,
etc. for their master’s wellbeing.

 Again WTO according to Baldwin,
(2016) 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.

 

 

 

 

 

 

 

 

 

 

 

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