Free Trade and Developing Countries

Pre Assignment

Free trade is simply a process where markets are liberalized by the existing government in such a way that organizations and individuals are allowed to conduct business in foreign markets without restrictions or tariffs. It is a system where there is free movement of goods, capital, and labour between nations without hindrance on the trading process. This paper will discuss the position that free trade will inhibit the flexibility of developing countries to use trade Policy for industrial development and could leave firms in developing countries worse off.

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Several nations around the world have embraced free trade agreements, with several organizations formed to promote unrestricted entry and exit of goods and services among their member countries. Those organizations include World Trade Organization (WTO), European Union under the European Union Economic Area (EUEA), North America Free Trade Agreement (NAFTA), Arab Free Area (AFA), Common Markets for Eastern and Southern Africa (COMESA), and Asia Pacific Trade Agreement (APTA) amongst others. Free trade is normally characterized by -trade of goods without taxes or any sort of structural or logistical hindrances. Investors from the member countries have free access to the domestic market of each country (Irwin, 2008).

In 1995, the General Agreement on Tariffs and Trade (GATT), which was formed after World War II, was transformed to WTO (Irwin, 2008). Generally, WTO has more than 140 member countries from around the world, with its main functions being regulation of trade between member countries and mediation of disputes related to barriers and tariffs that may arise during the conduct of trade. Importantly, all member countries are required to comply with trade policies established by WTO, failure to which the body has powers to impose penalties on culprits.

The trade exchanges at both quantitative and qualitative level in regards to free trade can be explained as follows. The 1958 formation of the European Economic Community, presently referred to as European Union, was aimed at reducing barriers of trade among European member states; this was in lieu to the formation of a customs union. From its original six countries, it has grown into twenty-seven European member states, with each member country mandated to remove any trade barriers that may hinder freedom of movement of goods across borders, except when trading with a country that is not a member of EU. The North American Free Trade Agreement was formed in 1994, uniting the three North American countries in common trade and investment policies that would apply to all member economies (Irwin, 2008). In the Arab league, eighteen Arab states approved the establishment of Arab Free Trade Area (FTA) in 1998, which gave an autonomy for intra-Arab imports to enter each member state from Morocco in far west to Oman in East with the inclusion of Yemen in the south without trade tariffs and barriers. One example of trade barrier that has recently been lifted is Japan’s tariff on the Australian beef industry where a deal was made on tax reduction from 38.5 % to 19.5% for a period of about 18 years, and in return, Australian car buyers would be paying about $1,500 less for Japanese vehicles (Irwin, 2008).

Rules governing free trade are regulated by the WTO, which creates a forum for members to negotiate issues concerning trade barriers and tariffs. It also mediates trade disputes among member countries and penalizes countries that fail to comply with FTA guidelines as stipulated. Countries engage in international trade as a way of diversifying their products, skills and technology, which the original country lacks. International trade promotes innovation and competition within a country, as people strive to provide products and services that match their global counterparts. In addition, free trade generates economic growth both in importing and exporting countries. Moreover, it enhances the chances of a country to produce products that it has a comparative advantage in and import those products that it cannot produce locally mainly due to lack of resources or production knowhow.

For instance, country A can get a product it does not produce from country B, while at the same time offering a product it produces locally to country C. This enhances inter-governmental cooperation between different nations, thus creating trading blocks on terms that favour all members. However, not all products are included in free trade agreements, as some items are considered sensitive and left to individual countries to regulate them (Shapiro, 2012). Laws have been enacted to help in the negotiation of the agreement and assist in settlement of disputes between investors and governments (Froning, 2000). Nevertheless, despite free trade demonstrating benefits to participating countries, regulations should be enforced in order to prevent unfair competition or exploitation of developing countries by developed countries and MNCs, which have immense powers and resources.

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Debate

I am supporting the notion that free trade will inhibit the flexibility of developing countries to use trade policy for industrial development and could leave firms in developing countries worse off. The reasons for this position are highlighted in the following section.

  • Closure of domestic companies and the resultant case of unemployment are just some of the effects free trade would bring to developing countries such as the United Arab Emirates in the long run.
  • Most companies in the United Arab Emirates do not have a comparative advantage over their international counterparts. These domestic companies are left on their own to compete without government’s protection, a factor that either reduces the rate of their development or even closure (Ismail, 2012).
  • Lack of government intervention would certainly lead to small scale producers such as farmers and manufacturing companies failing to protect their production. The increased access of the U.A.E market by foreign producers has eventually led to the flooding of textile products and resulted to stagnation of price of these products, with the imported ones going for much less than the locally produced goods (Lumina, 2008).
  • Most foreign companies use free trade to dump or dispose of the overproduced inventories of their products from their home country into host countries, especially developing countries (Becker, 2004). They do this by offering products at low prices compared to prices of locally produced goods, and to some extent, most of the goods are substandard, obsolete and of poor quality. This can eventually force death/closure of local industries producing the same kind of products, as customers would likely switch to the cheap imported products, the result of which is declining local investment, reduced income streams, and general economic downturn.
  • Difficulty in developing and establishing new industries is another problem that is experienced due to a competitive business environment (Hitchens, 2014). Some infant companies handicapped by lack of government protection policies find it difficult to get established as they face stiff competition from large foreign corporations.
  • Foreign corporations’ entry to local markets probably raises the living standards of the indigenous community. Free trade offers opportunities for foreign corporations to bring products that are less costly than locally produced products and eventually influencing terms of spending for local citizens, a factor that raises standards of living of the indigenous community (Lumina, 2008).
  • International and regional regulatory bodies, which operate as watchdogs in free trade regulations such as WTO, seem to be compromised by multinational corporations due to their immense powers and resources, thus failing to effectively protect developing countries from exploitation by these MNCs (Ismail, 2012).

