Poor Countries Could Not Possibly Benefit From Free Trade

| January 16, 2020

Title: Poor Countries Could Not Possibly Benefit From Free Trade

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Introduction

A poor country is characterized by lack of exports, lack of different forms of capital, high unemployment rates and lack of educational and class mobility opportunities. A poor country suffers from perennial balance thro payment deficits and her populace lives at the mercy of assistance, financial or otherwise, given by richer countries. Sarup (2005, p. 2) defines a poor country as one “with low level of material wellbeing, where there are many homeless people, underpaid workers, many unemployed people, and many ill people with no access to basic medical care”.

Discussion

Eichengreen (2007, p. 45) defines the international monetary system as the glue that binds different economies together. International monetary systems play a significant role of bringing about order and stability in foreign exchange markets, provision of access to international credit whenever there are disruptive shocks and elimination of problems associated with balance of payments.

The origin of monetary systems can be traced to the development of capital markets. Even before the introduction of money markets and capital markets, other forms of money were still being used. The use of money evolved from very deep-rooted customs as shown by various studies on primitive forms of money such as cowrie shells, cattle, manilas and teeth. The development of money ushered in the switch from barter trade to monetary trade. Barter trade involved exchanging goods for other goods. When money was introduced, it became a new, efficient standard medium of exchange.

Banking was developed before money in the Egypt of the Ptolomies. Early monies were in the form of coins. Use of coins was spread mainly through trade and at times, through military conquests. In many western societies, warfare contributed greatly to development of trade, money and banking. During the American Revolution, paper money was a major causative factor as well an important means of financing all trading activities that transformed a divided country into today’s world superpower.

The forces of globalization and capitalism have penetrated almost every corner of the world. However, globalization and capitalism are two different concepts; the former is about the closeness of societies on the global platform while the latter is about the nature of economic structures. Trade at the international level is being facilitated by globalization. However, there are many anti-globalization activists who insist that countries should form regional trading blocs before conglomerating into a global marketplace.

Anti-globalization activists claim that globalization may bring about inflation problems since there is no jurisdiction that can impose and enforce strict laws. However, the issue of free trade tops the list of the reservations of these activists concerning globalization efforts. When 34 leaders of democratic nations of the western hemisphere convened in Quebec, Canada in April 2001, the third summit of the Americas got underway. The main objective of the summit was to make a follow-up on the objectives of the first summit, which had been held six years earlier.

Schott (2001, p. 24) says that the 23 initiatives that had been agreed on during the first summit all dwelt on the steps that needed to be taken in order for progress to be achieved the western hemisphere in the form of democratic values, institutions, prosperity and security. Anti-globalization activists in the western hemisphere believe that the best way to close divide between rich and poor countries is to forge regional trading bloc in the form of free trade areas.

According to Schott (2001) globalization activity is a powerful force that requires new trade ties to be made in order to replace regional agreements. The conditions that triggered the liberalization wave two decades ago are still present. The anti-globalization activists, observes Schott (2001), may have to change their minds and instead, lobby for trade agreements that are compatible with a globalized trade environment.

A free trade area is a trade bloc mainly designated by, a group of countries that have entered into an agreement that allows the elimination of tariffs and quotas on most of the items traded among member countries. Adam Smith invented a case in support of free trade when he wrote The Wealth of Nations two centuries ago. Since then, international economists have been defending the concept of free trade. However, many opponents of free trade have emerged, ranging from mere skeptics to hostile protectionists.

            Adam Smith introduced the law of comparative advantage by asserting that it pays off more for country A to specialize in what she does best compared to country B, although the she (country A) can do everything better than country B does. The argument here is that each country, rich and poor, would benefit a lot from non-coercive free trade, leading to specialization. However, when Nobel Laureate Paul Samuelson was asked by Ulam, a mathematician to mention the most counterintuitive outcome in economics, he chose the theory of comparative advantage.

