Assignment title: ‘Free Trade is not free in its present form’, discuss, with reference to the international trading system.
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‘Free Trade is not free in its present form
Free trade and free markets are essentially made to make trade easier by allowing the market to balance needs, supply, and demand. Free trade is the agreement to regulate the tariffs Taxes and duties that countries impose on their imports and exports (Amadeo, 2019). Trade is the oldest and most important economic nexus among nations and is central to the evolution of international nations (Gilpin, 1987). The cost of trade goes back to the nineteenth century with the ideas of Adam Smith which was to raise revenue and tariffs to protect domestic producers from foreign competition (Renata, 2019). Smith asserted that trade should be free and nations should specialize in what they could do best so they could become wealthy and powerful but unfortunately, this idea was unrealistic, and the nature of nations possesses attributes of parsimoniousness (Ravenhill, 2005). The countries of the developing world welcome the idea of globalization through free trade but unfortunately, it allows the economic and politically powerful countries of the south to dominate and submerge countries of the weaker and peripheral region of the north (Shah, 2006). The global trade regime is a rule-based political system organized by an international agreement that seeks to promote and stabilize economic exchanges between counties within regulations. Unfortunately, as we see in today's world, countries often restrict these regulations and exchanges as they impose rules and reduce the protectionism of national regulation to promote the stability of their own country (Ravenhill, 2005). In the twentieth century, economic growth allowed domestic sources of revenue to displace the tariff revenue which has diminished the revenue effects of trade while taxation is still a major source of revenue for the political elites and the official bureaucracy of many less developed countries (Gilpin, 1987). Now, in the twenty-first century trade is based on national regulations and international agreement which is regulated by the World Trade Organisation (WTO) (Ravenhill, 2005). This essay will underline the reasons why free trade is not free in its present form by looking at trade theories of the past, free trade in the global market, and free trade versus economic protectionism in today's world.
To understand this essay, free trade needs to be understood. Free trade is the trade of services and goods between two or more countries without tariffs on imports. The reason why free trade is not free in today's society is that countries that have a lower cost of living have exports that cost less (Amadeo, 2019). Many co-operations steal ideas and sell them at a lower price. This is evident with many goods and services one major example today is the makeup industry. China will produce counterfeit makeup stolen from the ideas of major American brands like ‘Urban Decay’ and ‘Too Faced’ and sell them at a lower price. The result of this is that small family firms cannot compete with subsidized agribusiness in developed countries and poorer countries gain aggravated unemployment, crime, and poverty. Free trade also leads to the depletion of timber and deforestation which results in the destruction of natural resources which can be seen in the Amazon Rainforest in Brazil (Amadeo, 2019). Reduced tax revenue in smaller countries leads to a struggle to replace revenue lost from import tariffs and fees. This essay will go through the process of how free trade which is not free results in developed countries getting richer while developing countries stay poorer.
Today we see the ingenuity of government regulators and the establishment of new forms of protection called Non-Tariff measures (NTMs). NTM’s have become more important than tariffs as tariffs have been reduced to promote ‘free trade’. NTMs are replaced instead by mainly developed countries, and in return developing countries are left without tariffs or NTMs making trade much more expensive for them. The implementation of NTM instead of Tariffs are allowed by trade agreement under the General Agreement on Tariffs and Trade (GATT). NTMs have restricted trade in recent decades imputed by the national government (Renata, 2019). To make matters more difficult for developing countries, some governments have international agreements with specific countries which restricts the free flow of international trade anyway. This specific international agreement usually stems from a historical agreement, for example, commercial treaties between kings of ancient Egypt and Babylonia which gave parties the right to exact duties on the merchandise of traders and travelers, and this agreement still exists today in 2019 (Ravenhill, 2005). This shows that developed countries already have a high ground when it comes to international trade which makes tariffs and exchange rates perhaps ‘free’ between certain long-term relationships that countries have developed throughout history and this presents the idea of trade as a diplomatic practice between countries today leaving out less developed countries (Ravenhill, 2019). The first trade tolls were made to regulate the entry of country borders and it has been translated since the eighteenth century to modern-day customs duties. Customs duty is a tax on imported goods and is the main source of revenue for European countries which are developed regions of the world. For the rest of the world, customs duties are used to protect domestic producers from foreign production but this has led to failure in eastern countries such as China and India. This then leads to controversial and cultural effects of trade which impacts the values, ideas, and behavior of a society. This idea arises from the overlapping in bureaucracy in societies that have an inadequate domestic tax base because it is easier for western countries to place direct taxation on outsiders which results in high tariff rates and an increase in the cost of imported goods which ultimately discourages economic advantages from developing countries (Gilpin, 1987).
