What is the role and impact of trade in developing countries

Subject: “How realistic is free trade in the real world?” Critically examine the competing perspectives about the role and impact of trade in developing countries”. Explain why you might be pessimistic about the prospect for global growth and development in the future?.

The history of free trade is a history of international trade focusing on the developments of open markets and it is common to hear that today’s world economic system as being “free trade” or “globalization”. Theoretical rationalization as to why a policy of free trade would be beneficial to nations developed over time. Free trade agreements are established to enhance free trade of goods and services, in the belief that they will bring beneficial for all parties involves and lead to further economic develop and growth. But in realistic in real world it is not benefits for developing countries. That make many recession and pessimistic for growth of global in the future.

Free trade is a system in which goods, capital, and labor move freely between nations, without barriers hinder the trade process. Many countries have free trade agreements, and many international organizations promote free trade between their members. A number of barriers to trade are removed in a free trade agreement (taxes, tariffs, and import quotas, subsidies and other forms of support to domestic producers), restrictions on the flow of currency are also lifted. Put simply, free trade help foreign companies to trade efficiently, easily, and effectively as domestic producers. There are many free trade agreements around the world, some of which have come into being after much controversy, protest and debate such as:

WTO- The World Trade Organization is an organization that intends to supervise and liberalize international trade.

NAFTA -The North American Free Trade Agreement. The goal of NAFTA was to eliminate barriers of trade and investment between the US, Canada and Mexico.

APEC- The Asia-Pacific Economic Cooperation is a forum for 21 Pacific Rim countries (styled “Member Economies”) that seeks to promote free trade and economic cooperation throughout the Asia-Pacific region.

AFTA- ASEAN Free Trade Area is a trade bloc agreement by the Association of Southeast Asian Nations supporting local manufacturing in all ASEAN countries.

CAFTA- The China- Asean Free trade area. Touted as the world’s biggest Free Trade Area.

In realistic, free trade between equal partners may be mutual benefits. But between a strong country and weaker or between a developed country and a developing country, the developed country tend to get more benefit as they have the capacity to sell whereas the developing country in unable to make use of the increased market access.

This is so even in agriculture, where developing countries have comparative advantage. After the North American free trade agreement (NAFTA) was signed, Mexico increased exports fruits and vegetables by 50% to the US. But Mexico also increased imports tripled for corn and over 500% for soybean, wheat, poultry and beef from the US. It can see that Mexico’s agricultural imports increased more than its exports, so 1.7 million rural jobs have been lost. The reason is very simple, after NAFTA’s signing, Mexico reduced its tariffs to zero but the US still did not reduced its subsidies and many agriculture product of the US could sell at lower prices than the production cost. Thus the US’s agriculture product swamped the Mexico market. Similar, Australia could not get extra sugar quota in free trade agreement with the US (AUSFTA- The Australia- United States free trade agreement). On beef, it only obtained 18.5% increased in its quota, confined to manufacturing grade beef spread over 18 years or extra half a cow/farm/year. And, in free trade agreement with china (CAFTA- China- Asean free trade area), from 2005 to 2008, Indonesia increased imports by over 150% from china and exports to China increased by around 77%. Moreover, the growth of Indonesians exports to China was mainly driven by raw materials, such as mineral fuels and ores, while the growth of Indonesian imports from China was due to increasing Chinese manufactured goods, ranging from electronics/electrical products and iron/steel products to furniture and textile items.

Besides, between the developing countries and developed countries, explicit barriers especially Tariffs have come down but countries find other ways to block goods from other countries, if they are trying to protect domestic jobs or something like that. Or if there is some industry group that has political power and can get special protections for their business. Developed nations tend to do this for labor intensive goods which is exactly what many developing nations are trying to export. Recently Vietnam has faced barriers for selling shoes to the EU, and catfish to the United States. Anti-dumping taxes have been imposed by the US Department of Commerce on Vietnamese frozen catfish exports to the US since August 2003. Vietnamese exporters will be charged at the rate of 63,88 per cent on catfish exports to the US. The decision was made on the basis that American catfish producers claim that Tra and Basa fish imported from Viet Nam were being sold below market rates. Vietnam has proven that it was not dumping catfish, and the tariff will lift for Vietnam on March 21, 2011. But Vietnam has to face with the new tariff for selling shrimp to US until 2016.