Samuelson wrote several articles between 1948 and 1949 whereby he argued for what economists today call Factor Price Equalization. At the time of its introduction, this theory was regarded as a theoretical curiosum. Today, it forms a compelling reason for immiseration or the richest countries’ proletariat. Samuelson believes that the argument in the contention over free trade is not about free trade area with poor countries such as Nigeria, Bolivia and South Korea being bad for everyone’s aggregate income; rather, it is about income distribution. Thus, while a country gains a lot from free trade, the poor are immiserized. The poor get a smaller slice out of the pie that is being enlarged on the free trade arena. A classic example is Nigeria and Bolivia.

            The proponents of the idea of The North American Free Trade Agreement (NAFTA) believe that this organization promotes jobs and exports especially in poor countries and will continue to perform these functions in the future. Nader (1993, p. 20) warns that multinational corporations are working under the banner of “free trade” in order to expand their continued control over the global economy. According to Nader (1993), owners of international corporations know that victories cannot be won in state offices, town halls or U.S capitol, such that the only thing they can do is to consolidate democratic power through “free trade” agreements such as General Agreement on Tariffs and Trade (GATT) and NAFTA.

            Poor countries such as Bolivia and Nigeria often find themselves on the receiving end of autocratic practices imposed by over 100 major international trade players who impose regulations through coercive trade practices. Such practices have far-reaching implications on the economies of poor countries, economically, the obvious result of flow of revenue from disadvantaged countries into developed, economically powerful nations, who control more than four fifths of the trade (Nader, 1993).

            Over the 40 years of GATT’s existence, the organization has busied itself with matters of tariffs levied on imported goods. By extending their regulatory power to poor countries’ products relating to agriculture, food and services (banking, insurance, tourism etc), which are the main sources of foreign exchange for poor nations, GATT and NAFTA appeared to be elevating the importance of these organizations in international trade, in order to prevent local, state and national governments from imposing any control in business.

            Many poor countries such as Nigeria and Bolivia are unable to make the best use of the resources at their disposal as a result of technological challenges and inaccessibility of target markets. The trade agreements in which these countries are signatory are crafted in such a way that all nations are given equal power in terms of exploiting trade opportunities on the global platform. This brings about unfair competition, meaning that poor countries start trading “freely” on a point off weakness. The resulting fundamental structural trade-related weaknesses convert competitive advantages into competitive disadvantages.

            Cross-border transactions bring about interdependence among nations. When countries trade with one another at the international level, they are able to create diplomatic ties that form the basis of more mutually beneficial trade agreements. a good example of this scenario is the diplomatic ties formed between poor South Korea and rich U.S, a tie that resulted in the exultation in the status of South Korea from a poor country into a rich country. However, problems arise when the nature of relationships does not always turn out to be mutually beneficial as both countries had envisaged. This often arises when multinationals of country A are stronger financially such that they are able to exploit the benefits of multilateral relationships better than the multinationals that are based in country B. The predatory nature of trade relationships, according to Nader (1993), is responsible the continued oppression of poor countries by rich countries through international trade.

            Meanwhile, there are some fundamental benefits of cross-border trade that should be highlighted, one of them being an increase in sales.  Through cross-border trade, two countries are able to exchange goods and services, leading to generation of revenues, which accrue to the owners of factors of production in either country. Additionally, access to important human and natural resources has been made very possible through cross-border trade. Whenever such resources are exchanged in a manner that is not exploitative, traders on both sides of the border benefit a lot.

            In the course of transacting across the borders, both parties should be aware of cultural, legal and political requirements that are fundamental pillars of cross-border relations. In any case, it is important for all parties to upskill labor forces in order to increase production. They also need to invest in education since this will ultimately lead to increased output for export purposes.

            There are many determinants of cross-border equity flows. Portesa & Rey (2005, p. 269), in a study of international transactions involving financial assets among 14 countries, proposed the “gravity” model in order to explain the that gross transaction flows depend as much on market size in both source and destination countries as on trading costs. They argue that information and transaction information technology always play a very significant role in determining cross-border financial assets exchange patterns. This explains why a poor country such as South country prospered while Nigeria and Bolivia remained poor.