Free trade intertwines with regionalism which is most important in trade today. Regionalism is the formal process of intergovernmental collaboration between two or more states but the problem arises with the idea of what is a ‘natural’ region as a region is just a social construction. The use of regionalism has increased in the last two years means that there is a reduction in global welfare by distracting the allocation of resources. Regional economic integration has become the integration of association of arrangements between three or more geographically contiguous states. All countries that tend to lie on each other's borders have a better opportunity for free trade (Ravenhill, 2005). The European Union have free trade agreements with twenty-seven countries because they are all close to one another and share a similar history, this is the same for China and Hong Kong trade agreements and also Korea and Chile. This all results in the scrutiny of WTO committees on RTA’a because they labeled these free trade agreements ‘regional’ which they are not and thus neglecting the third world countries due to economic reasons and not regional. In order to prevent this, the WTO created transregional relations to link countries in different parts of the world. Minitel relationships include the North American Free trade agreement (NAFTA) and ASEAN Free Trade Agreement (AFTA). The most important example of a transregional relationship is the Asia- Pacific Economic Cooperation (APEC) which links the United States to twenty-one countries outside of America but still is connected to wealthy countries such as Singapore and Jordan (Ravenhill, 2005). It is more obvious that regionalism is being used in trade for economic means with the result of political ends. There are multiple examples of this as the failure of the regional trade agreement is seen among less developed countries as it happens more slowly. A major example of this is the breakup of the Soviet Union which led to six new Republican states which meant they were a new trade area. The EU saw this as an opportunity to make a trade agreement with these less developed states so that they could be compatible with the WTO’s regulations. Hence the EU offered these new states duty-free access to the European market in return to make these new states in industrialized countries for their own use in the future (Ravenhill, 2005). Countries that enter free trade agreements are concerned that non-members of the agreement will exploit the benefits that they provide to their parties. The fear of regionalism is that no common tariffs mean that non-members will send goods into the free trade arena through a country with the lowest tariffs and use the free trade provision for groups to access other members' markets. As a result of this countries are scared that this will lead to trade deflection and loss of tariff revenue for the economies of higher tariff payers which inevitably causes greater competition for domestic produces (Ravenhill, 2005). Hence Free trade is not free in terms of regional agreements as they enable industries to become internationally competitive and therefore RTAs will ease a path towards non-discriminatory liberalization which leads to competition at a regional and global level, which will increase tariffs (Ravenhill, 2005).
Today protectionism is the main reason for tariffs because it is the main source of revenue in some developing countries. Economic protectionism is the main thing that restraints free trade and the meaning behind it. Protectionism entails the expanded government discretionary powers that influence trade patterns and the global location of economic activities. The foremost manifestation of the new protectionism has been the governmental use of voluntary export restraints and orderly market arrangements to create the idea of ‘organized free trade’ (Gilpin, 1987). Protectionism also entails the spread of trade to service sectors and to high technology industries which are believed to be both a strategic plan of countries and provide future growth in industries of the advanced countries. In Asia, the majority of their exports are construction services, electronics, and information industries especially now in India with an increase of call centers located there to provide information to developed countries like Europe and America. This might sound good but the estimates differ greatly and the actual extent of non-barriers is a completely different gauge as they are hidden from view by their nature (Renata, 2019). In many cases, a non-tariff barrier to one nation is a legitimate activity to another. The important message in this statement is that trade restrictions and government interventions are relatively small but growing in a number of sectors that are actually more than one-fourth of the world trade in manufactured goods (Shah, 2013). These goods include textiles, steel, automobiles, and electronics which all have high tariffs and non-tariff barriers which results in distorting subsidization (Gilpin, 1987). Protectionism is necessary but is only a temporary expedient and a stepping stone toward a system of free trade. This is why the General Agreement on Tariffs and Trade (GATT) was established in 1948 to achieve ‘freer and fairer trade’ through the reduction of tariffs and elimination of other trade barriers (Gilpin, 1987). The downside of this agreement was that less developed countries never signed it and did not accept its principles of it and even developed countries did not fulfill the obligations of the agreement. Instead, the World Trade Organisation (WTO) was set up to replace the GATT, with the same idea to promote trade between member countries and to provide non-discrimination in trading relations. The WTO still manages the struggle between liberalization and protectionist forces and all agreements are slow and neglectful. Today the WTO has created the Uruguay Round Negotiation of 1993 which is a contract between its members to establish trade rules with a powerful dispute settlement system (Gilpin, 1987). This only benefits developed countries and again forgets about the less fortunate regions. From this evidence, protectionism suits the needs of the rich countries while only opening the markets for the poor. Developed countries have the luxury of being protectionist but in return expect developing countries to completely remove barriers and free trade which causes an imbalance in the favour of already industrialized countries (Gilpin, 1987).
