n 1776, Scottish economist Adam Smith called for an economy where people could engage in trade with citizens of other countries free from protectionist restraints imposed by government. Two-plus centuries later, the debate about the virtues and defects of his vision goes on. The issue is particularly complicated when discussing free trade between developed countries and those in the developing world. The latter often lack the leverage to negotiate successfully under free-market conditions as they generate less than 1 percent of global trade flows. However, for many people in developing countries, free trade represents their only opportunity to emerge from poverty.
Free trade is a system of trade policy that allows traders to act and/or transact without interference from the government. According to the law of comparative advantage, the policy provides the trading partners mutual gains from trade of goods and services.
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. ‘Free’ trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from those that would emerge under deregulation. These governed prices are the result of government intervention in the market through price adjustments or supply restrictions, including protectionist policies. Such government interventions can increase as well as decrease the cost of goods and services to both consumers and producers.
Free trade implies the following:
trade of goods without taxes (including tariffs) or other trade barriers (e.g., quotas on imports or subsidies for producers);
trade in services without taxes or other trade barriers;
the absence of “trade-distorting” policies (such as taxes, subsidies, regulations, or laws) that give some firms, households, or factors of production an advantage over others;
free access to markets;
free access to market information;
inability of firms to distort markets through government-imposed monopoly or oligopoly power;
the free movement of labor between and within countries;
the free movement of capital between and within countries
Benefits of Free Trade for Developing Countries:
Developing countries can benefit from free trade by increasing their amount of or access to economic resources. Nations usually have limited economic resources. Economic resources include land, labor and capital. Land represents the natural resources found within a nation’s borders. Small developing nations often have the lowest amounts of natural resources in the economic marketplace. Free trade agreements ensure small nations can obtain the economic resources needed to produce consumer goods or services.
Improved Quality of Life
Free trade usually improves the quality of life for a nation’s citizens. Nations can import goods that are not readily available within their borders. Importing goods may be cheaper for a developing country than attempting to produce consumer goods or services within their borders. Many developing nations do not have the production processes available for converting raw materials into valuable consumer goods. Developing countries with friendly neighbors may also be able to import goods more often. Importing from neighboring countries ensures a constant flow of goods that are readily available for consumption.
Better Foreign Relations
Better foreign relations are usually an unintended result of free trade. Developing nations are often subject to international threats. Developing strategic free trade relations with more powerful countries can help ensure a developing nation has additional protection from international threats. Developing countries can also use free trade agreements to improve their military strength and their internal infrastructure, as well as to improve politically. This unintended benefit allows developing countries to learn how they should govern their economy and what types of government policies can best benefit their people.
Developing countries can use free trade to improve their production efficiency. Most nations are capable of producing some type of goods or service. However, a lack of knowledge or proper resources can make production inefficient or ineffective. Free trade allows developing countries to fill in the gaps regarding their production processes. Individual citizens may also visit foreign countries to increase education or experience in specific production or business methods. These individuals can then bring back crucial information about improving the nation’s production processes.
Free Trade involving “Poor” Countries in the World:
The policy of Free Trade is still in debate due to the questionable benefit for each side. Poorer countries, in comparison to their trading partners, may suffer due to the ‘unfairness’ and ‘expensive’ nature of a free trade agreement. However, the nations’ governments must find ways to make free trade a promising solution for development.
The problem with the developing or under-developed countries is straight at the root level i.e. the various resources required for production and successful trade. The countries face shortage of raw materials, lack of skilled and expert labor, unemployment, lack of good quality capital resources such as land, lack of training and basic education among the masses. Moreover, the scale of production is so low that there is not much left for the “exports”.
Thus, in order to make them-selves capable of International free trade, these poor countries will need significant additional financial assistance from developed countries. The assistance would have to come in an organized form with multiple nations working together.
Trade, when combined with more and better aid and debt relief, has an enormous role to play in making poverty history. Even a 1% increase in developing countries’ share of world exports could lift 128 million people out of poverty.
But without ministers taking concrete steps towards a substantial overhaul of the global trading system, developing countries will continue to get a raw deal – particularly on agriculture.
In the world’s poorest countries, seven out of every 10 people depend on agriculture for their livelihoods. Yet nearly 900 million people in these countries do not have enough food to eat and despite being home to 98 per cent of the world’s farming population, developing countries capture just a third of agricultural trade.
For too long rich countries have been manipulating international trade rules to protect their own interests.
The United States, the European Union, Japan and other rich countries insist that poor countries should open their markets to all their exports, while they themselves spend around $300 billion each year subsidizing and protecting their own farm industries – more than the combined income of the world’s poorest 1.2 billion people.
These subsidies lead to massive overproduction of most farm products, which rich countries then dump on world markets at prices well below the cost of production, making it impossible for agricultural exporters from poor countries to compete. This must stop, for rich countries to end all forms of dumping and instigate meaningful cuts to trade-distorting farm subsidies.
Taking a purely “free trade” approach is not the best way to eliminate poverty. Even if these farm subsidies and dumping were scrapped tomorrow, many of the poorest people in developing countries would not be able to benefit from the change without further support.
Rich countries would also have to stop trying to force developing countries to open up their agricultural markets, without consideration for the impact this will have on the most marginalized members of their societies.
Forcing developing countries to open their markets too quickly and too deeply can have devastating effects, including putting millions out of work, increasing poverty, stymieing development, undermining food security and even creating political instability and conflict. Developing countries must be allowed to retain some control over how fast and how far they open their markets when the livelihoods of millions of their poorest are at stake.
Developed countries must also acknowledge that aid and trade are inseparable, rather than seeing them as competing solutions to poverty.
For poor countries to engage in and benefit from free and fair trade, more and better aid is needed, which is aimed at improving health, education, roads, ports, electricity, telecommunications, banking and legal systems. This is because without a healthy and highly skilled workforce and functional infrastructure, transport, legal and commercial systems, most poor countries will not be able to take up the new export opportunities offered by fairer trade.
If fairer trade rules were combined with more and better aid and debt relief, then the world’s poorest countries would be able to successfully promote their interest in free world trade.