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Role of free trade and how it has impacted developing countries’ trade Essay

Role of free trade and how it has impacted developing countries’ trade

Introduction

            Free trade is a trade where countries carries out economic activities “without restrictions or barrier such as import and export tariffs”, barrier to market entry and policies (Johnston, Gregory, & Smith, 2011, free trade). Many countries have reaped benefits from free trade and especially developing countries. Some benefits include improvement in infrastructures, expanded markets, access to technologies, free movement of labour and capital, investment, and political relations in form of integrations. These benefits have played a major role in the economic developments of developing countries. However, some countries argue against free trade claiming that it is a burden to developing countries and they object it. Some arguments against include exploitation of developing countries by industrialised, environmental pollution, unemployment of domestic workers, and underperformance of domestic industries thus affecting the country’s economic growth. Free trade has positively impacted to developing countries by stimulating their economic development goals such as millennium development goals thus it can be said to be realistic in the real world.

            Free trade was found to work out for countries such as Japan, South Korea, China, other East Asia countries, and most of the developed countries in the world. Trade liberalization led to development of these countries and to attainment of their current level of ‘developed countries’ in the world. The countries formed “free trade and economic partnership agreements that helped in negotiations of trade across borders was important in facilitating trade,” technical support, services, environmental and social issues (Zeng, 2010 p. 651). The guidelines helped countries to carry out trade in a defined environment that prevented them from exploiting each other in terms of natural resources. As a result, the countries realised developments. This has also worked out for developing countries such as those in sub-Sahara Africa for example Egypt. Moreover, free trade agreements encourage foreign direct investments in developing countries increasing inward revenues to these countries. The increased revenues to these countries are channelled to development projects such infrastructures and improving social amenities to citizens. In addition, foreign direct investments create employment for domestic workers thus helping developing countries to lower their unemployment rates. This is one of the achievements that have contributed greatly to shifting of countries from undeveloped cycles to becoming developed. For example, foreign direct investment has contributed to development of China. China is among the developing countries that” has the largest reserve of foreign direct investments” (Chen, & Emile, 2013 p. 120). China has attracted many foreign investors due to reduced market barriers such as “uniform tax for both domestic and foreign investors” and trade liberalization resulting to increase in its gross domestic product (Davies, 2013 p. 11). As a result, China’s economy has continuously grown making it among the most developed countries. This has shown how trade liberation impacted on the development of countries through trade agreement that encourages foreign direct investment.

            Free trade allows free movement of labour and capital across countries and regions. Free movements of labour and capital ensure that countries under the trade treaties are able to acquire the necessary factors of production for their businesses that will help them to improve their productivity and output. In late 1950, some of the countries in Europe suffered shortage of labour while other experienced high levels of unemployment. For example, Italy experienced economic problems such as high levels of unemployment while other countries such as Germany were lacking different types of labour and shortage on experts (Zaiceva, & Zimmermann, 2008 p. 429). Presence of free trade that was steered by European Economic Community ensured that Germany could be able to get labour from Italy at no cost. As a result Germany was able to get experts that it lacked while Italy benefitted from reducing the level of unemployment. Free trade helps to settle unemployment problems in developing countries as it allow free movement of people from their countries to more developed ones where they are able to get employments. This in turn helps them to reduce unemployment rates and realise their economic goals from increased income from abroad. Consequently, the income of people increases resulting in improved standards of living for the people in developing countries. Free movement labour created employment raising the economic status of people, which was a greater achievement towards country economic goals on reduction of unemployment (Nicoleta, & Camelia-Daniela, 2011 p. 303). As a result poverty is reduced in these countries, which is one of the millennium development goals for them. Movement of highly skilled labour to developed countries also results in high performance of domestic industries thus increasing their productivity, which in turn contribute to economic growth of the recipient country. The initiative was purely inclined to economic gains and there was no any political involvement or interference during the whole process. Moreover, the policy saw drastic improvement of the economy in the region. From this literature, it can be noted that free trade provision to free movement of labour contributed both to reduction of unemployment and poverty, increased productivity, and increased living standard of citizens in developing countries thus fostering the economic developing goals of the countries.

            Free trade policies enhanced trade, transport, agriculture, manufacturing industries, imports and exports in developing countries. “Free trade area covers all manufactured and agricultural products, although the timetables for reducing tariffs and removing quantitative restrictions and other non-tariff barriers differ, (Association of South Asian Nations, 2009 update on free trade). Due to entry of various industries in the market, infrastructures are improved in collaboration of state’s government and the industries for their market accessibility. Improvement of infrastructures such as roads, railways, communication, electricity, and social amenities by these industries serves as a gateway to developments in these countries. Increased developments results to increase in investments and thus a country realize its development goals of. Although a country does not benefit directly through revenues from tariffs and taxes, the industries help it to meet its development goals. , its development vision is addressed. Improvements of infrastructure such as transport, electricity and social amenities results to improvement of investment capacities of regions and countries, which in turn contribute to economic growth (Jovanović, 2013 p. 971). Policies that lift barriers on export and imports by lowering or elimination tariffs and duties encourage export and import of both goods and services to across the region. Developing countries are able to gain revenues from exports while imports supply them with necessary services and goods that are important in steering economic development. For example the European Economic Community elimination of import and export tariffs for its member states encouraged free movement of goods and services across the region in a common market (Bento, 2009 p. 73). Therefore, free trade has contributed greatly to development of small nations through improved trade that encourages export of goods and services without barriers.

