Free trade Essay

The progress of science has brought nations and states far closer contact with one another than they were in past centuries. The communication of intelligence throughout the world is instant, so that the daily happenings of the whole world appear within twenty-four hours in the papers of the principal cities in all countries. By mass media a man’s thought is carried instantly to the four corners of the earth. Travel by aircraft between the most distant countries requires less time than was needed two centuries ago for a journey of a few hundred miles. Stability and external activity of the nations, and the growing facilities of rapid communication, trade and travel, have greatly multiplied the contacts of the nations with one another, and as a consequence have greatly complicated the problem of the fair adjustment of their various interests and of the maintenance of peace among them.Developing transport and communication systems produced new political and economical order – globalization. Globalization is easier to describe than to define.

This is because, in its present form and usage, it is a new, complex, dynamic, multidimensional, and worldwide phenomenon, which means different things to different people and different things to the same people across time and space.It is also seen through ideological prisms as being associated with capitalism or what George Soros calls “market fundamentalism (laissez-faire), liberalism, and Western democracy.” 1Globalization most often refers to the growth of transnational politics, the integration of the world economy, and a subsequent blending of cultures around the world. While there might be remote areas still untouched by free trade, television, or migration, the scope of globalization’s impact is by definition global.

There are few regions of the world unaffected by the global flows of investment, tourists, pollution, people, crime, and so on. The thrust of globalization theory suggests that global forces will eventually influence even the most remote ‘corners’ of the globe.As the primary engine of globalization, capitalism drives the movement of people, the exploitation of resources, the opening of markets, and the diffusion of technology. Capitalism extends commodity chains across the planet in search of the lowest price for labour, the greatest expertise, the cheapest materials, and the largest markets.

12 But capitalism has been a globalizing force for centuries.13 One novelty of the current experience of globalization is found in technological advances in media and transportation that generate a heightened awareness of the world filtered through the international media and commodity culture.15As the 1990s came to a close and the new millennium began, the WTO became the leading international symbol for or against globalization. Yet, ten years before, nobody had ever heard of the WTO, and only academics and senior trade officials, mainly in industrial countries, paid much attention to its predecessor, GATT.

Today, no serious discussion on globalization is complete without a close examination of the role of this controversial organization and its impact on the global economy, different regions and countries of the world, and ordinary citizens. This chapter begins by providing the history, mission, structure, and governance of the WTO. It then looks at the relationship between the WTO and developing countries, focusing on current issues important for developing countries.Like most international organizations, the WTO owes its origins from the time immediately after World War II when the Allies were creating new institutions for a world order that would promote peace, reconstruction, and development. At the time, a suggestion was made for the creation of an international trade organization, but opposition from the U.

S.WTO member countries as of November 2001 (the end of the fourth Ministerial Conference in Doha, Qatar). It also lists thirty-seven countries that sent observers to the conference and fifteen countries—the isolates—that stayed away. The list of members is testimony to the support the world community has given to the WTO as an agent of globalization.

The WTO represents mainstream countries of the world: big and small, rich and poor, from all continents, races, creeds, and cultures. Most of the nonmembers are former Communist states such as Russia, Vietnam, Cambodia, North Korea, and Yemen; Islamic states such as Saudi Arabia, Libya, Iran, Iraq, and Syria; and post-conflict states such as Bhutan, Tuvalu, Micronesia, and East Timor. Overall, these countries make up a small fraction of the total global economy and world population. Most of the observer countries listed in Table 1 are actively taking steps to join the WTO.Although most of the world trade takes place among the developed countries within the Organization for Economic Cooperation and Development (OECD), the European Union (EU), and the North American Free Trade Agreement (NAFTA), developing countries are increasingly becoming significant players both as exporters and as potential markets for the developed countries.

In the 1990s, ten years after the end of the Cold War and the opening up of various economies of the world for developing countries, the average ratio of exports of goods and services to GDP grew to over 21 percent. For most of these countries, trade and investments provide the best and most sustaining opportunity to alleviate poverty among their citizens and to catch up to the developed countries in terms of wealth creation, income generation, and rising standards of living. According to the World Bank, abolition of all trade barriers would boost global income by U.S.

