Economic Liberalism And The Current Ipe Economics Essay

This essay discusses the liberal theory of international political economy in terms of how its advantages and disadvantages can be related to todays IPE with a focus on the free trade aspect, the extent of economic development associated with it and if peace and a less hostile relationship can be achieved through economic dependency. Accordingly, Free trade is characterized in this article by the free trade agreements that took place in the 21st century. The aim of the focus on the interdependence liberalism is to see to what extent the logic and the theory behind interdependence has been adapted in today’s economic world and to what extent it has enhanced international relations among countries. Thus, the discussion will be biased toward the above mentioned focus on interdependence. The first part of this article will explain the major benefits of a liberal economic sphere, followed by a summary of the downsides of such a system. A conclusion will provide the main inferences of the discussion.

Free Markets, Trade and Interdependence.

Every day, people from different countries exchange different products, services and materials as they do not have the capabilities, resource access or labour for a diversified production. I believe that the main concern of liberalism is truly to bring about the maximum possible cooperation and coordination amongst societies as well as states on both a domestic level and an international level. Such corporation leads to interdependence with the goal of achieving mutual gains that in theory will insure to deter or minimize conflict, hence, leading to peaceful and stable world relation. The United States, for example, has its main “international trading partners in Australia, Central America and the Dominican Republic, Chilli, Jordan, Bahrain and many more. It has free trade agreements with each of the aforementioned countries with the purpose of increasing international trade and opportunities of competition” (US Trade Policy Agenda 2012). This network that the U.S established has enabled it to earn the hegemonic power that it holds today.

Therefore, a crucial strength in the liberal view is the free trade factor and all of the economic elements that follow from that concept. As Adam Smith implied that “trade is the main form of interaction between people within a state as well as between states” (Sorensen 2009). Whatever form of trade it is, goods, services, capital and resources, it will require a certain amount of cooperation in order for it to take place. In today’s modern world, the need for a variety of goods and services demanded by citizen results in comprehensive import/export activities for “states to maintain themselves and satisfy market demands” of its citizen. (Witztum 2010)

Thus to facilitate trade activities, the free market calls for “a limited involvement of the government in the matters of the market with a supervisory role rather than a dominating body” as Smith’s invisible hand will naturally bring balance to the market. The liberation from governmental pressure is a key attraction and strength in a liberal economy. In my opinion, organizations such as the World Trade Organization (WTO), the Organization of Petroleum Exporting Countries (OPEC) and the North American Free Trade Area (NAFTA), act only as a supervisory, facilitator and a body for resolving disputes only within a liberal ideology. Moreover, it calls for a market where “national barriers are removed, such as taxes in imports and exports, as well as tariffs and quotas between states”. (Roy Smith 2011 P. 100)

Furthermore, the impact of free trade can be observed with the boom of multinational companies and the emergence of free trade agreements (FTA’s). On a multinational level, for example, Apple’s and Samsung’s specialization in the field of electronics is viscously competitive evident by the legal issues between them. Consequently, such competition has led to innovation and that is one of the perks of trade. Both companies dominate the market with their products over the globe through means of import/export. However, the price of such products “differs from the country of origin and that of other countries and that is due to tariffs and quotes costs” (Sahajwani 2012). Therefore, through means such as FTA’s, all barriers of high tariffs and quotas would be eliminated and facilitating “market access”, competitiveness and profitability, thereby creating a free market zone between two countries or a whole region. (UN Conference on Trade and Development 2012)

For instants on January 1, 2010, a free trade agreement took effect between Association of South East Asian Nations (ASEAN) and China on “economic integration in trade of goods, trade of services and on investment. China and six ASEAN countries (Brunei, Indonesia, Malaysia, Philippines, Thailand and Singapore) eliminated tariffs on 7000 product categories which cover 90% of traded goods and their foreign direct investment (FDI) has gradually expanded soon afterwards” (Lakatos & Walmsley 2012, P. 767). Further analysis has showed that over the years, trade liberalization will lead to economic development and prosperity as well as it will boost their profitability. Hence, the FTA allowed “ASEAN to benefit from china’s economic growth and its ability of providing investment opportunities through gaining access to a diversifiable market and it gave China access to the vast natural resources and raw materials in ASEAN countries” (Lakatos & Walmsley 2012, P. 766).

From the above example, one can derive that implementing the aspects of free trade truly brings about the maximum benefit to the participating countries and such integration between state economies in a region scale will most likely make each country dependent on the other. “Through fear of losing gains, theoretically countries will avoid conflict and promote peaceful relations as well as the fact that conflict will have a higher cost” (Polachek, Robst and Yuan, 1999). It will also lead to creating norms between the involved countries through eliminating cultural barriers amongst them creating a unity of mutual interests.

Analysis of Liberal Drawbacks.

Liberalism has been critiqued for the fact that markets are not “a natural phenomenon” and thus, it can’t be argued that it will balance by itself. It has been also criticized for “not looking in to the political or the social aspect as it only sees individuals as rational actors”. Moreover, “a Marxist critique is that liberalism does not count for equality and justice of economic outcomes”, thus, creating class conflict (Smith. R 2011, P. 16).

From the above points and the example of China-ASEAN free trade agreement drawn in regard to the liberal principle, it can be inferred that it does not account for the equality of the economic outcomes. For instance, although all countries participating in the FTA have a mutual gain, it is not a fair gain in terms that not all countries (6 out of 10) get to benefit from eliminating tariffs over the 90% range of products. Also FDA varies from one country to another. In addition, studies by Csilla Lakatos & Terrie Walmsley have shown that the economic gain of China as a country is expected to be more than ASEAN countries economies combined and “ASEAN manufacturers are expected to face higher competition from cheaper Chinese exports on both domestic and international markets.” (Lakatos & Walmsley 2012, P: 767).

Such inequalities might have a larger impact in the long run as their economies will part ways from each other creating a gap of unequal gains. The gap may raise security alerts among the participant countries resulting in a security dilemma leading to conflicts due to one or more than one country with higher economic powers.

Another notion that can be derived from the imbalanced economic power, one can argue that “the interdependency the FTA created might be shifted to be a one side dependency on that exact higher power” creating hegemonic instability (Keohane & Nye 1977, P.8).

Addressing the argument that liberalism ignores political and social factors in its interpretation of international relation, is a major lack of foresight with regard to other countries. In my opinion, a free trade zone will create an issue for other countries not participating in the FTA. Logically the magnitude of trade will be amplified for those who are included in the FTA. Therefore, other countries that ones depended on one of the ASEAN countries for example, will be left a side and their trading activities will be reduced. On a social level, the diversity of products that will be available in China and ASEAN will attract imports from other states resulting in an increased flow of cash into the FTA zone. From a financial perspective, a negative balance of trade in a given country will lead to lowering living standards and a weak economy. Thus, the disregard to the political side with other countries and how free trade will be reflected on their economies might lead to unwanted tensions.

Conclusion:-

The article has attempted to shed light on the basic assumptions of the liberal theory. Many of the trade activities that the theory suggests would dramatically enhance the economic situation of the countries adopting it leading to economic prosperity. However, I do not deny that there are some disadvantages that can emerge from the example illustrated above, theoretically as viewed by other grand theories (mercantilism & Marxism); the end result of a free market is conflict as at some point, injustice and inequality might dominate. But, I conclude, the shortcomings mentioned depend on the nature of the agreement, the political situation between the participants and the economic situation of each country.