How Free Trade Disadvantages The Poor Nations
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How Free Trade Disadvantages the Poor Nations
Free trade is the process of liberalizing the market from any government intervention. Under the policy of free trade, all economic resources from all the countries involved are subjected to price; reflecting the forces of demand and supply. This makes price the only determinant for the allocation of resources (Fawzy, 2002; pp.12). Free trade involves characteristics such as tax free and non-barrier kind of trade, free labor movement between the involved countries, free capital movement within the countries involved, free capital movement between the involved countries, and free market accessibility. According to Bernanke (2013; pp.32), free trade seeks to ensure similar playing rules for competition, although it does not automatically ensure fair competition for the involved parties. This means that as much as free trade may create equal or similar business environment, the poor countries will still be disadvantaged because their private sectors, which are relatively weaker are left to compete with stronger and bigger companies (Hall, 2012; pp.39). The countries may be put under equal or the same regulations but the capabilities of the players are certainly not the same or equal. It is like a football match where two teams play in a level playing field but one team has better capabilities that can not be matched by those of the other team.
Free Trade is blamed for the idea of Western Capitalist Nations surging ahead and leaving behind the poor third world nations. This is because the poor countries do not have the infrastructure, technology, and the ability to complete with countries that have free enterprise and a tradition of deregulated markets. As a result, free trade becomes harmful to poor countries because the rich nations will not accept to trade with the poor nations, but rather with other rich countries. The poor countries are consequently condemned to complete poverty. This means the free trade is only beneficial to the economically powerful nations. The situation is worsened by the fact that the governments of the rich nations refuse to promote trade with the poor nations, thereby making the citizens in the poor nations worse off (Weinstein, 2005; pp.57-8). On the other hand, governments of the poor nations also refuse to promote trade with the poor nations, thereby making the citizens in both nations worse off. This scenario implies that the controlling force, which is the intervening state actor, disrupts the mutually beneficial action brought about by voluntary trade. A view presented by Schiff and Winters (2002; pp.82) asserts that free trade is not harmful to the poor countries, but it is the lack of proper trade caused by governments of both the rich and poor nations that makes the poor countries remain in their wretched poverty.
It has been observed that rich countries like the United States impose tariffs and subsidies aimed at discouraging its citizens from importing better and cheaper products from the poorer countries. Rich countries may open up its markets for free trade but decide to place massive subsidies, thereby disadvantaging the goods from the poor countries. The poor countries also open up their markets for free trade but they become very vulnerable to the highly subsidized export goods from the rich countries (Weinstein, 2005; pp.67-8). This has an implication that as much as the poor countries strive to trade with other countries, they get sidelined by the rich nations, making them remain in their original state of poverty. Since 1945, international trade has shown that unfettered global market tends to fail the poor and full trade liberalization also brings huge risks and not provides the desired outcome. Allen (2011; pp.78) asserts that it has often been observed in the past that developing countries whose economies have successfully expanded are those that have strived to put in place policies aimed at protecting its industries while they get the strength and provide the communities with time and opportunities to expand into new areas of operation.
While most economists agree that, in the long run, free trade perform better in aggregates than the closed economies, many observers on the other hand fear that free trade harms poor countries. For example, African countries have experienced great improvements in trade and market liberalization in the past decades. But Africa is still the world’s poorest continent. It is most likely that the expected large gains from involvement in international economic activities have been greatly limited in Africa, particularly for the poor (Schiff & Winters, 2002; pp.88). Several research works have been conducted to determine if trade really reduce poverty and the connection between trade liberalization and poverty. The findings shows that trade reduce poverty but only under specific conditions. It can only benefit countries that have deep financial sectors, high education levels, and strong governance. The three dimensions (education, finance, and governance) reflect an economy’s ability to properly reallocate resources; to move the resources away from sectors that are less productive to those that are more productive. This consequently gives countries the ability to take advantage of any opportunity offered by free trade (Allen, 2011; pp.125).
