Is Free Trade Desirable? Essay
Is Free Trade Desirable?
The first part of this essay will be aimed towards understanding the concept of globalisation. We will analyse the various advantages and disadvantages that arise as a result of globalisation. The second part of the essay will concentrate on investigating the benefits and drawbacks that arise from the free trade.
In order to devise an accurate and informative response to the essay question we must first understand the concept of globalisation. Globalisation is about what is happening to economies on a world scale. Although the idea is not often clear, everyone who talks about the concept recognises that the countries of the world tend to divide into two groups: those with developed economies and those that are sometimes referred to as developing countries. The economically developed countries have modern industries and technologies (the U.S, Japan and the countries of western Europe). The developing countries (most of Asia, Latin America, and Africa) have more lower incomes and large groups of impoverished people, especially peasants. However some countries are in between and have characteristics of both kinds of economies (for example, states of the former Soviet Union and Eastern Europe).
The economic interactions of globalisation are fundamentally about big capitals of the developed countries that operate around the world. These are sometimes called multinational corporations; these dominate the economies of the developing countries along with a handful of global agencies such as the International Monetary Fund, the World Trade Organisation and the G-7 central banks. The results affect the majority of the working population in the developed countries, as shown by issues like runaway factories, satellite-linked offices and the attack on social welfare programs in the name of the free market.
The term globalisation was originally started in the 1960’s to describe international capital flows. Today however, globalisation is not just capital flow, but a revolution to make individual nations part of a global village, under one legislation. Basically, it’s to remove the distance between countries. As a result, it’s also the restructuring of everything, from politics, to the economy, to make it part of a global economy. The defining characteristic of globalisation is a free market capitalism and trade liberalisation. The consequences of these changed however, have not been discussed and are under heated debate. While some people think of globalisation as primarily a synonym for global business, it is much more than that. The same forces that allow businesses to operate as if national borders did not exist also allow social activists, labour organizers, journalists, academics, and many others to work on a global stage. With the technological revolution, it is now a lot easier to do so.
Advantages and Disadvantages of Globalisation
The existence of trade has always been present between people and between countries. However since the 2nd World War trade in goods and assets has gained a larger significance everywhere. There are various advantages related to globalisation – first the foremost related to trade and investments spreading wealth and linking countries together, however simultaneously there are various negative consequences.
Some of the main advantages are:
Increased liquidity of capital allowing investors in developed nations to invest in developing countries.
Increased free trade between nations.
Corporations have greater flexibility to operate across borders.
Increases in environmental protection in developed nations.
There will be a reduction in the likelihood of war between developed nations.
Greater independence of nation-states.
Spread of democratic ideals to developed nations.
There will be a reduction of cultural barrier, increases the global village effect.
Faster and easier transportation of goods and people.
There will be increased flow of communication allowing vital information to be shared between individuals and corporations around the world.
The presence of global mass media will tie the world together.
Some of the main disadvantages are:
Corporations seek out for the cheapest labour, therefore there will be increased flow of skilled and non-skilled jobs from developed to developing nations.
There is increased risk of economic disruptions in one nation affecting all nations.
Corporate influence of nation-states far exceeds that of civil society organisations and average individuals.
There will be a threat that the control of world media by a handful of corporations will limit cultural expression.
Greater chance of reactions for globalisation being violent in an attempt to preserve cultural heritage.
Greater risk of disease being transported unintentionally between nations.
International bodies like the World Trade Organisation infringe on national and individual sovereignty.
Increase in the chances of civil war within developing countries and open war between developing countries as they compete for resources.
Spread of materialistic lifestyle and attitude that sees consumption as the path to prosperity.
What are some of the benefits of globalisation as put forward by the pro-globalisation movement?
At a global level, globalisation has many benefits. For some people, it has been seen as an alleviation of poverty. One such example is the use of labour in 3rd world countries. At world level, globalisation creates hundreds of millions of jobs, not unemployment. These are mainly in the developing countries, but they are only marginally at the expense of jobs in advanced countries. As a result, the extra income would go to food and an improved lifestyle for some of the people living in 3rd world countries.
For an example, the Japanese motor industry, Honda is manufactured in Thailand, and the U.S. Nike sports wear clothing are manufactured in China and South East Asian countries. This can create more jobs in the poorer countries and it also helps the wealthier countries. Due to the lower labour costs, larger quantities can be produced at a lower price. According to the World Bank report, it has said that developing countries have experienced high income growth, longer life expectancy, better schooling, higher wages and fewer people living in poverty since becoming integrated in the global economy.
Environmental protection could also be pursued at a global level. Where international impacts, international cooperation and technology innovation, each of which is enhanced by the process of globalisation, can significantly accelerate efforts to find solutions. One such example is the whaling in Japan. With the population whales in the world declining, Japan was pressured into a Whaling Ban Treaty. Through this process, the amounts of whales around the world have gradually increased.