$2.8 trillion and lift 320 million people out of proverty by 2015. 2 This is more people out of poverty than foreign aid, in general, and U.S. Agency for International Development (USAID), in particular, has been able to lift since the end of World War II. Indeed, the future of globalization may well depend on the world community’s ability and willingness to manage global trade and investment for the benefit of all nations and all their citizens.Free Trade is the main device of  globalization. Development economics in the 1950s provided intellectual justification for the dirigisme course that political leaders in developing countries began to chart at the end of World War II; in the 1960s, that course was altered in a number of countries with unexpected success, and true to form, “academic scribblers” came forward to demonstrate that what works in practice also works in theory.

Taiwan, South Korea, and thereafter, a growing number of countries demonstrated that removing some, but not all, trade restrictions and other impediments to exporting led to higher growth rates. What Taiwan and Korea discovered by trial and error became christened the “export promotion strategy,” and since then it has achieved the status of orthodoxy in development policy circles.The export promotion strategy does not rule out import-substitution as an appropriate strategy in the early phase of industrialization, and it is consistent with selective import-substitution in later phases.The export promotion strategy is not to be confused with a free trade strategy, which implies equality of effective exchange rates for each and every branch of industry, not just equality on average for broad aggregates of import-competing and exporting industries.

3Table 2 presents the similarity indices in import markets for 1971 and 1987. An interesting result is that in 1987 one-third of Canadian value of exports to the United States is matched by Mexican exports in the same product classification. Furthermore, the similarity index increased from 16 percent in 1971 to 34 percent in 1987.

This reflects that Mexico’s economic structure is becoming more similar to that of Canada. Therefore, after the establishment of NAFTA, Canada would face relatively more competitive pressures from Mexico and would lose some market share, as a result of trade diversion, in the U.S. market. Under North American economic integration Canada would have to adjust to a new trading environment and thus would incur significant transitional adjustment costs. As Walter Russell Mead has argued, “low wages in developing countries contribute to a weakness of global demand and . . .

this weakness in turn undermines political support for the multilateral free trade system.” 16The country studies have received less attention than they deserve also because their results are difficult to summarize. Nonetheless, they do clearly establish that changes in policy, especially policies affecting a country’s ability to participate in international trade, lead to changes in economic performance. The validity of these findings has sometimes been denied on grounds that protectionism is pervasive even in fast-growing, export-oriented countries, like Korea ( Wade, 1988).4 This has led to an endless debate about whether the protectionism cup in exportoriented countries is half full or half empty, which is entirely beside the point since all that the empirical evidence purports to show is that reducing the level of protection and elevating the role of trade raise the rate of growth. It could be inferred that going further toward a policy of free trade would yield an even higher growth rate, but that is not necessary to make the point that classical cum neoclassical principles, especially that of comparative advantage, are relevant to developing countries.The evidence for the recent period is of two kinds: studies of trade and industrialization in individual countries over time;5 and cross-country studies of the determinants of growth.

6The key problem is how to measure a country’s openness to trade. The level of protection is impossible to measure precisely when quantitative restrictions are used alongside tariffs. Attempts have been made to classify countries as relatively open or relatively closed according to various criteria, but they are inevitably arbitrary. Cross-country differences in level of traded-goods prices have been interpreted as a measure of openness, but there is always doubt that the goods whose prices are being compared internationally are sufficiently similar to make the comparisons meaningful (Barro, 1991)7.

The alternative is to use an ex post facto performance measure, such as the share of trade in gross national product (GNP) or the rate of growth of exports, as a proxy for openness, but this approach inevitably encounters an identification problem.Trade orientation refers to a country’s attitude toward trade and thus to the role played by trade in the economy. To determine whether a country is outwardor inward-oriented, such a role must be related to a theoretical, or a priori, standard. When this is done, trade orientation can be gauged in terms of deviations of actual from expected outcomes.Given that trade orientation will presumably depend on such factors as the physical, economic, and human attributes of a country (size and endowments of land, capital, and labor) and the relevant policies being followed (trade regimes and incentives pro or against tradable output), the standard that should logically be used to evaluate a country’s trade orientation (and to compare it with others) is the trade expected on the basis of its factor endowment and size, under conditions of free trade and neutrality of price incentives to the production of goods.But there exists some opposition against globalization in national governments. Another example of this contraposition is the one between free trade and protectionism. Nowadays several economists tend to differentiate between the short run and the long run and among periods, countries, and sectors and consider the cost-benefit balance between the two lines of policy.

