FREE TRADE CAUSES NEGATIVE SIDE FOR DEVELOPING WORLDS

(Writer: Ine Ventyrina, Lecture/Government Employee of Indonesia Department of Education)

(Personal Number: +6281396534624, Email: ineventyrina@ymail.com)

Free trade’s virtues have been praised for three hundred years. By allowing every country equal access to all markets, the theory says, you guarantee the most efficient allocation of resources and the cheapest prices for consumers. This means reducing tariffs, and quotas, and other forms of protectionism that prevent countries from trading goods freely. Can such a theory work in practice? Specifically, can it help the world’s least developed countries provide themselves with a better quality of life? Western liberal rhetoric says it can, and points to international institutions such as the World Trade Organization to promote free trade of goods, and the World Bank to provide credit for development projects. However, so long as the West continues to protect its own agriculture and industries from the international market – such as through the European Union’s Common Agricultural Policy, or the United States of America’s bailout of its steel industries – its position is arguably hypocritical, which jeopardizes a full embrace of free trade around the world. This debate centers on the benefits, detriments, and practicality of free trade.

 

1. Free trade jeopardizes countries’ security.

    a. Point

If a country goes to war with one of its trading partners, it needs to have the capacity to produce all of the necessary tools for war domestically, and not depend on other countries for supplies and parts. Additionally there is fear that disease-causing agents and bioterrorism can enter countries through the trade of poorly inspected food1. For reasons of national security it makes sense to retain the capacity to produce what is necessary to win a war and to protect the domestic population. This is one of the reasons why countries—such as the US1—like to protect their agricultural industry. Free trade is a threat to global security. For countries to stay safe, they need to retain some protectionism in their international trade policy.

1George W. Bush, “Homeland Security Presidential Directive 9: Defense of United States Agriculture and Food,” U.S. Department of Homeland Security, accessed July 15, 2011.

b.      Counterpoint

Marian Tupy of the Center for Global Liberty and Propensity states, “In the history of the world, no country has ever suffered military defeat, or capitulated to sanctions, due to the inability to produce a domestically producible product”1. Globalization also means there are many partners to trade with, so even if a country is at war there are plenty of options of other countries from which to buy necessary products.
1 The Industrial College of the Armed Forces (2008), “Industry Study”, National Defense University,

2.  Free trade hurts the world’s poor.

     a. Point

Free trade creates demand for extremely cheap products produced by poor people in terrible conditions in third world countries. In Indonesia, there are people working in sweatshops for 60 cents an hour1. It is estimated that there are 158 million child workers around the world2. Free trade creates demand for the products produced by this modern day form of child and adult slavery. The governments of the countries where this takes place do nothing to improve the working conditions. Sweatshops are produced by free trade and demand for cheap goods, and the way that workers are treated is inherently wrong. Therefore free trade is not a force for global betterment, but instead hurts the cause of the poor and their standard of living.

1 Krugman, Paul (1997), “In Praise of Cheap Labor”, Slate.com,

2 UNICEF, “Child Labor”,

      b. Counterpoint

Sweatshops are unfortunate, but free trade can benefit from cheap labor without relying on exploiting workers. Economically, cheap labor is a step in the right direction for poor countries and their people. Making 60 cents an hour in a factory that exports goods is better than 30 cents an hour working in the field, trying to feed a family in Indonesia1. Paul Krugman explains that sweatshops allow the poor to get jobs, and manufacturing development has a ripple effect on the rest of the economy and its development. Taiwan and South Korea, and even the US, went through this type of industrial development and it is better than the alternative, which is failed farming or dependence on aid1. If workers are being exploited—which is different from being paid low wages that are actually good by the standards of the country—then that should be regulated by governments, but that in no way infringes upon free trade.

1Krugman, Paul (1997), “In Praise of Cheap Labor”, Slate.com

 

3. It is just to protect industry and jobs.

      a. Point

When countries dump their products in other markets without barriers, they undercut the ability for local industries to compete. If those local industries try to compete, large foreign or multinational companies can use extremely low predatory pricing to make it impossible for the smaller industries to break into the market. The fully developed industries in rich countries are almost impossible for poorer, still developing economies to compete with. If they are not given the chance and have to compete with large international industries from the beginning, domestic industry in poor countries will have a hard time. The overall economic development of the country will thus be inhibited1. Additionally, competition can cost jobs, as industries become less profitable and labor is outsourced, so there is reason to retain protectionism as countries put their economic health first. For example, America has long protected its steel industry, as in 2002 when it adopted a controversial 40% tariff, because it was thought that competition put 600,000 jobs at risk2. Since 1977, 350,000 steel jobs have been shed, so these tariffs are justified3. Countries should put their economies and jobs first and therefore protectionism is warranted.