            Trade liberalization has increased countries integrations and as a result aid to trade inflow to developing countries in terms of technologies and capital has been increased. This has led to strong economic growth, which has been reflected by the increasing gross domestic product and exports for developing countries in East Asia, Africa and Latin America. For example, most of Latin America middle income level countries have integrated with developed countries such as china resulting to improvements of their financial system and consecutive developments (Chen, & Emile, 2013 p. 118). Consequently, technology transfer has led to shift to manufacturing industries, which has attracted investors to the countries. Technology has resulted to increase of improved productivity through lowered cost of production by lowering the cost of labour and increasing relative labour productivity. According to comparative advantage theory by Ricardo, a “country should concentrate on production of goods that is best suited at lowered cost in order to improve productivity and economy through export to a second country that is not good in production” (Bento, 2009 p. 28). Developing countries have been able to achieve improved productivity and specialization through adoption of technologies that have been introduced in their countries by other developed countries through trade liberalization. For example, India has evidenced comparative advantage by employing labour intensive production skills in manufacturing and services that employs intensive skills as in software industries. This has led to its increased exports in its production to other Asians countries thus increasing its revenues and gross domestic income that has played a major role in its economic development. High technologies attract foreign investors and investments increase. Increased investments in the developing countries also results to significant decrease in levels of unemployment. Consecutive increase in exports from developing countries has been due to decreased barrier and reduced tariffs (Johnston, et al 2011, free trade). Therefore, it can be concluded that free trade is has helped countries to advance economically and realise their economic goals such as millennium development goals.

            Free trade has led increased access of economic resources to developing countries and utilization of limited available resources thus stimulating their economic and social development. Small developing countries struggle with scarce and underutilised resources. Free trade allows free entry of other countries and investors to small developing countries and as a result, they participate in conversation of the available resources to economic development resources through “mobilization of capital and labour thereby improving the status of the country in the economy” (Unger, 2010 P 171). Moreover, free trade gives small developing nations chances to obtain resources such as capital from already developed countries that assist them to attain economic development resources or utilize what they have. For example, countries from Asia such as India have developed due to trade liberalization where they have been able to obtain capital, labour and other necessary resources from already developed countries. If there were restriction and barriers between countries, it would have been very difficult for countries like India to realize their development. Therefore, free access to economic resources by developing countries have shaped their economies and helped in consecutive developments.

            However, free trade has been argued to be unrealistic to small developing countries and instead it is detrimental to its economy by increasing level of unemployment, exploiting domestic companies, increasing pollution and lowering people’s standard of living.

            Free trade is viewed as means by which developed countries exploit domestic industries of developing countries thus affecting their economic development. Multinational companies such as Nike have been reported to exploit developing countries, (for example Asian countries) by recruiting cheap labour and taking advantage of reduced barriers to maximise on their profits (Irwin, 2009 p. 204). Free trade causes increased influx of imports in a country resulting to increased supply of goods in the market. This causes decrease in prices of goods and services causing domestic companies and industries to reduce their prices, which may result loss and reduced share of the market. Therefore, they become less competitive. This may affect the domestic industries by causing decreased growth and as a result crippling. Hence, for countries to protect their domestic industries, they “impose taxes on imports and policies that restrict imports” that may cause price fluctuations in the market (Hanson, 2010 p. 204). For example, increased steel import to UK from Asia resulted in “decreased prices of motor vehicles and thus the car manufacturers and sellers experienced reduced prices thus making losses” (Verband der Automobilindustrie, 2005 p. 34). The imposition of tariffs on imports decreases entry into a country market thus increasing the prices and the supply of goods by domestic companies. On the other hand, free trade has increased imports resulting reducing the price of good in the market, thus increasing the demand of imported goods and decreasing demand of domestic products thus affecting domestic industries economic growth and that of the host country.

            Free trade has also been argued to be the cause of unemployment to domestic developing countries. Free trade does not limit both the entry of entrepreneurs and labour in a countries. This means that there will be transfer of skilled labours from different countries coming together with their manufactures and other entrepreneurs in the country to carry out their operations. This limits the country’s domestic workers from getting such employments and hence increasing the levels of unemployment to developing countries (Trentmann, 2008 p. 73). This increases dependency ratio to these countries and hinders them from realizing developmental goals such as decreasing unemployment rates. Similarly, due to lack of tariffs and barriers to market, many industries are established in the developing countries resulting to losses of some of the industries due to competition and hence the industries move to other countries leaving a gap in employment in the previous country. According to Isis Women, (2014 Free Trade Causes Massive Unemployment) free trade caused massive unemployment in Philippines in 1995 to 2001 with 53 firms being closed down resulting in loss of jobs for 80,319 workers as 29 downsized their human resource causing unemployment of 4,019 jobs. Similarly, free trade in US has led to relocation of most of companies to Mexico, India and other place of the world where tariffs could restrict industries from entry and thus enjoying a stable market. This led to mass unemployment in US.