                        According to the Portesa & Rey’s (2005), “gravity” model, distance has to proxy some information costs while other variables represent information transmission, efficiency of transactions and information asymmetry between foreign and domestic investors. In their study targeting 14 countries, Portesa & Rey’s (2005) noted that the geography of information was the main determinant of international transaction patterns, although, they admit, data for the diversification motive could not be strongly supported.

            Porter (1991, p. 112) perceives two problems that are often encountered in the course of efforts to define a truly dynamic theory of strategy; the cross-sectional problem addressing causes of superior performance during a specific period and the longitudinal problem addressing the dynamic process through which different competitive positions are created.

            A close analysis of Smith’s theory shows that in addition to supporting the concept of free trade, it also supports Michael Porter’s theory. Faulkner (1992, p. 120) says that this is because the cross-sectional problem seems to correlate to Adam Smith’s theory of comparative advantage, which is logically prior to all considerations of modern-day cross-border trade dynamics. However, Porter’s theory does not explain the true origin of competitive success. What Porter (1991) explains is only one aspect of the origin of competitive success: the local environment in which firms are based.

            Merchantilism is a theory that describes a nation’s power on the basis of its wealth or capital compared to that of other nations. According to merchanitilism, a nation should accumulate as many valuable commodities as possible while at the same time ensuring that a balance of trade exists, which favors exports over imports. Merchantilism motivated many European nations to engage in colonialism and monopolistic traading activities that ensured that profits made in colonies were repatriated back to the home countries of colonizers. Merchantilism was the first theory of international trade, conceived in the 16th century, according to which, it was in a nation’s best interest to maintain balance of trade surpluses all the time.

            Adam Smith was a fierce critic of merchantilism, and instead, proposed the theory of absolute advantage, in which case, countries should differ in what each of them produces in order to compete effectively. Borrus (1992, p. 12) says merchantilism bred exploitative approaches to international trade, whereby poor countries were providers of natural resources to rich countries who, after manufacturing finished products using these resources, shipped them back to the poor nations to be used as a tool of encouraging consumerism, thereby perpetuating and sustaining the poor status of these countries.

Conclusion

            Both poor and rich countries have an important role to play in international trade. The issue of creation of free trade areas runs counter to that of creation of regional trading blocs. Many protectionists are not as opposed to the idea of creation of an international monetary system as they are to the creation of free trade areas. Multinationals have been accused of using the idea of free trade in order to direct the center of trade influence from sovereign governments to agreements. This claim seems valid considering that multinationals are known to have enormous capabilities of influencing the nature of agreements entered into for their own business-related benefits. It is only fair for international trade regulators to protect poor countries’ economies from being exploited by traders from rich countries. This is the only way that poor countries can benefit from free trade.

References

Borrus, M.1992. Merchantilism and Global Security, Berkeley: Berkeley Roundtable on the International Economy.

Eichengreen, B. 2007. Globalizing Capital: A History of the International Monetary System. Routledge: London.

Faulkner, D. (Ed.) 1992. Strategy: Critical Perspectives on Business and Management, Volume 2. London: Routledge.

Nader, R. 1993. The Case against “free trade”: GATT, NAFTA, and the globalization of corporate power.  San Francisco: Earth Island Press.

Portesa, R. & Rey, H.2005. The Determinants of Cross-Border Equity Flows. Journal of International Economics, 65(2), 269-296

Porter, M. 1991.Towards a Dynamic Theory of Strategy, Strategic Management Journal, 12 (1) 95-117.  

Sarup, K. 2005. Can A Poor Country Become Rich? A Personal Opinion, International Journal of Sustainable Development & World Ecology, 12(4), 1-2.

Schott, J. 2001. Prospects for Free Trade in the Americas, Liberalization and International Economics Journal, 5(2), 23-35.

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