As in all economic questions, here, too, there is a problem of optimum, although a presumption in favor of free trade seems to be justified. The presumption is particularly strong in the case of machinery and equipment, for the reasons discussed previously.Protectionism exists to preserve and maintain nation’s unique cultural heritage in economics.

Other provisions concerning government procurement were intended to serve as an impetus for the “multilateral liberalization of international government procurement policies to provide balanced and equitable trade.” The FTA also established dispute settlement procedures intended to provide effective and expeditious dispute settlement procedures, which included use of binational dispute resolution panels. While each country would continue to apply its own antidumping and countervailing duty laws to imported goods, a new procedure provided for a special binational panel to review appeals.

Trade orientation, therefore, is not the same as openness. Any measure of openness that simply conveys the actual weight of trade in the economy of a country is, strictly speaking, an inadequate indicator of trade orientation. It is an ex post measure and does not differentiate between the determinants of trade orientation. Openness indicators cannot therefore characterize accurately and unambiguously the attitude of a country toward trade.8 For these reasons the standard openness ratios cannot be used to adequately classify countries into more or less outward-oriented at any given time.9Openness, for example, may be large because factor endowments allow in practice the production of only one tradable good, whose proceeds go to finance all needed imports, regardless of the trade regime, which can be restrictive, and of price incentives, which can be nonneutral.

A small, oil-based economy with high import (and export) duties for revenue purposes and an overvalued real exchange rate would approximate this situation. Similarly, openness may be small despite a country’s varied factor endowment and liberal trade regime, if production of tradables does not receive sufficient incentives from prices. In both cases the trade orientation of the country would, strictly speaking, be inwardlooking, despite high openness in the first and low openness in the second.As a result, the new protectionism is politically stronger because it accommodates a broader range of interests. Where earlier forms of protection created vested interests in the importing country only, the new protectionism has built up almost equally strong vested interest on the export side as well; paradoxically perhaps, discrimination has become the means of making certain export industries interested in continuing protection. For all these reasons the new protectionism will be much more difficult to roll back.They were to be technical forums in which the issues of monetary and trade relations would be dealt with on their own merits, apart from “high foreign policy” considerations, “with trade issues travelling along their own track, not interfering with traffic elsewhere.

” 10An international order in which all or many aspects of international relations become embroiled in every particular question will soon lose its capacity to dispose of problems. Indeed the main impression from the conduct of trade policy in this most recent period is that it is not motivated by a need to dispose of problems. It prefers to nurse them, perhaps out of need to keep its large staffs continuously employed. The antitrust implications of export restraints, for example, bring into focus a curious symbiosis of two large bureaucratic establishments in contemporary democratic governments. One, the antitrust establishment, is trying to enforce competition at home; the other, the trade policy establishment, is trying to stop it at the border. They are busily making work for each other, taking in each other’s washing.Besides, while arguing over the extent and the mechanism of monetary cooperation, the Bretton Woods negotiators had a common philosophy about the basic principles implied by an open society. Money had a primary role to play if free trade beneficial to all countries could ever be recovered.

Stable exchange rates were the key, not to repeat the errors of the interwar years. But they could no longer be achieved by a binding rule of gold convertibility. Collective action was in the intellectual mood of the new era. It had to be secured under the guidance of an international institution operating on behalf of the mutual assistance of its members.

Also we are going to said about the problem of the fair price. The solution of this problem thus calls for a determination of the cost of production, the amount of the investment, and the fair rate of return. Let us first consider the situation as to costs, making as we proceed certain comments on price-making as based on costs of production.