1 Suranovic, Steven, “The Infant Industry Argument and Dynamic Comparative Advantage”, International Economics,

2http://www.commondreams.org/views02/0307-05.htm “> Flanders, Lauren (2002), “Unfair Trade”, CommonDreams.org,

3 Wypijewski, JoAnn (2002), “Whose Steel?”, The Nation,

     b. Counterpoint

Even with tariffs the steel industry in losing jobs. Nothing can save steel. It simply does not operate as effectively as other global steel industries. Further, protectionism helps a small group of workers, the rest of American industry that is dependent on steel for their operation is hurt by high prices and inefficient production1. Protectionism puts the good of the few above the rest. Additionally, the WTO was created to ensure that dumping does not happen. The problem with infant industry is it’s hard to determine when to start the transition away from protectionism, and often it never develops fully. For example, Brazil protected its computer industry and it never was able to compete even past the infant industry stage2.

1 Lindsey, Brink and Griswold, Daniel T. (1999), “Steel Quotas Will Harm US”, CATO Institute,

2 Luzio, Eduardo and Greenstein, Shane (1995), “Measuring the Performance of a Protected Infant Industry: The Case of Brazilian Microcomputers”, Review of Economics and Statistics,

4.  Implementing true free trade is unfeasible because it is unreasonable.

     a. Point

An increasing number of countries are looking to bilateral Free Trade Agreements that will help them specifically. They are not directly open to free trade with all countries. These FTAs are undermining the position of the World Trade Organization which is meant to push countries towards economic liberalization1. Countries have no reason to start trading freely with everyone, if they already have FTAs with the most beneficial trading partners. The Doha round seeks to reduce trade barriers in industry and agriculture has been going on for ten years, but there is still no agreement. Disputes are becoming more common when it comes to trade. In 2009, there was a dispute over the US putting tariffs on Chinese tires that has created tension in the trade relationship between those two countries2. Considering that the WTO countries have been debating the Doha round for ten years, it is unreasonable to think that countries are going to adopt free trade policies with the whole world. It is much more likely they will concede to bilateral free trade agreements that specifically help themselves. Since it is unlikely for free trade to become a universal policy it is not beneficial for all countries.

1 Meltzer, Joshua (2011), “The Future of Trade”, Foreign Policy Magazine,

2 Bradsher, Keith (2009), “China-US Trade Dispute Has Broad Implications”, .

       b. Counterpoint

Opening up in FTAs is the first step towards liberalization in the larger sense and opening up to all free trade, so it should not be considered a failure. Additionally, free trade needs to balance international and domestic goals so coming to an agreement is difficult, but the WTO has been successful in the past. The current problems with the Doha round do not spell the end to the WTO or free trade1.
1Meltzer, Joshua (2011), “The Future of Trade”, Foreign Policy Magazine,

 

Disagree Opinions

1.      Free trade creates substantial cooperative relationships between trading partners.

a.      Point

There has long been a debate as to whether aid or trade is more effective in promoting development and cooperative relationships. Being interlocked through trading relationships decreases the likelihood of war. If you are engaged in a mutually beneficial relationship with other countries, then there is no incentive to jeopardize this relationship through aggression. It leads to more cooperative relationships because trading partners have incentives to consider the concerns of their trade partners since their economic health is at stake. This promotes peace, which is universal good. In 1996, Thomas Friedman famously pointed out that no two countries with a McDonalds—a sign of western liberal economic policies—have ever gone to war together.1 Academic studies have shown that this is specifically a result of free trade. In 2006 Solomon Polachek of SUNY Binghamton and  Carlos Seiglie of Rutgers found that the last 30 years have shown that economic freedom is 50 times more likely to reduce violence between countries than democracy2. Erik Gartzke of Columbia University rated countries’ economic freedom on a scale of 1 (least free) to 10 (most free). He analyzed military conflicts between 1816 and 2000 and found that countries with a 2 or less on the economic freedom scale were 14 times more likely to be involved in armed conflicts than those with an 8 or higher2.  Aside from war, free trade also solidifies countries’ alliances. For example, the US wants to begin a free trade relationship with South Korea to create a concrete partnership that will ultimately lead to greater cooperation3. Free trade promotes global connections and peace and therefore is a beneficial force.

1Thomas Friedman, “Foreign Affairs Big Mac,” New York Times, December 8, 1996

2http://www.csmonitor.com/2006/1120/p09s02-coop.html/(page)/2

3http://www.nytimes.com/2010/11/11/world/asia/11prexy.html

b.      Counterpoint

Free trade is the economic policy that many liberal countries—who are less likely to go to war with each other—have chosen. It’s not the policy that makes them liberal. These studies show such a strong correlation, because the countries that have chosen free trade are largely a huge block of countries that already get along, particularly the EU countries and the US. These countries already have the productive relationships necessary for peace. And history has shown that those relationships can be fostered without resorting to free trade. For example, for many years after World War II, Japan protected many national industries, but it was a peaceful country with a productive relationship with the West. Therefore, the costs of free trade are not necessary to achieve that benefit since it can be fostered under different conditions.

