Politicians and economists have all along been advocating for free trade, which they point out will guarantee that resources reach out to consumers at lower costs. Developed countries, especially Europe, are reaching out to African countries with the aim of signing an economic partnership agreement (EPAs) (Mankiw, 2009, p.549). An economic partnership agreement is ideally purposed towards the facilitation of equal access to markets in the African countries. The agreement is meant to allow free international business between African countries and Europe.
International business is beneficial to participate in countries in many ways. First, it allows a nation to be able to import products that are not produced locally. In this arrangement, a country can focus on producing products that are more viable due to say the availability of raw materials and labor. By focusing on what it can do best, the country builds a competitive edge in international trade. Zeroing in on what can competitively be produced improves efficiency and effectiveness in international trade engagement.
The major hindrance to free trade has been whether a liberalization approach can be beneficial to poor nations. The poor nations do not have a similar competitive advantage as the developed nations. They have poor political, social, economic, legal, and technology structures. They also suffer from high unemployment levels and low capital, which makes them less competitive in international trade. Opening up their markets to products and services from developed nations has more cons than pros for the poor nations. This paper discusses how poor nations are disadvantaged in the transacting free trade with developed nations.
Most developing nations have been pursuing economic development by concentrating on the inward trade-oriented policy. This is a trade policy where a nation closes its borders and tries to limit international business interaction with foreign nations. The move is meant to protect domestic industries from foreign firm competition. To achieve this, poor nations develop policies that impose tariffs and trade barriers to foreign firms (Mankiw, 2009, p.567).
A common call to developing nations today is to embrace an outward business policy that is meant to link the countries to the world market and attain rapid development. The objective is to enable the country to find market to what it produces in large quantities and import what it does not produce locally. By eliminating trade barriers, developing nations can benefit from the technology of the developed countries in the form of trade.
Mankiw (2009, p.568) points out countries such as Singapore, South Korea, and Taiwan, which attained rapid economic development as a result of adopting outward policy. Most of the poor nations are small in size, they do not have the potential to produce goods and services that sufficiently caters for their general populations.
Applying inward policy would mean their populations are accessible to insufficient products, which are expensive due to the high cost of production. Developed nations have state of the art production means, which lowers the production costs as well as the cost of the products. It is widely agreeable that poor nations are bound to benefit by adopting free trade. It is worth noting that developing nations lack a competitive advantage to wrestle out for a market share with the developed nations.
Developing nations need to levy tariffs on incoming goods to earn revenue for economic growth. Furthermore, tariffs are a legitimate source of revenue to the government and a way of promoting health business transactions between nations. Elimination of tariffs means that the products would gain undue advantage over similar products produced locally. When this happens, local companies are exposed to the high competition that makes them lose market segmentation. Tariff revenue can be used by the government to secure jobs for its citizens by investing the revenue in various sectors of the economy. The call by developed nations on developing nations to adopt economic partnership agreements (EPAs) is one-sided.
Developed nations enjoy what Smith Adam refers to as an absolute advantage over the developing nations (Hufbauer & Wong, 2004, p.19). Developed nations are more efficient in the production of various products, they have well-advanced technology in comparatively, and this enables them to produce most of the products at a relatively cheaper cost. When the relatively cheaper products are allowed to flood the markets of developing nations, domestic industries can be driven to closure due to lack of market. As domestic industries close down, those initially employed in the industries lose their jobs (Trapp, 2009, p.108). Developed nations are driving at maintaining stable jobs for their citizens by seeking to expand markets for the products produced in their countries.
Developed nations have set stringent standards for goods from poor nations to access markets in the developed nations. For example, agricultural produce from African nations is only accepted if they were grown under organic agriculture. These stringent measures are measures work to block products from poor nations reaching the markets of developed nations (Kelly, 1988, p. 75). This creates an imbalanced trade between the developed and poor nations; poor nations can not meet the standards because of financial constraints. Poor nations experience more social and development problems, which are a priority to them than struggling to meet the trade standard issues (Trapp, 2009, p.109).
Capital flow in developed and developing nations is another factor to consider. Developed nations are readily accessible to capital to invest for development and sophisticated production. Developing nations depend on the speculations by investors; they invest capital depending on the viability to get back returns (Baldwin, 2006, p.26). Many of the poor nations have internal political problems that scare away potential investors. The result is that they are forced to rely solely on capital from within, which is not enough to compete effectively with developed nations. Developed nations stand to benefit more from this relationship in which they will be able to access international markets, sell their products, and make more returns for reinvestment.
Most countries that are now ranked among developed nations did not open their borders free to international trade in the beginning. The countries started by setting high tariffs as a measure to protect domestic industries first. After attaining good levels of industrialization, the countries then opened up to international trade. This was after they were well aware that their economy could compete favorably at international levels in terms of trade (Swedberg, 2006, p.79). Opening to global competition with a weak economic base is equated to exposing oneself to the dangers of extinction. It would be beneficial for poor nations to relate in trade with nations that are relatively at the same economic levels rather than with highly developed nations.