The problem of the “fair price” is solved by Proudhon’s theory of synthetic value–that is, the value of a product based on the labor time which is incorporated in it. The production cost in labor time is the absolute norm which should determine the price (or exchange value) of the product, and not the relative standard of supply and demand. But, Marx objects, if the value of a product is determined by the labor time required to produce it, then it also follows that the value of labor itself, if measured by wages, is determined by the labor time required to produce the wages. By valuing labor in terms of wages, Proudhon in effect treats labor as a commodity and thereby subjects it to the fluctuations of supply and demand. “Labor, inasmuch as it is bought and sold, is a commodity like any other commodity, and has, in consequence, an exchange value.

” 11Assuming that Labor and Capital are partners, and that the fruits of industry are their joint product, to be divided fairly, there remains the question: What is a fair division? The answer is not simple–the division can never be absolutely just; and if it were just to-day, changed conditions would make it unjust to-morrow; but certain it is that the injustice of that division will always be greater in proportion as it is made in a spirit of selfishness and shortsightedness. Indeed, because of the kaleidoscopic changes which the factors entering into the production of wealth are always undergoing, it is unlikely that any final solution of the problem of the fair distribution of wealth will ever be reached. But the effort to devise a continually more perfect medium of approach toward an everfairer distribution, must be no less energetic and unceasing.It is at this point that the great importance of a return to a basis of justice and complete comprehensibility in the theory and practice of taxation begins to appear. The problem of production will never be solved until the problem of the fair distribution of the wealth produced is also solved, and its solution fully comprehended and approved, not merely by the citizen in his capacity as taxpayer but also by him in his capacity as trade-unionist. To be sure, policy disagreements are always part of international trade diplomacy, but the intensity and rigidity of these recent deadlocks have raised questions about whether the WTO’s internal decision-making process–in particular its long-standing practice of consensus decision-making–can any longer function well enough to permit the WTO to operate effectively in the new and enlarged setting.

World society trends to maintain developing countries through free trade.TABLE 1World Trade Organization MembershipMembers (142:72.5%)AlbaniaAngolaAntigua and BarbudaArgentinaAustraliaAustriaBahrainBangladeshBarbadosBelgiumBelizeBeninBoliviaBotswanaBrazilBrunei DarussalamBulgariaBurkina FusoBurundiCameroonCanadaCentral African RepublicChadChileChinaColombiaCongoCosta RicaCôte d’IvoireCroatiaCubaCyprusCzech RepublicDemocratic Republic of the CongoDenmarkDominicaDominican RepublicEcuadorEgyptEl SalvadorEstoniaEuropean CommunityFiji IslandsFinlandFranceGabonGambia, The GeorgiaGermanyGhanaGreeceGrenadaGuatemalaGuinea, Republic of Guinea-BissauGuyanaHaitiHondurasHong KongHungaryIcelandIndiaIndonesiaIrelandIsraelItalyJamaicaJordanKenyaKirgiz RepublicKoreaKuwaitLatviaLesothoLiechtensteinLithuaniaLuxembourgMacau, ChinaMadagascarMalawiMalaysiaMaldivesMaliMaltaMauritaniaMauritiusMexicoMoldovaMongoliaMoroccoMozambiqueMyanmarNamibiaNetherlandsNew ZealandNicaraguaNigerNigeriaNorwayOmanPakistanPanamaPapua New GuineaParaguayPeruPhilippinesPolandPortugalQatarRomaniaRwandaSt. Kitts and NevisSaint LuciaSt.

Vincent and the GrenadinesSenegalSierra LeoneSingaporeSlovak RepublicSloveniaSolomon IslandsBrazilSouth AfricaSpainSri LankaSurinameSwazilandSwedenSwitzerlandTaiwanTanzaniaThailandTogoTrinidad and TobagoTunisiaUgandaUnited Arab EmiratesUnited KingdomUnited StatesUruguayZambiaZimbabweObservers (37:18.9%)AlgeriaAndorraArmeniaAzerbaijanBahamasBelarusBhutanBosnia and HerzegovinaCambodiaCape VerdeComorosEquatorial GuineaEritreaEthiopiaHoly SeeKazakhstanLao, People’s Democratic Republic ofLebanonLiberiaLibyaMacedonia, Former Yugoslav Republic ofRussian FederationSamoaSan MarinoSão Tomé and PríncipeSaudi ArabiaSeychellesSudanTajikistanTongaUkraineUzbekistanVanuatuVietnamYemenYugoslavia, Federal Republic ofIsolates (15:7.6%)AfghanistanEast TimorIranIraqKiribatiMarshall IslandsMicronesiaMonacoNauruNorth KoreaPalauSomaliaSyriaTuraluTurkmenistanNote: Members as of November 2001 (the end of the fourth Ministerial Conference, Doha, Qatar). Observer governments at the conferences and isolates were not represented at the conference. China and Taiwan became members at this conference.

