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How viable is free trade in the real world

How realistic is free trade in the real world

According to The Organization for Economic Co-operation and Development (OECD), “Free trade occurs when goods and services can be bought and sold between countries or sub-national regions without tariffs, quotas or other restrictions being applied”.

Free trade have always been one of the most disputed topics in economics from the 19th century and trade was the engine of economic growth in the 19th. “In particular, since the end of the Second World War, the Western World has lead the way in the quest for free trade between nations. Various arms of the United Nations, chiefly The World Bank, The International Monetary Fun (IMF) and The World Trade Organisation (WTO) have been the main bodies through which the developed world has pushed its agenda of liberalisation” (James Lawrie).

However, there have been an growingly popular arguements against free trade. It is often said that free trade encourages the exploitation of labours in developing countries which do not have the advanced manufacturing infrustructure to enjoy the benefits of free trade while the developed countries have maintained protectionist policies to protect their domestic production. Consequencely, the gap between rich and developing countries seems to remain large.

Critically examine the competing perspectives about the role and impact of trade in developing countries

2.1 Understanding on Developing countries

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“About two thirds of the WTO’s around 150 members are developing countries. They play an increasingly important and active role in the WTO because of their numbers, because they are becoming more important in the global economy, and because they increasingly look to trade as a vital tool in their development efforts. Developing countries are a highly diverse group often with very different views and concerns.” (Understanding WTO: Developing countries)

2.2 Competing perspectives

In the process of trade liberalization, the WTO’s trading policy exhibits that freer trade will boost economic growth and development. However, free trade seems to be undesirable in the real world, a lot of criticisms of free trade lead to a big question that how are the role and impact of trade in developing countries, especially after joining WTO?

The role and impact of trade in developing countries will be discussed through competing perspectives with Neoclassical approach, Structuralists and Dependency Theory.

Looking back to previous time, as discussed above, free trade has occured from the 19th century when diverse arms of United Nations stimulated trade liberalization. The supranational organizations pursued policies which were broadly known as the “Washington Consensus” basing on western economic concepts as well as theories. The Washington Consensus was a term first invented by John Williamson, an economist from the Institute for International Economics, in 1989 and rooted in the Neoclassical approach to economic thinking and has been criticised by two main shools of thought; Structuralists and Dependency Theory”( James Lawrie).

First of all, with Neoclassical principals, free trade is mutually beneficial and it leads to trace back to Adam Smith’s theory in which trade is mutually beneficial basing on Absolute Advantage and the theory of David Ricardo of Comparative Advantage as well as the Hecksher-Ohlin model “which explains how free trade between nations enhances a populations welfare by allowing a nation to employ its various factors of production (land, labour and capital), more effectively” (James Lawrie)

The WTO and IMF policy had underpinned with the Neoclassical philosophy for a half century since free trade was started, therefore, the Neoclassical theory was criticised that it has been built entirely by western economists who only think about the problem in western views. Thus, the Neoclassical approach advocates free trade although the fact is opposing to its assumptions that the theory implies.

Meanwhile, Structuralist, the second theory, is in the middle ground and supposes that least developed countries (LDC’s) and developed countries (DC’s) gain from free trade whereas developing countries should manage appropriately if they want to get benefits from trade liberalization.

On the one hand, with Structuralist’s view, import substitution industrialisation (ISI) is a means for growth, especially in terms of getting LDC’s producing simple manufactured goods and then, shift to export orientated industrialisation (EOI) when the time is right. Dependency Theory (the Theory is against free trade) also in favour of Structuralist to prefer ISI, means that “A combination of relatively low income elasticities of demand for most primary goods, and export earnings instability due to the steepness of the demand and supply curves for these commodities” (James Lawrie)

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On the other hand, regarding developing countries, Structuralist thinks that trade liberalization can be good if developing countries know how to manage properly.

Contrary to the Neoclassical approach, Dependency Theory seems to be against free trade and also in favour of the Structuralist approach for disregarding potential gains of developing countries from trade liberalization.

Dependency Theory sees free trade to be an inefficient way, causing unequal exchange as well as unbalanced development and LDC’s can not find a right time to trade with DC’s. Especially, regarding permanent ISI, many of technological advances from Dc’s of which LDC’s are denied to access. A typical example for this issue is in Argentina, where “the 1964 Ford Falcon is still being produced with the U.S. machinery of that time, without model change, as if the clock has stopped.” (Dornbusch 1992 p.75)

In addition, Dependency Theory see the a variety of problem such as environmental pollution through such operations as well as considers about the negative impact on LDC workers’ health and safety, causing a ‘race to the bottom’, therefore, nations must reduce regulations as well as standards to keep on being competitive. ” (James Lawrie)

Why you might be pessimistic about the prospects for global growth and development in the future?

It can not be denied that there have been a global unstability in almost fields for recent years. There is a growingly increasing number of people tend to be pessimistic about the prospects for global growth and dvelopment in the future and I am not an exception. Reasons for the pessimistic view focus on some primary issues, including Political and social unstability, financial crises, nuclear crises, environment pollution and climate change, the Doha Round will be conclused in general because its effect scale on almost factors.

