Global Trade Liberalisation In Developed And Developing Countries Economics Essay

The global free trade is a relatively new concept which supports a system of trading policies which permits free trading across national borders. Trade liberalisation is practised in various countries as a means of boosting development and growth. Traditionally, each country will have policies set which ban or restrict trading of certain goods or services across national borders. This could hamper the economy of not only that specific country but also of various other countries. The free trade policies allow prices to be set without any restrictions and based on the demand and supply relations.

Global trade liberalisation has been the centre of economic debates for some time now. When many countries and international bodies are the proponents of the cross border trade liberalisation, others, including some developing countries, were sceptical either to the idea of opening its borders for free trade or to the implementation of the liberalisation policies in its current form. There have been numerous studies and researches (Bouet, 2008; Anjaria et. al., 1998; IMF staff, 2001a; IMF staff, 2001b; Held et. al., 1999) which shows the benefits of free trade including development of economy and poverty alleviation. There are other writers (Das, 2007; Das, 2004; Greenaway et. al., 2001; Byers, 2003) who are not so confident about the positive outcomes or at least are cautious of the effects. The studies also show the various views of developed and developing economies.

Anjaria et. al. (1998) supports the idea of free trade. According to him, “a liberal or free trade system is necessary to allow the effects of shifts in comparative advantage to be felt across national borders over time.” International bodies like IMF are huge proponents of the liberalisation. They published various studies which list out the benefits of liberalisation. “The resulting integration of the world economy has raised living standards around the world. Most developing countries have shared in this prosperity; in some, incomes have risen dramatically. As a group, developing countries have become much more important in world trade-they now account for one-third of world trade, up from about a quarter in the early 1970s” (IMF staff 2001a).

Das (2007) is cautious about the performance variations among developing countries. Ha accepts that during 1990s the developing economies recorded an average export growth rate that was one-third greater than that of industrial economies. But he then goes on to says that “the fact remains that only a number of them have so far benefited from the expansion in trade volumes. Developing economies are known for wide diversity in their performance” (Das, 2004). Meller (2003) says that “trade liberalisation helps growth through two different mechanisms; it generates a better environment for private investment and it simulates exports. There are several developing countries experiences showing that exports could be an important engine for development and growth.”

Contrasting perspectives

The developed countries and developing countries seem to have split views about the trade liberalisation. From the perspective of developed world, the trade liberalisation has many benefits and the developing countries should also open their borders for cross border trade without any tariffs or any other restrictions. The developed countries hold it that the free trade is for the benefit of the developing countries. There are two main arguments which are put forth in support of this point of view; one is that trade liberalisation is a necessity for the growth of the economy and to achieve development (Bouet, 2008; Das, 2007) and two that the growth achieved by removing trade barriers will help to alleviate poverty that is more prevalent in developing countries.

Perspective of developed countries

In terms of accepting and implementing free trade, the developed world is of the opinion that the developing world is afraid of free trade and hold on to a severe and destructive protection to free trade. They also raised concerns that to implement the rules and open the borders developing world countries are taking too much time than ideal. They also concerned that even after implementation of free trade many developing countries are still protected and restrict trade across its borders by maintaining the tariff structure and through other loop holes (Das, 2004).

Below are the major developed countries’ views summarised.

Comparative advantage

One of the main benefits of the free trade is defined by the comparative advantage theory. The theory says that “total output will be increased if people and nations engage in those activities for which their advantages over others are the largest or their disadvantages are the smallest” (Ricardo, 1817). When the trade barriers exist a country cannot achieve its maximum output by not concentrating on industries and products which give that particular country a comparative advantage. Batra and Khan (2005), explains this theory further and says that “reduction of trade barriers creates competitive pressures and the potential for technology transfer so as to lead to productivity gains and restructuring of an economy toward its comparative advantage”.

The developed world countries held to the opinion that the developing world countries are not concentrating on the products/services which give them a comparative advantage. So by opening up the borders these countries will adjust within and will be more productive in the process and achieve economic growth. Their argument also centred on the argument that by not allowing free trade those countries are not only disturbing their own growth but also of other countries.

Huge market opportunity

One of the main benefits to the developed world with the free trade implementation was that their industries and businesses get a huge untapped market without many restrictions. There are much too many people living in the developed world and with increasing income as the economies grow but without much of a competition as in many sectors the only players were government or private monopolies (Batra and Khan 2005). With the international experience and strength in production and marketing they could tap into this huge market.