The numbers in parentheses indicate total number and percentage of total, respectively.Source: Based on information from and www. 2Indices of Similarity* of Exports; Exporting Countries of Import Countries, 1971 and 1987ExportingCountries                                                        Importing CountriesCanada           Mexico            United States1971    1987    1971    1987    1971    1987                                               (per cent)Canada/ Mexico                     –           –           –           –           –             -Unites States/ Mexico            12        13        –           –           –             -United States/ Canada           –           –           21        21        –             -*The total exports have been adjusted to remove the scale effect. See J. M.

Finger and M. E. Kreinin [ 1979]. “A Measure of Export Similarity and Its Possible Uses.” The Economic Journal, pp. 905-10 (Dec.).Source: Statistics Canada, The World Trade Data Base, 1971-87.

Reference List1.      Soros, G. 1998, The Crisis of Global Capitalism, Public Affairs, New York.2.      See World Bank, World Bank Press Report (Washington, DC: World Bank, November 7, 2001). Even Oxfam, a London-based international nongovernmental organization traditionally opposed to globalization, has grudgingly accepted that trade offers poor people better opportunities for poverty alleviation and sustainable development than foreign aid. The report also points out that current rules of international trade and the behaviour of the developed countries work against the trade interests of developing countries and transition economies.

“Nontariff barriers raise the average of EU barriers against poor countries from 5.1 percent to 9 percent.” See Oxfam, Rigged Rules and Double Standard (London: Oxfam, April 10, 2002).3.      Bhagwati, J. N. 1988, Protectionism.4.

      Wade, R. 1990, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton University Press, Princeton.5.      See, for example, Little, Scitovsky, and Scott ( 1970); Balassa ( 1971); Donges and Riedel ( 1977), Bhagwati ( 1978); and Krueger ( 1978).6.      See, for example, Balassa ( 1978); Barro ( 1991); Dollar ( 1990); Feder ( 1983); Jung and Marshall ( 1985); Michaely ( 1977); Ram ( 1985); Salvatore ( 1983); and Tyler ( 1981).

7.      Barro, R. J. 1991, ‘Economic Growth in a Cross-Section of Studies’, Quarterly Journal of Economics (May).8.      Leamer, E.

E. 1988, Measures of Openness. In Trade Policy Issues and Empirical Analysis, University of Chicago Press, 147 20, Chicago.9.      Pritchett, L. 1991, ‘Measuring Outward Orientation in Developing Countries: Can It Be Done? Policy’, Research and External Affairs Working Paper, No. 566, World Bank, Washington.10.

  Cooper, R. N. 1973, A Re-Ordered World, Potomac Associates, Washington.11.  Marx, K ; Engels, F.

, 1927,  Historisch-Kritische Gesamtausgabe, Frankfurt am Main.12.  McMichael, P.1996, Development and Social Change: A Global Perspective, Pine Forge Thousand Oaks, CA.

13.  Gunder-Frank, A. 1978, World Accumulation, 1492–1789, Monthly Review Press, New York.14.

  Wallerstein, I. 1974, The Modern World System, Academic Press, New York.15.  Gray, J. 1998, False Dawn: The Delusions of Global Capitalism, Granta Books, London.

16.  Mead, W. R. 1991.

The Low-Wage Challenge to Global Growth: The Labor CostProductivity Imbalance in Newly Industrialized Countries, Economic Policy Institute, Washington, D.C.;