Many developed countries however meet the conditions stated above and are for that matter positioned to exploit the available opportunities offered by free trade (Jin, 2011; pp.95). On average in the developing countries, while the financial system is deep enough and education level is high enough, the institutions in those countries are generally very weak and can not benefit from free trade. Some countries, worse still, do not meet the three conditions sated above. According to Grinblatt and Titman (2011; pp.143) the developing countries need to formulate strategic policies designed to promote trade power for economic development. Inadequate institutions and policies, limited financial development, and weak human capital are not only unhealthy for a country’s welfare but they also make the poor become held up, thereby denying the low income individuals of the developing countries the benefits that come as a result of free trade. Other researchers also argue that the benefits of free trade are never automatic; they rather depend on well formulated policies. The policies should however be aimed at financing new investments, effective conflict resolution, and the ability to learn and adjust to new skills (Steger, 2013; pp.54-5). The policies should also enable the reallocation of resources away from sectors that are less productive to sectors that are more promising. Trade liberalization should for this matter not be viewed in isolation.
As much as open trade agreements between developed and developing countries may be highly beneficial, especially in situations where barriers to trade exist, the question remains how the poor countries can increase higher literacy levels, a functioning credit market, and government policies that can enforce contracts. This is the only way that can make them benefit from free trade. In most cases, the trade agreements only open up the weak states to highly predatory trade policies that only hurt the poor but benefit the existing power structures (Grinblatt & Titman, 2011; pp.81). For the poor countries, free trade often has the meaning that the benefits from trade are not usually distributed to the country’s infrastructure, education, or to any other activity that promotes redistribution of resources to raise the country’s poverty level. It rather tends to fund the individuals in power (either a business community or the government leaders). In addition, corruption is likely to diminish investor confidence, thereby decreasing the benefits of free trade since the revenue does not get distributed throughout the country.
If a state is weak, the individuals in power can easily negotiate and manipulate trade contracts to only benefit themselves, rather than benefiting the whole country. Steger (2013; pp.61) says that most developing countries have very weak governing structures and poor political ideologies that promote the existence of corruption and embezzlement of funds, thereby making the developing countries remain in the state of poverty. It is important to note that trade only occurs when countries exchange resources (Jin, 2011; pp.101). Most developing countries lack structural or human resources (literacy, contract reliability, credit system) to enter into any trade agreement with other nations that are well endowed. This drives the rich countries to initiate trade with other rich countries, thereby leaving the poor countries in the cold. According to Grinblatt and Titman (2011; pp.71), all trade agreements are not that good. Most trade agreements can not be said to be “free trade” because they are associated with limitations and restrictions. In addition, if the governments involved in the trade agreements have poor domestic economic policies, trade can not help in any way, it only opens up the country to potential economic fluctuations, thereby harming it from outside. This implies that for trade to be effective, certain conditions must be put in place. According to Reinhart and Rogoff (2009; pp.54), one of the greatest dampers to the poor countries is the western agricultural subsidies that tend to prevent the farmers in the developing countries from producing. The import tariffs in the developing countries are likely to force the domestic resources to move towards inefficient industries. If the whole world had free trade in agricultural sector, the poor nations would be better off. For example, studies show that if the US and Europe removed their import quotas and farm substitutes, total financial flows coming into Africa in just a year would be much greater than all the foreign aid, public and private, that has ever come into the continent.
In conclusion, it is without doubt that international trade plays a very significant role in tackling the problem of poverty. In terms of income and revenues, trade has the ability to be more important than the debt or aid for the developing countries. The only problem is the inability of the countries to set up strategic policies that would help the developing countries benefit from the trade. The World Bank has stated that if the rules set up by the rich countries for international trade could be reformed, over 300 million people would be moved out of poverty. This is because the international trade rules are often rigged against the poor countries. As much as the rich nations would be willing to open up markets, they would still put in place huge subsidies, which often work against the poor nations. Poor countries normally suffer when they involve in free trade due to the “expensive” and “unfairness” nature of the free trade agreements.
References
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