To begin with, it is easy to understand that the widespread phenomenon of political and social instability in many countries across time negatively effects on their economic performance (Ari Aisen and Francisco Jose Veiga). It should sound the alarm about the absolutely serious situation on politic and society worldwide, from political crisis in Thailand, Argentina, Korea, Turkey in 1990s to severe conflicts and violence in Middle East and North Africa recently.

Furthermore, the current political unrest in Middle East is supposed ‘a nightmare’ for the developed countries such as United State and Asian nations such as China, Japan, India, Korea… which depend so much on the Gulf States’ oil resources. Therefore, the world crue oil prices have significant increased, leading to a rise of gas, fuel prices and considerablely affecting enterprises’ production in related countries and consumption in the world. Consequencely, increasing inflation and the rate of unemployment, rising poverty and social evils, reducing FDI, low living standards, huge debts… leading to threaten international prospects for economic recovery.

Meanwhile, financial crises has recently swept across borders, not only in developing countries but also in the rich countries. The most significant financial crisis started in the US housing market in 2007, continuing to spread worldwide and severely damaged the economies, specifically, a number of prominent US-based financial institutions such as AIG, Lehman Brothers (John Marshall).

Besides, in Europe countries, Greec, Italy, Spain, Portugal and Ireland also have been pushed to the edge of insolvency by Europe’s debt crisis. Particularly, Greek debt-to-GDP ratio is over 140%, heading towards 158% whereas GDP will shrink this year by 3% and unemployment heads towards 14% (Gavin Hewitt, BBCNews.co.uk, 2011). In case of United States, a Bloomberg Government survey presented on March 7 that the public debt has increased to 62.1 percent of GDP over the past decade from 34.7 percent and it is predicted to reach 84.9 percent of GDP by 2020. Also, “the government is projected to spend $44.5 trillion from 2011 through 2020, requiring $10.4 trillion in additional borrowing” (Vincent Del Giudice, www.bloomberg.org,2011). Consequencely, borrowing costs are pushed considerably higher, curb economic growth as well as tens of thousands of people have become unemployment, huge budget deficits, more strikes and social unrest (Lisa Bryant, VOANews.com, 2010).

Another issue makes us pessimistic for global prospects is a nuclear crisis in Japan which have been the most serious and concerned problem in the world now. The Japanese nuclear cisis have been rooted from its historical earthquake and tsunami on 11 March, causing to the destruction of Fukushima’s reactors with a highest level of radiation leak. Therefore, the Fukushima incident is currently upgraded to a level seven on the International Nuclear and Radiological Event Scale, puts it on a par with Chernobyl (Richard Black, BBCNews.co.uk, 2011).

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Although Mr Denis Flory, the International Atomic Energy Agency’s Deputy Director, said the amount radiation at Fukushima is much lower than at Chernobyl and the two incidents are very diffrent (Lisa Bryant, VOANews, 2011), the Japanese nuclear crisis is extremely threatening human health because of the long-term health damage.

Besides, the catastrophe in Japan also causes an environmental tradegy, leaving the area around the nuclear plants unhihabitable for a long time because of a high radioactivity into water, land and air, destroying all the living organisms.

Moreover, the environmental pollution is not only in case of Japanese disaster, but also in global scale and impact on the earth’s lives because of chemicals, litter, smoke, motor oil, car exhaust, used tires (Keshav Saini, www.environmentabout.com). These are also reasons for climate change which is one of the main factor for changing environment harmfully to human health. Because of the constant transfer of mechanics of life as gases, heat and energy, it is extremely dangerous if human beings pour billions of tons of carbon dioxide into the atmosphere. “Over the 50 years since 1960, the amount of carbon dioxide in the atmosphere has risen nearly 25%. Since the start of the industrial revolution it has risen by 45%, putting it at a level not seen in millions of years” (Ramez Naam,www.ieet.org) and it is estimated that the world will emit more than 35 billion tons of carbon dioxide in 2011. Thus, Earth’s atmosphere is heating up by the impact of atmospheric mix of gases continously, creating Greenhouse Effect (Keshav Saini, www.environmentabout.com) and the consequences have been largely warned in all countries due to its extremely seriuos effects on human beings, plant and animal species, worldwide climate and weather conditions.

Finally, the Doha Round, started in 2001 with focus on needs and benefits for developing countries, has collapsed since the first conference until now. The main reason is clear that “the WTO model of corporate globalization has not delivered the promised benefits of increased economic prosperity, while economic, social, and environmental conditions have worsened in many rich and poor countries alike” (Lori Wallach and Deborah James). Actually, the Doha Agenda focuses on balance promoting international trade between different, unique countries or regions, but it have been fail in all around, especially the WTOs agriculture trade rules which are supposed to be a disaster all around. “The Indian government has confirmed that at least 100,000 farmers who have lost their livelihoods to this scandalous WTO system” (Lori Wallach and Deborah James). Besides, the number of people living under the poverty rate in Sub-Saharan Africa and Middle East, less than $1 a day, have not reduced while the those living on less than $2 a day has increased in these regions, as well as in Latin America and the Caribbean. (Lori Wallach and Deborah James). Thus, the Doha Round always be collapsed since its beginning because of its policies seem to encourage the developed countries which have the definitely protectionism to protect infant industries from the rest of the world, especially developing countries while developing countries feel pessimistic about free trade, the WTO’s regime



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