Poverty alleviation in developing world

According to Bouet (2008), free trade could directly contribute in reducing the poverty in developing countries. He says, “The traditional argument in favour of a positive relationship between trade liberalisation and poverty alleviation focuses on the first two linkages. Many poor people are working in the agricultural sector where trade distortions are higher. Liberalisation could imply high higher world agricultural prices and could raise activity and remunerations in the agricultural sector. The same beneficial outcome could also occur in textiles and apparels sector” (Bouet 2008).

Held et. al. (1999) is also of the same opinion. He says that “trade expansion can indeed play a consequential role in poverty alleviation by driving economic growth in the developing countries”. The IMF published report supports this view when it says that “freeing trade frequently benefits the poor especially. Developing countries can ill-afford the large implicit subsidies, often channelled to narrow privileged interests that trade protection provides. Moreover, the increased growth that results from freer trade itself tends to increase the incomes of the poor in roughly the same proportion as those of the population as a whole. New jobs are created for unskilled workers, raising them into the middle class. Overall, inequality among countries has been on the decline since 1990, reflecting more rapid economic growth in developing countries, in part the result of trade liberalization” (IMF staff 2001b).

Successful exporting of products and services

Das (2007, p: 22) says that “in the recent past the developing economies have been more successful in exporting manufactured goods than agricultural products. These sets of simple statistics shows that trade barriers have been more effective in stifling agricultural exports from the developing economies than manufacturing economies.”

Some developing countries including China and other Asian countries made successful places in global trade scenario particularly in manufacturing goods trade. On a particular example, China overtook the US as the world’s largest exporter of advanced technology products like laptop computers, cellular phones and digital cameras (Das 2007, p: 23). India is another country where liberalisation gave ample growth opportunities and also helped to boost its economy. The services, mostly IT and ITES sectors in India became the best biggest in the world through globalisation (Batra and Khan 2005).

The perspectives of developing countries

The developing countries on the other hand were more worried about the idea of a free trade system. They were of the opinion that the free trade might destroy their existing industries and in turn might even affect the entire economies. One of the main concerns was that the local industries which have no experience of competing in the international arena or with international brands would break-apart when immediately the borders are opened and the international brands with their heavy-weight marketing and strategies compete with the local brands. Another concern was that the farming and agriculture in general have huge influence in their economies, both with the size of the production and with the number of people working on the sector. So the developing countries were more sceptical to any changes which could affect the agriculture, as there were too much pressure.

Doubts about the genuineness of the developed world countries

One of the main concerns of the developing countries is that they think they might just be used by the developed countries. Anjaria et. al. (1998) talks about the concerns raised by the developing member countries during trade negotiations. “The main concerns are that they considered the developed and industrial countries did not observe the principles of GATT declaration to make determined efforts to resist protectionist pressures and avoid measures inconsistent with GATT principles. Some of the developing countries feel that the developed countries are not doing justice to them”

When they open their borders for free trade they might be overwhelmed by a large number of incoming businesses that might gradually eat into and destroy the home-grown businesses. They also are worried that the developed countries keep tariffs in sectors where developing countries have any chance of competing. This is more evident in farming or agriculture where developing countries argue that the developed countries provide unjustifiable rebates.

Need for a developing country bias

In his paper, ‘a developing country view on liberalisation of tariff and trade barriers’, Meller (2003) is of the opinion that there should be a developing country bias to really achieve the expected growth. He says that “trade liberalisation helps growth through two different mechanisms; it generates a better environment for private investment and it simulates exports”. But then he goes on to ask, why should these developing countries liberalise service exports and protect intellectual property when LDC exports of goods having comparative advantage to developing country markets do not face a levelling field?

Held et. al. (1999) says that there is an inconsistency in the developing country economic argument. On one hand it is recognised that the exports are a key tool for the development. On the other hand, developing countries maintain trade barriers to significant products which developing countries could export. As a result, in the Doha development agenda, the key issue should be to find what rules will maximise the rate of development particularly for the developing countries. For this, there should be a developing country bias, mainly because of two reasons. First, developing Countries have the most significant markets given the high purchasing power of its population. Second, the increased access to other developing countries is through two distinct mechanisms; unilateral trade liberalisation process and free trade agreements (Meller, 2003, p: 2-4).

Political issues

One of the reasons why some of the developing countries were sceptical to implement the trade liberalisation was because of being politically correct. The farmers are one of the main vote bank sectors. So it is important to keep them happy and satisfied. There were concerns about farming sector being destroyed completely by the importing of various agricultural products (Held et. al., 1999). The opposition parties would be easily utilise the opportunity. This has led to the governments take a stand against the liberalisation.