Post- assignment

In some instances, free trade affects a host country negatively; more than it would positively benefit its economy (Ismail, 2012). Closure of domestic companies and the resultant case of unemployment are just some of the long-term effects free trade would bring to developing countries. In the situation where free-market agreement is applied, domestic companies are left on their own to compete without government’s protection, a factor that either reduces the rate of their development or subsequently leads to their closure. The closure of such companies results in un-avoidable layoffs and the existence of high unemployment rates, which further increase dependability levels and poverty. The skilled labourers eventually move to other countries for greener pastures, leaving the U.A.E with unskilled and cheap labour, something that foreign companies are largely associated with.

Lack of government intervention would certainly lead to the collapse of small scale producers due to stiff competition from MNCs. For example, the U.A.E opened its markets and lowered tariff of textile commodity between 1995 and 2003. It is also important to note that the U.A.E. textile production was about 15,000 tonnes of cotton by 1995, but by the year 1998, the increase of textile imports from the EU and Asia forced domestic production to decrease to a paltry 7000 tonnes. The increased access of the U.A.E market by foreign producers eventually led to the flooding of textile products and stagnation of prices of textile products, with the imported ones going for much less than the locally produced goods. The local textile-producing industry had to also lower its prices, thus affecting the indigenous cotton farmers who also had to either change the nature of farming to other agricultural products or conform to lower prices.

One benefit that may be associated with large foreign corporations is influence on living standards of local communities due to increased employment and corporate social responsibility activities. Free trade offers opportunities to foreign corporations bringing products that improve the value of life and attract conformity to changing global lifestyle. However, restrictions may impede the free movement of goods, thus preventing economic benefits from free trade being realized (Keillor, 2013). Another impact of free trade connected to this is cultural conflict. The cultural identity of the U.A.E, which has a strong Islamic background, has come under attack, with pundits claiming that foreign corporations are bringing the case of Americanization or cultural commercialization to the United Arab Emirates. Demonstrations and civil unrest have been reported so far connected to this cultural problem.

Dumping normally happens when foreign corporations bring products into the country whose prices are lower than prices of similar goods both in their home country or the receiving country. The price that is normally low is sometimes supported by subsidies offered to foreign producers in the receiving countries and foreign production in the home country (Becker, 2004). This can eventually force the closure of local industries producing the same kind of products, as they may not be capable of competing effectively, thus increasing cases of unemployment. Most Western companies flood developing countries with products that are substandard or obsolete in their home (developed) countries, with some of such products proving to be an environmental and hazard when disposed of.

The contemporary global business environment has become very competitive, making it difficult for new and small firms to develop effectively (Lumina, 2008). Generally, small local firms need government protection in order to survive; otherwise, they are forced out of the market by large multinational corporations. With huge resources, multinational corporations are able to invest in advanced technology, enjoy economies of scale in procurement of inputs, pay high wages to competent employees, invest in research and development, and access a large market globally. This contrasts to local and small companies, which are not well endowed to compete effectively in a globalized free market.

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In conclusion, Free trade area has contributed immensely to the diversification and general development of international trade. Through regulations and agreements, skills, raw materials, and innovations have been shared across borders, thus enhancing unity and promoting fundamental peace. The only problem it has brought is the unfair competition between the developed and the developing economies. Importantly, it is worth noting that, despite MCNs contributing to the growth of developing economies through foreign direct investments and employment of local labour, they tend to equally deprive those economies their deserved share of benefits by repatriating much of their revenues and resources to their countries of origin. Moreover, their powers transcend beyond powers of countries themselves, thus affecting political, social and economic systems of host countries. The unregulated or free trade seems to offer MNCs an opportunity to drive domestic and small companies away from the business, as they have the ability to produce low-priced goods due to high economies of scale.

Reference List

Froning, DH 2000, ‘The Benefits of Free Trade: A Guide for Policymakers’, The Heritage Foundation, Web.

Irwin, D 2008, ‘International Trade Agreements’, The Concise Encyclopedia of Economics, Library of Economics and Liberty, Web.

Shapiro, G 2013, ‘China Blowing Up Free Trade’, Investors Business Daily, p. A19, viewed 23 May 2014, EBSCOHOST.

Hitchens, P 2014, ‘Free trade will make slaves of us all’, Mail on Sunday, p. 29, viewed 26 May 2014, EBSCOHOST.

Ismail, F 2005, ‘Mainstreaming Development in World Trade Organization’.

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Lumina, C 2008, ‘Free trade or just trade? The World Trade Organisation, human rights and Development’, The Southern African Legal Information Institute, Web.

Becker, E 2004, ‘Interim Trade Triumph Short on Hard Details’, New York Times, Vol. 153, Issue 52929, pp. C1-C9, EBSCOHOST.

Ismail, F 2005, ‘Mainstreaming Development in World Trade Organization’, Journal of World Trade, vo. 29, no. 1, pp. 11-21, Web.

Keillor, B 2013, Understanding the Global Market: Navigating the International Business Environment, ABC-CLIO, California.

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