The mercantilism model brings favors export as an advantage over importation (Jackson & Sørensen, 2007, p.182). Countries that have attained a surplus in manufacturing aggressively explore markets in less developed nations. Poor nations have deficits and are rated as weak countries according to mercantilism theory (Jackson & Sørensen, 2007, p.184). These weak nations, according to the model, need some sort of protection, just like weak persons would need protection against injustice (Laidi, 2007, p.187). Developing a regulated trade relationship is also seen as a form of maintaining political sovereignty. There is a lot of political interference from foreign nations when a nation opens up its borders to free trade. Developed nations tend to dominate over developing nations, directing them to make policies that favor developed nations’ trade interests.
Laïdi (2007, p.187) points out that trade relations result in losers and winners; in this case, poor nations are losers. They need protection against the loss, and this is achieved through trade barriers and. Comparative theory advanced by David Ricardo indicates that countries stand to benefit when they relate in trade and especially if they specialize in what they can do best (Brakman, 2006, p. 64).
Mankiw (2009, p.56) alludes that for two nations relating in trade, the benefits can be shared equally if their trading price is rated between their opportunity costs. This is not the case between developed and poor nations, unfortunately. The trade price between developed and poor nations does not lie mid-way of each opportunity cost; it is higher for developed nations and lowers to the poor nations (Hufbauer & Wong, 2004, p. 23). In view of this imbalance, the conclusion points to a raw deal for the poor nation that are opening up their borders for free trade.
Comparative advantage theory emphasizes that countries specialize in producing what they can at a small opportunity cost (Mankiw, 2009, p.59). What is expensive to produce should be imported from other countries; this creates the need for countries to rely on one another for trade through imports and exports. It should be noted, however, that trade relations can only be beneficial to both nations if there are regulations and tariffs. Without these checks, developed countries will benefit more than the poor nations. If this type of relationship is maintained, poor nations will remain poor as the rich continue top develop. Developing nations
The Heckscher- Ohlin model supports this argument pointing out that production alone is not enough to rate how countries can compete in trade (Swedberg, 2006, p.76). The factor variation aspect must be considered because countries vary widely in factors of production and how they are applied (Suranovic, 2006, p. 61). The factors of production considered include labor, land, and capital; developed countries enjoy the best of each of these factors of production. Considering labor as a factor of production, for example, it is a fact that countries vary in technology. Technology is utilized to improve labor productivity; poor nations apply poor technology, which reduces labor productivity. It is on these differences that international trade is based, such that best-placed countries produce a surplus and direct the surplus to poor nations’ markets.
Since their markets are already saturated except for a few products and services, their poor import nations are restricted. Land, which is also a factor of production, is not utilized productively due to the lack of appropriate technology. Farming activities in poor nations are still dependent on weather elements such as rain and temperature. Developed nations use technology to control the environment under which crops are grown if there is no rain; for example, irrigation is used to grow crops.
Poor nations struggle to raise their industries to the competitive levels of those in developed nations with difficulty. Poor nations lack a national competitive benefit that derives the growth of local industries. Porter developed a model that describes the aspect of the national competitive benefit (Krueger, 1995, p.23). In his model, local demand for products produced by the local industries counts a lot on how fast the industry grows. Local support to industries is significant in driving the industry to greater growth potential. Demand for products enables the industry to convert her stock into revenue required for re-investment. Local industries also need the support of industries dealing in similar products for them to develop fast. For example, industry manufacturing steel products should support local steel mining industries rather than importing raw materials from other nations.
Poor nations can not compete effectively with developed nations in trade. Developed nations have sophisticated technology that enables them to produce products at a relatively lower cost than developing nations. Developed nations, especially Europe, are encouraging African nations to sign economic partnership agreements, meant to allow entry of African products into the foreign markets and vice versa.
The tricky part about these economic partnership agreements is that the developed nations have set stringent standards or requirements to be met before the African nations are able to access their markets (Baldwin 2006 p.17). This is an imbalanced trade scenario that can not benefit the participating nations equally. Capital flow in developing nations is low, mostly dependent on the speculation of the investment climate by investors. Investors tend to shy away from developing nations due to political instability and corruption.
International trade can benefit poor nations if poor nations apply appropriate regulations. Levying tariffs on imports will give poor nations revenue needed to grow the economy and protect their local industries from foreign competition. Protecting local industries from external completion helps in keeping and creating more jobs for the citizens (Krueger, 1995, p.29). High competition from foreign companies can cause the closure of local companies leading to loss of jobs. The issue of free trade is one-sided and ideology by developed nations to seek markets for their products in developing nations. It can only benefit developing nations unless appropriate regulations are strictly observed by the engaging parties.
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