1Paul W. Kuznets, “An East Asian Model of Economic Development: Japan, Taiwan, and South Korea,” Economic Development and Cultural Change, vol. 35, no. 3 (April 1988)

2. Free trade promotes global efficiency through specialization.

    a. Point

Operating at maximum productivity is one of the most important aspects of an efficient economy. The right resources and technology must be combined to produce the right amount of goods to be sold for the right price. Therefore all markets should strive for highest efficiency. In order to maximize efficiency in the international economy, countries need to utilize their comparative advantage. This means producing what you are best at making, compared to other countries. If Mary is the best carpenter and lawyer in the US, but makes more money being a lawyer, she should devote more of her time to law and pay someone for her carpentry needs. Mary has an absolute advantage in law and carpentry, but someone else has a comparative advantage in carpentry1. Comparatively it makes more sense for someone else to do the carpentry, and for Mary to be the lawyer. It is the same in the international economy. Countries can be more efficient and productive if they produce what they are best at based on their domestic resources and populations, and trade for other goods. This promotes efficiency and lower prices. Free trade enhances this. The Doha round that is currently being debated in the World Trade Organization would reduce trade barriers and promote free trade, economies of scale, and efficient production of goods. It is estimated that the Doha round would increase the global GDP by $150 billion alone just by promoting free trade2. Free trade leads to specialization and efficient production, which ultimately would increase the size of the global economy and the individual economies in it.
1 Library of Economics and Liberty, “Comparative Advantage”,

2 Meltzer, Joshua (2011), “The Future of Trade”, Foreign Policy Magazine,

     b. Counterpoint

For countries that are dependent on their resources and lack developed industries, free trade does not promote efficiency. Free trade makes them overly dependent on their resources, which other countries are coming in and buying. This is because their domestic industries cannot compete with those of the developed world, so they have difficulty fostering sectors besides raw goods. They are forced to rely on supplying materials, rather than being able to build innovative industries. That does not offer efficiency, it just suppresses economies. For example Nigeria is dependent on oil for 95% of foreign exchange earnings and 80% of their budget money1. Trading oil is not making it a more diversified, sophisticated economy.
1CIA World Fact Book, “Nigeria”, CIA,http://en.wikipedia.org/wiki/Comparative_advantage

 

3. Free trade reduces poverty.

     a.  Point

Free trade reduces poverty for two reasons. First, it creates direct “pull up” as Columbia economist, Jagdish Bhagwati calls it because it creates demand for a country’s good and industry and thus employs the poor and expands jobs1. Additionally it creates more revenue for government that can be directly targeted towards anti-poverty programs. Independent research Xavier Sala-i-Martin at Columbia University estimates that poverty has been reduced by 50 million people in the developing world during the era of free trade, since 19871. Hong Kong, Singapore, South Korea, and Taiwan have been liberalizing trade for the past 40 years and have not suffered from one-dollar-per-day poverty in the last 20 years1. If agricultural subsidies were removed from developed countries, food would become more expensive as there would be fewer producers, and poor farmers would have a better shot at competing and making a living. Free trade promotes the necessary monetary flow and demand for goods to increase jobs and sustainably grow an economy to reduce poverty. Prices are lower, more products are available, and the poor are able to achieve a higher standard of living.

1 Panagariya, Arvind (2003), “Think Again: International Trade”, Foreign Policy Magazine,

      b. Counterpoint

Therefore, there is no empirical evidence that proves that poverty is reduced. If countries removed all agricultural subsidies domestic production would decrease and world food prices would increase. Poor countries that import food will suffer from increased food prices due to trade liberalization. 45 of the least-developed countries on earth imported more food than they exported in 1999, so there are many countries that could be severely harmed by increasing food prices1.

1 Panagariya, Arvind (2003), “Think Again: International Trade”, Foreign Policy Magazine,

4. Free trade promotes growth in all countries.

     a.  Point

Through global competition, specialization, and access to technology, free trade and openness allow countries to grow faster—India and China started in the 1980s with restrictive trade policies, but as they have liberalized they have also improved their growth enormously1. The International Trade Commission estimates that a free trade agreement between just Colombia and the US would increase the US GDP by $2.5 billion2. When industries have to compete with competition around the world, they are pushed towards innovation and efficiency. Entrepreneurs are more productive if they have to compete. Free trade increases access to technology which also increases overall development. Because of free trade, prices are lower for everyone. Trade offers benefits to both developed and developing nations by encouraging competition, efficiency, lower prices, and opening up new markets to tap into.

1Panagariya, Arvind (2003), “Think Again: International Trade”, Foreign Policy Magazine

2White House (2010), “Benefits of US-Colombia Trade Promotion Agreement”

      b.  Counterpoint

Although free trade may promote innovation and growth, because of issues like dumping (where rich countries sell their products very cheaply in poorer countries and make it impossible for local industry to compete), or jobs being exported to places where labor is cheaper, free trade has significant costs and does not necessarily foster benefits for all. It is necessary to grow infant industries and create jobs, and free trade hurts both.

 

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