For developing countries, instability of domestic economy increases from international trade and economies depends on global trade. Economic of America and EU go down, it would be very hard for developing countries to recover. For instance, recession in the USA led to the increase in unemployment in USA and decrease demand for Australian exports, leading to falling export incomes, lower GDP, lower incomes which leads to lower domestic demand and increased unemployment in this country. From the financial crisis in USA in 2008 which was caused by real estate bubble and under-standard lending operation with the consequence of high inflation and unemployment, lower growth. Massive action in money in the US creates pressure on US dollar, this makes US dollar depreciate against other strong currencies (EUR and Yen), which reduces competitiveness of exports of these countries, forcing the government of these countries to depreciate the domestic currencies by expanding money supply. This leads the “currency war”, causing turbulence in the currency markets and international trade, increasing inflation and restricting the consumption, lower production, lower income and decreasing growth rate of the economy, pushing back the process of the global economy recovery. As a result of the financial crisis in 2008 (the credit crunch for poor households and a decline in housing price), unemployment in USA increases strongly (8.9%) and is predicted not to improve in 2011. According to FED, the growth rate of USA is forecast about 3.4%-3.9% while the prediction of unemployment rate is from 8.8%-8.9%. Economists calculate the growth rate gains 5%, which reduces the unemployment by 1%. This means that it’s difficult for America to reduce the unemployment rate in the near future. This is also the main reason causing personal consumption declined. Consumer spending, which accounts for 70% of the US economy, will be hampered by unemployment when the need to save more. Moreover, deficit situation is estimated to gain 1,480 billion USD in 2011, equivalent with 9.8% GDP of this country (Financial Times), the highest deficit level in the history. However, the USA government still has no action to improve this situation but keep easing monetary policy. In Europe, public debt crisis is the most serious problem in these countries. As a result of global financial crisis, nations fell into deficit state due to borrowing to cover for their spending so much. But the main cause is still the excessive spending and inappropriate financial policies that lead to this situation. Firstly is the rescued package of IMF and EU of 110 billion EUR to save Greece from default threat, next is 85 billion EUR for Ireland and accompanied with tight monetary policy as increasing tax which Ireland has advantage to gain strong growth over past years, reducing spending and saving 15 billion EUR in 4 years to lessen the budget deficit rate from 32% to 3% with GDP. This threat of public debt crisis can spread Spanish, Portugal and even Italy. Unemployment increases highly in these countries. But one question is raised that when rescued packages expire, whether the effort of IMF, EU and the government can prevent default of many nations and banks. With the total public debt can increase about 100% in the early of year 2014 in Europe, economic growth only gained 2% in 2010 and 1.5% in 2011 and unemployment rate can rise up to 8.3% (Vietnam Plus). The ability of collapse of common currency in this area may occur if this state is not improved. With the approximate rate of 20% global GDP from now to 2014, EU plays an important role in the world, if there is any breakdown in EU, it will be a detrimental consequence for global economy. In Asia, excessive growth in China leads to strong increase of inflation with predicted CPI is 10% and inflation rate is 5% in 2011 (Chinese Statistic Department). Real estate market developed excessively, landing price went up strongly, the landing price in some places increased more than 20 times, even 100 times from the original price. Furthermore, the ease of fiscal and monetary policy with excess in issuing money leads to depreciation and high inflation, which raises the primary commodity price. Not for China, inflation tends to increase in other Asian countries. In the next year, to prevent inflation, the governments need to have tight monetary policies. If the money supply is tightened so much, it can lead to slow growth. But if keeping ease monetary policy, it can cause more inflation and leads the economy to overheat growth. One problem in developing countries is that fluctuations in the currency market is also creating macroeconomic instability threat even more detrimental to recovery process global economy

So it is easy to see that economics of some developing countries may fall into recession and growth of developing countries will slow in 2011 and in the next few years. And the growth of global economy will growth very slow, according to World Bank predicts growth of global economy is at 3.3% in 2011 and 3.6% in 2012. Moreover, the recent Japan’s disasters (Earthquake and Tsunami) cause a big loss for the world economy in the short term. Japan is the place attracting the majority of FDI to some regions in Asia. Japan is the most important trade partner in Asia. Therefore, trade between Japan and other countries in the region will decrease strongly in the short term, accompanying with high inflation, the growth rate of Asia will slow down. Moreover, the economy of America will also be affected by Japan’s disaster. Export occupies by 10% GDP of America in which exports to Japan occupy by 5%, so this detriment on the USA economy is not small (Info TV). This calamity also affects the countries which have big export turnover to Japanese market. One threat of the global inflation is that the increased oil price due to instability of Middle East and Africa, anxious psychology of violent prospect spreading out everywhere, the oil supply can’t meet the recovery of the world economy, big demand of imported fuel of China and India (CNN, Foxnews). Economists worry about the possibility of the oil price increasing in some years, which causes a big pressure of increased price for most commodities in the world, decreasing the global growth, increasing inflation. That is reason why might be pessimistic about the prospects for growth and development in the future.