Das (2007) says that “unquestionably the largest cost of not exploiting the external sector as an engine of growth and of non-participation in the multilateral trade regime was in terms of deterred GDP growth. The ultimate result was that while developing countries protected their own markets they had to accept high trade barriers against their most competitive exports in the large industrial country markets. The developing countries found this strategic stance on international trade politically convenient”. When the government finds it difficult to convince the people of the policy implications and also when their very own existence is on the verge of jeopardy, their decisions are easily influenced.

Government funding

Bouet (2008) talks about some negative impacts of free trade and says that the openness in trade might lead to negative outcomes. According to him, “the decrease in import duties might reduce custom revenues so the government’s public revenues may be cut and government transfers can shrink” (Bouet, 2008). This might have an impact on government’s available funds which could be used for economic development and growth. It is really critical to have enough government funding available in case of an emergency situation.

The IMF study points out that the “Genuine trade liberalization must eventually result in reduced trade tax revenues and, hence, will raise difficult fiscal issues if appropriate steps have not been taken to strengthen the domestic tax system” (IMF staff, 2001b). Another important point to consider is how the free trade will impact on the import of goods and services and how that might affect the economy within the country. “Cutting trade barriers in a country increases import competition which implies reallocation productive factors and entails adjustment costs and short-term risk” (Bouet, 2008).

Structural adjustments and liberalisation

The structural adjustments of the economy and the role of government intervention to adapt to the competitive forces play a major role in shaping up the trade policies. Anjaria et. al. (1998) says that “failure to adapt to shifts in demand, technological change, and improved productivity generate protectionist pressures which unless resisted, are translated into progressively restrictive trade policies. Policymakers have long recognised this link between open trade policies and the promotion of adjustments.”

Thus, the GATT rules permit protection of national industries through tariffs rather than quantitative restrictions. Successive trade negotiations between member countries mostly aimed at lowering this protection and in turn increasing the exposure of economies to foreign competition (Das, 2007). There is also another proposition in the GATT rules which permits the member countries to impose temporary and non-discriminatory restrictions to tackle unforeseen difficulties faced by domestic industries as a result of the previous trade liberalisation. Anjaria et. al. (1998) points to a central problem to liberalisation that is “how to define the appropriate role of government intervention in promoting more efficient resource allocation through the use of tax policies government subsidies, antitrust legislation, labour legislation and government ownership of production facilities.”

The effectiveness of liberalisation in boosting growth and alleviating poverty

Bouet (2008) points out “terms of trade can be negatively affected, either because import prices increase or export prices decrease from more severe competition in export markets”. Anjaria et. al. (1998) is also conscious about the effectiveness of the liberalisation in boosting growth and to alleviating poverty. Bouet (2008) also talks about the “the positive relationship between trade liberalisation and poverty is based on the predominance of agricultural activities in developing countries. But not all developing countries have a comparative advantage in agriculture and not all poor people are engaged in agricultural activities”. So if agriculture is not a predominant sector of the economy the performance of the country might not be that good.

Conclusion

As we saw in the study above, there are various contrasting perspectives among developed and developing countries. The developed countries are mostly supporters of the free trade and they want complete free trade without any barriers. They are also hopeful of benefiting from the liberalisation through multinational industries and better production technique. At the same time their view is that the developing countries could benefit from the free trade. When they move to products or services which give them a comparative advantage, they will be more competitive and their economy will grow better. The agriculture which is a major sector of economy in majority of developing world will also benefit from better market in the developed world and better remunerations.

The developing countries on the other side are more sceptical to opening their gate for free trade. They are worried that the foreign multinationals will eat into their home market and might eventually destroy their home grown companies. They preferred a more or less take it slow approach in the beginning. But there are good examples in the form of countries like India, China and South-Asian countries where their economy boosted as a result of liberalisation and free trade. They are also worried that the developed world are giving more support to the farming sector and do not allow the agricultural sector in the developing world to compete with them.

Even when there are conflicting interesting and varying perspectives, most of the countries are more or less agree to and support free trade policy. Mostly it is the implementation that creates a conflict. But the implementation of these is not easy and reaching at an agreement is the key to achieve a free trade economy. The Doha round discussions made good progress on reaching at an agreement between various parties. More discussions are the way forward in reaching at more beneficial conclusions.