            Free trade has been argued as form of colonialism and imperialism in disguise and instead of contributing to developments it results in exploitation of small developing countries (Igwe, 2013 p. 113). Free trade is believed to benefit industrialized countries because of their capital potential. Most developed countries target the third world countries as the host countries where they carry their investment through exploitation of their resources. They dominate in the economy of the host country ending up controlling most of its resources, revenues, and most development projects. In 19th century, free trade helped European countries such as “Britain to obtained natural resources from small developing countries and this became disadvantageous to colonized countries over years, creating a gap development between the countries” (French, 2008 p. 13). This may lead to industries or companies controlling the government though being independent. Therefore, for government to avoid this problem, it imposes barriers, taxes and customs duties so that it can limit industries and also control their operations within the country (Hanson, 2010 p. 204). This has seen countries deviating from policies of free trade and moving back to controlled trade with little free trade that is allowed to the level of regions where countries have similar economic capacities and so there would be no likelihood of exploiting each other or feeling of unfairness for example in European union.

            Countries argue that free trade deny them access to sources of revenue from foreign investors that could otherwise be used in their development projects. The argument is laid on the fact that “free trade allows trade between countries without imposing tariffs and taxes” (Wacziarg, & Welch, 2008 p. 197). Hence, the trade is exploitive to the developing countries. Most governments and particularly those from developing countries steer their economic development projects and caters for wages from revenues that they get from tariffs, taxes and licensing of businesses that operates within its territories and so, free trade deny them from accessing these funds. Hence, their development projects may end up taking time and making a country poorer as most of its resources are utilized at no benefits.

Conclusion

            From the discussion, it can be concluded that free trade has been a reality to developing countries since it contributed greatly to development of current developed countries such as china, South Korea, and other European countries such as Germany and Britain. For example, China is one of the developed countries that have achieved its developments through taking advantage of free trade to attract investors to its country and it investing in small countries such as those in Latin America thus boosting its developments. Although free trade has been attributed by negative impacts on small developing countries, positive impact surpasses the negative one and thus contributing to most of developments in the small countries. Therefore, based on my opinion, I think that free trade has positively impacted to developing countries as it has stimulated their economic development goals such as millennium development goals. Hence free trade has been a realistic aspect to developing countries.

References

Association of South Asian Nations, 2009. Update on free trade. [online] Asean.org.

Bento, J. P. C. 2009. Economic integration, international trade and the role of foreign direct investment: The case of Portuguese manufacturing. Berlin: Lit.

Chen, Y., & Emile, E. S. 2013. Trade Openness and Finance: Effects of Foreign Trade with China on Latin American Financial Development. Emerging Markets Finance & Trade, 49 110-122.

Davies, K. 2013, “China Investment Policy: An Update”, OECD Working Papers on International Investment, 2013/01, OECD Publishing.

French, M. 2008. The impact of globalization on less developed countries and the role of intergovernmental/multilateral organizations in promoting development in less developed countries. Ann Arbor: ProQuest

Hanson, D. 2010. Limits to free trade: Non-tariff barriers in the European Union, Japan and United States. Cheltenham, UK: Edward Elgar.

Igwe, D. O. 2013. Nigeria in the age of globalisation. Journal of Public Administration, 5(5), 109-116.

Irwin, D. A. 2009. Free trade under fire. Princeton, N.J: Princeton University Press.

Isis women, 2014. Free Trade Causes Massive Unemployment. [online] Retrieved from: http://www.isiswomen.org/index.php?option=com_content&view=article&id=368:free-trade-causes-massive-unemployment&catid=96:gender-and-trade3&Itemid=219 [Accessed: 2 Apr 2014].

Johnston, R. J., Gregory, D. & Smith, D. M. 2011. The Dictionary of human geography. Oxford, UK: Blackwell Reference.

Trentmann, F. 2008. Free trade nation: Commerce, consumption, and civil society in modern Britain. Oxford: Oxford University Press.

Unger, R. M. 2007. Free trade reimagined: The world division of labor and the method of economics. Princeton, N.J: Princeton University Press.

Verband der Automobilindustrie, 2005. Auto Annual Report. Westendstrasse: Frankfurt

Wacziarg, R., & Welch, K. H. 2008. Trade liberalization and growth: New evidence. The World Bank Economic Review, 22(2), 187-231.

Zeng, K. 2010. Multilateral versus Bilateral and Regional Trade Liberalization: explaining China’s pursuit of free trade agreements (FTAs). Journal Of Contemporary China, 19(66), 635-652.

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