More fundamentally, globalisation fosters economic growth, which in turn generates and distributes additional resources for environmental protection. Increased trade and investment also promote opportunities to exchange more environmentally efficient technologies, share good practices, and contribute to environmental capacity building, particularly in developing countries. Green house gasses are one example. Through the Kyoto Treaty, most of the world’s leading nations have signed a contract to reduce greenhouse emissions. Only America and Australia have not signed.
What are some of the disadvantages of globalisation as put forward by the anti globalisation movement?
In this utopian idea, there are still flaws and disadvantages; mainly concern the developing countries. Some countries are just not able to compete with the cheap labour costs of other nation. The reason why countries such as Russia remain not integrated with globalisation is because they would lose many jobs. They are not able to compete with the prices of foreign products and many of the local manufacturers would begin to close down. Employment, nationally, would decrease as the factories move to countries of cheaper labour costs. Also, Australia has suffered because of the lamb tariffs in the U.S. As a result of this, many Australian farms will become bankrupt. George Bush, though an avid supporter of free trade and trade liberalisation has puts tariffs on lamb to help the ailing U.S. farming industry. Such hypocrisy however, does not help promote the benefits of globalisation.
Despite claims from pro-globalisation companies the globalisation helps alleviate poverty, the Oxfam Community Aid Abroad estimates the 60 countries, a third of which are African, have become poorer since 1990. But why? Before some developing countries can join the globalisation market, they have to meet a certain criteria before entering. This might include dismantling trade protection policies and privatising public assets. This would allow rich and powerful multinational companies to buy up everything at a cheap cost, which would leave developing countries without many assets.
The free trade debate has been a long and very much politicized one since its conception, with people split up into camps such as “Economic Liberalists” and “Neo-Mercantilists”. Whether or not to impose a free trade system between countries has caused much fear and confusion within the public.
Will free trade be beneficial to all or will it cause unemployment in developed countries? Will it cause entire domestic industries to crumble under the pressure of cheaper foreign products or will it lead to more productive domestic markets and new jobs in booming export industries? Will it lead to a so called ‘race to the bottom’ in which countries compete for the most lax environmental standards and low wages so as to attract investment, or will it increase workers rights and wages in developing countries and encourage better environmental standards for all countries? These are just some of the issues looming the free trade debate.
Economic Liberalists argue that free trade would be beneficial to all countries if each country exports goods that it has the comparative advantage in producing, and imports products that they do not specialize in producing. Thus maximizing profits in they’re own specialized exports and obtaining other goods cheaply from other countries. However, as Clive Hamilton observes (2002:61) the comparative advantage theory makes many assumptions that do not hold in reality. Assumptions such as the non-existence of unemployment, perfect competition and the overlooking of implicit cost such as pollution and damage to the natural word make this theory in applicable in the real world. Even so this theory remains the basis for pushing free trade in the global market.
Hamilton also stipulates that producing just what appears to be a country’s “comparative advantage” is not always the route to the highest profits. For example, in the 1950s the percussor to the World Bank advised South Korea to produce what was in its “comparative advantage”; rice and silk. However South Korea ignored this advice and instead went on to invest in industrial markets like the automotive industry and today is generating huge profits as a result of this (2002:48). This suggests that free trade would lock countries down into producing goods that it appears to have the “comparative advantage” in while locking them out from realizing potential in other, previously unexplored markets. Many free trade advocates also put forward the case that free trade encourages competition.
Ellig argues that “By exposing domestic companies to diverse overseas competitors, free trade creates pressure to improve quality” (2000:20ff). This stipulates that the introduction of less expensive quality goods from other countries will cause domestic companies to re-think strategies and operate more efficiently to compete with the foreign product. Thus improving the domestic market for that product. Hetzel also discusses this in his article The Free Trade Debate: The Illusion of Security Versus Growth:
Free trade is a major source that drives innovation. …the McKinsey Global Institute….compared productivity for the United States, Germany and Japan in selected sectors… For each country, the Institute found that sectors facing foreign competition were highly productive, while protected sectors where unproductive. For example, in Japan, food manufacturing and brewing are protected from foreign competition. In these sectors, output per man hour is only a third of that in the US. (1994:44)
However there is a fear that foreign competition may not always be able to be met by domestic firms thus destroying entire domestic markets for certain products. For example countries that allow sweat shops, suppress trade unions, allow child labour and tolerate highly polluting production methods will always have an advantage over domestic markets such as textiles and clothing (Hamilton, 2002:62). This would prove to be detrimental to unskilled workers. Therefore there is a fear that free trade cannot be fair or advantageous to all countries until a set of minimum workers rights and acceptable production processes are imposed on all countries.
