Trade liberalization seems to have increased growth and income through lower price, advanced inputs, technology sharing and access to various infrastructures. However, these gains have been appeared as inverse in case of low-income countries. Great thinkers like Milton Friedman, Adam Smith, David Ricardo, Heckscher- Ohlin and others advocate for free trade.
Such great thinkers claim that all those who are involved in trade gets benefited.
They argue that free trade provides benefits some of them are mentioned below:
- Trading countries will get benefit from competitive advantage.
- Consumers will have variety of choices and can get benefit from low price.
- Free trade provides access to the international market.
- Optimal use of relatively abundant resources and then export and import of scarce resources. This creates win-win situation for country which has abundant resources and country which has scarce resources.
- Involvement in free trade agreement is considered as crucial factor for economic growth and can increase productivity.
- Involvement in trade creates huge dynamic for business environment.
Besides these pros, there are other advantages that trading countries can gain from free trade. As the protection is removed, domestic and local industries will have the motivation to become global competitors. There will be huge possibility for capacity of specialization and economies of scale. Lowering the government spending as after the agreement the funds that are assigned as subsidies will be put to better use. International investors will increase which will add capital to expand and boost the domestic businesses i.e. increase in foreign direct investment.
It allows the global firms to access and explore the domestic business opportunities. And it provides local firms knowledge about new methods and ideas. Also local firms will have access to the latest technologies that the international firm partners produce. Technology sharing is another advantage of free trade. As local economies grow, more job opportunities will be created. A restriction in trade creates lots of space for corruption and misconduct. Opening up to trade provides equal playing ground which will help to lower the corruption. More than these, relation between trading countries are built strong and likelihood of war is reduced.
However, we cannot just look at the brighter side of the free trade agreement. Obviously there are cons of free trade. There are some disadvantages that free trade brings in with it. They are mentioned below:
- Increase in job outsourcing. It is a business practice where certain job functions are done outside a company instead of in-house department and employees. Free trade allows companies to expand in foreign country which is also considered as cost cutting measure. But this has huge affect in jobs of employee and results in the reduction of workforce.
- It directly affects the local and small producers. When tariffs on imported goods are reduced foreign suppliers will reduce their prices. When this happens, local businessman also has to reduce their prices to compete but doing so is often hard. And normally a consumer will not pay higher price for the same kind of good. And eventually, the domestic producers have to back off and step out from the market.
- Free trade has led workers from poorer countries to work longer hours and live in dreadful conditions. The workers are paid lower and are forced to work longer hours because they have to send money to their families. There are many cases of labor abuse in countries like China, UAE, Qatar, India, Saudi Arabia and others that have been spotted.
- Free trade has huge impact on employees as the treaty offers business to do somewhere else or shut down many workers will be displaced leaving them unemployed or paid very low wages.
- Free trade harms the environment and adds pollution. With the increase in competitions in order to cut the cost, companies do not provide proper sites and ways of dumping waste materials which results in leaving negative externalities for the environment, people and whole nation.
- Free trade is not fair agreement. As barriers to trade might create more chances for corruption. But also free trade agreement creates opportunities for such misconducts. Such free trade agreements are arranged and discussed terms by various political leaders in terms of their self-interest and motives. It creates huge loopholes in the document making the agreement just a medium of exchanging business interest.
It is clear that free trade and competition is essential in order to develop a healthier world economy. However, critics argue that while openness to trade and globalization has become a positive driving force for the economic growth, it is the haves that are getting better off. While the costs and disadvantage of such agreement has to be bear by the have not’s which cannot be considered as positive economic growth. The cost has to be endured by millions of poor people and workers of developing countries.
The concept of free trade differs according to the context, size and condition of a country. In theory no one has doubted about the advantage of international trade. But what holds in reality and practicality cannot be ignored. The developed countries are already well off, its developing countries whose picture should be taken into accounts. Especially countries that are in the lower stage of development have to bear huge amount of disadvantage of free trade. They have to share bigger proportion of bitter experience of international trade.
The following points are mentioned to support the argument presented on this essay.
- Crowd out domestic industry
Many low-income countries revenue is based on agricultural products. There are small farmers that cannot compete with big multinational agri-businesses. So, they lose their farms which results in unemployment, crime and poverty.
Degradation of natural resources
Establishment of MNC’s in low-income country is mostly beneficial for the country that establish it not the host country. They exploit the available resources in order to gain maximum profit and promote their business worldwide. Natural resources like coal, minerals, oil and others are irreplaceable. Excessive use of such resources ends up drying the source. And the host country has to bear all the cost of such losses.
- Destruction of native culture, handicrafts and cottage industries.
- Increase in dependency of foreign goods and services
- Countries that sales the primary commodities and buys the manufactured commodities in return are always the losers.
- Environment and labor abuse.
- Increase in the imports of harmful drugs and luxuries. For example: opium in China ruins the health of the nation. Importing automobiles and smart phones has huge impact in the economy of a country. For such incidence, the accountability should be put on international trade which brings them into the country.
- Trade rivalry leads to war and friction.
- Reduced tax revenue
Tax is a medium of revenue generation for the government of low-income country. Such revenue is then spent on country’s welfare project and developments. Reduction in such revenue results in reduction of development plans which eventually means less economic growth. low-income countries has to struggle because of such depletion.
Hence, opening up to free trade has been harmful to low-income country like Nepal as it increases dependency on foreign goods and services. Its effect can be seen at difficult times of war when the country is cut off by enemy action. For example Nepal during the blockades that was posses by India. Such agreements will not allow a country to seek for alternatives and optimum utilization of the available resources. Protectionism should be applied to the low-income countries so that they can explore alternatives, can use their available resources in effective way, identify their strengths and weaknesses and can stand as an independent nation.