This leads to another fear expressed in the free trade debate; the so called “race to the bottom” in which large mega-corporations would move into countries that would allow them to produce their products at a lower cost due to low wages, the acceptance of child labour and no pollution restrictions in production plants, in turn prompting other countries to lower their minimum wages and environmental standards to keep themselves attractive to foreign investment. Hamilton argues that “by permitting environmental subsidies a country can gain an unfair advantage in the international marketplace” (2002:65). Hamilton sums up his fears when he states:
We frequently hear business groups arguing that Australia cannot afford proposed restrictions on pollution such as greenhouse gas emissions or improvements in working conditions such as shorter hours because it reduces their “competitiveness” against countries that have lower standards. They often threaten to move their operations to those countries giving rise to pressures for a ‘race to the bottom’. What is needed is a system that applies pressure to achieve ‘minimum safety standards for all workers. (2002:48)
This view is countered by economic liberalists who state that lower wages and pollution restrictions give countries only a small advantage in attracting investment. A common view is that the vast technological differences in developed and developing countries would make up for any advantage developing countries have by providing cheap labour and loose pollution restrictions (Hufbauer and Kotschwar quoted in Ellig 2000:22ff). Another view commonly held by pro-free traders is that increased trade with developing countries will create wealth, therefore increasing wages and working conditions in said countries (Ellig, 2000:23).
The view that free trade would improve wages and working conditions in developing countries is seconded by Lukas in his paper “WTO Report Card III: Globalization and Developing Countries”. Lukas highlights that although workers in the export sector of developing countries earn far less and endure much harsher working conditions than workers in the same sectors of developed countries, the comparison being made should be what these workers earn in the export sector, in comparison to other, locally available opportunities. It then becomes evident that employees in the export sector of developing countries are making much more than is offered in local opportunities (2000:7).
Another notable point, is that employees of large developed-country affiliate corporations, while making much less then they’re developed-country counterparts, are also paid significantly more then the average wage of the country they live in (2000:7). Lukas makes a significant observation that “poor countries tend to move away from labour-intensive production as they scale the ladder of economic development”. For example, South Korea’s textiles and apparel industry constituted 40% of its exports in 1980, however, this figure dropped to 19% in 1993. Today South Korea is more focused on automotive and electronic exports than clothing, and therefore, average wages have skyrocketed (2000:7).
Another crucial point raised by protectionists is the fear that free trade will lead to the exploitation of the environment, with developing countries willing to forego their natural resources in order to attract international corporations and investments in their countries. This leads to the fear that developed countries, will fall to competitive pressures and will lower they’re high environmental standards in order to remain feasible to investors, and this win turn, will lead to a massive global environmental deregulation (Lukas, 2000:9). However, this view is debunked by economic liberalists stating that environmental standards make up only a small part of the factors that businesses take into account when choosing a location to manufacture in (Lukas 2000:9). Lukas argues that:
Such considerations as guaranteed property rights, a functioning legal system, a well-educated workforce, and sufficient infrastructure figure much more predominantly in the calculations of most entrepreneurs and business managers than do environmental regulations (2000:9).
Another important consideration is that businesses make considerable cost savings when using standardized production techniques. Therefore companies usually operate at the highest world environmental standards rather then using different production methods in different areas (Lukas 2000:9). Ellig also states that as peoples income rises (as a result of trade), that they want a cleaner environment, and the wealthier a society becomes, the more it can afford to spend on environmental protection (2000:23). Ellig also cites a National (US) Bureau of Economic Research study that while studying 109 cities around the world, concluded that a 1% increase in income, leads to a 1% decrease in measured sulphur dioxide concentrations. This suggests that the more a country has the ability to trade, the cleaner the environment actually becomes.
In today’s corrupt society, it is hard to see globalisation work in a beneficial way for everyone. If it were to work, many of the rich and powerful nations would have to help many of the poorer nations, and not just with “jobs (cheap labour)”, but use initiatives such as dept reduction or cancellation. Although some good has been done through globalisation more damage has also been caused. A global effort to improve and upkeep the cultural, living and economic standards of every country would be required. Also, powerful nations would have to follow the rules and guidelines set instead of bullying poorer countries to allow them not to follow it. Globalisation is advantageous for the globe, but the world has to think globally instead of nationally. This would be difficult as there are many “rogue” countries that disagree with the globalisation paradigm e.g. Iraq.
The free trade debate is undoubtedly complex and difficult to conclude. The problem being that its politicised nature invokes many fears of unemployment and environmental breakdown. It is these fears that often cloud people’s judgement and forbid them from looking at the problem in a logical objective manner. Would you think objectively if you thought your job was on the line? Although historically we know what protectionism can lead to; the post World War I depressions, the collapse of the Soviet Union in the 1990s, all a result of gross protectionism. To contrast this we can be benefits of increased trading in East Asia, with countries such as South Korea, and Singapore. No one can deny that increased trade makes a country wealthier and better off, so why then is free trade, the unlimited trade between all countries, so frightening?
Bibliography and References:
Joseph E. Stiglitz, Globalization and its Discontents , 2002
Ellig, J. 2000. “Why Free Trade is Good for Consumers”, Consumers’ Research, January: 19-23.
Hamilton, C. 2002. “The Case For Fair Trade”, Journal Of Australian Political Economy, 48: 60-72.
Hetzel, R.L. 1994. “The Free Trade Debate: The Illusion of Security Verses Growth”, Federal Reserve Bank of Richmond Economic Quarterly, 80(Spring): 39-58.
Lukas, A. 2000. “WTO Report Card III: Globalization and Developing Countries”, http://www.freetrade.org/pubs/briefs/tbp-010es.html: 1-19.