Evidence of trade protectionism can be seen between countries in Europe and North America. Which North America is subsidizing their farmers for billions of dollars and making it harder for poorer countries to export these materials (Abbas, 2019). The rapid advance of the Asian industry especially in Japan and China has threatened sectors of the American electronics industry, so the I.T. industry of the U.S. and Europe is growing so that they can outsource the developments of these countries (Gilpin, 1987). Richer countries want their products to be prioritized when being exported and for them to have power over multinational cooperation companies (MNCs) (Abbas, 2019) A major example of this is Bolivia. In 2003, the town of El Alto, Bolivia was overruled by Spanish MNCs to dig out the resources of gold, silver, and rubber. Today El Alto is still being monopolized by MNCs by their gas reserves being privatized by Spanish MNCs and as a result, the taxes are slashed to attract corporate investment (Shah, 2006). These MNCs make an enormous profit while the nation of Bolivia sees the very little benefit and this is the case in many other developing world countries (Shah, 2006). This shows that free-market economics result in poorer countries being monopolized by MNCs as a result of economic protectionism.
The liberal trade theory is significant when it comes to trade. Liberal economists believe that the international division of labor is based on the comparative cost which in fact results in countries specializing in commodities whose costs are comparatively lower (Abbas, 2019). Liberal trade theory means that one nation in the developed part of the world has an absolute advantage over other countries in production. For example, in the EU, England and Portugal can have free trade by means of swapping. England would give Portugal cloth in return for Portugal's wine. The main disadvantage of this swap system is that it only benefits countries that have resources to give and is only successful on a two-country model (Gilpin, 1987). The neoclassical reformulation or otherwise known as Heckscher-Onlin-Samuelson (H-O) Theory is the standard liberal position of international trade since the 1980s. This is the idea that nations with competitive advantage are determined by the relative abundance and most profitable combination of several factors of production like labor, resources, and technology (Gilpin, 1987). The H-O model suggests the exchange of manufactured goods for commodities. It can be seen in practice by importing models of automobiles while exporting different models. For example, a Japanese ‘Mazda automobile would be exported to Europe while a German ‘Mercedes-Benz automobile would be exported to Asia. This kind of trade is successful in North and South countries but it is still less successful among non-industrialized countries (Abbas, 2019). However, liberals still consider free trade to be the best policy due to specialization and the international division of labor, the increase of individual productivity, and hence the accumulation of both national and global wealth while also increasing consumption possibilities. Liberals support the superiority of a policy of free trade over protectionism as they believe protectionism will end itself which will result in state building and industrial power (Gilpin, 1987).
On the other side of this free trade debate is the economic nationalist trade ideas. Economic nationalists share contemporary Marxist ideas and believe free international trade is destructive to traditional values. The idea is that free trade is a form of cultural imperialism that must be strictly controlled by tariffs. Nationalists believe that trade makes interdependence insecure and vulnerable to external developments, especially in poorer regions. The emphasis on the cost of trade and the favor of economic protectionism and trade and central for international trade and ‘free trade’ does not work (Abbas, 2019). This was seen in the twentieth century with Britain. Britain was seeking to advance their own national economic interests by gaining unimpeded access to foreign markets through free trade and this allowed Britain to now be an interdependent world economy by using the free trade market to their own advantage and not giving back into it (Gilpin, 1987).
From the contents of this essay, it is reasonable to accept free trade is not free in today's world. The agreement of free trade lies at the heart of the conflict between economic liberals and economic nationalists (Gilpin, 1987). The fact that integration of global markets and international production is taking place in a world divided among nation-states. Over sixty percent of this trade is among the developed countries and this results in many distributional and conflictual aspects of the trade (Shah, 2013). Globalization has created ‘social Darwinism’ which is the idea of the survival of the fittest and in a trading sense: countries have their own interest and financial gains in mind. It is true to say that the increase of globalization risks a financial crisis in the developing world as products being exported from poorer countries are facing high barriers in rich nations while their labor is paid less to enable them to pay these tariffs. Overall, this trade agreement is leaving the poorer countries poorer and the richer countries still accumulated wealth from taxes (Shah, 2006).
Bibliography.
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- Amadeo, Kimberly. (2019). 7 Pros and Cons of Trade Agreements. [online] The Balance. Available at: https://www.thebalance.com/free-trade-agreement-pros-and-cons-3305845 [Accessed 31 Mar. 2019].
- Gilpen, Robert. (1987) The Political Economy of International Relations, Princetown: New Jersey
- Renata, Mantel. (2019). KAFU Academic Journal - Free trade: pros and cons. [online] Kafu-academic-journal.info. Available at: http://kafu-academic-journal.info/journal/2/40/ [Accessed 9 Apr. 2019].
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- Shah, Anup. (2013). Free Trade and Globalization — Global Issues. [online] Globalissues.org. Available at: http://www.globalissues.org/issue/38/free-trade-and-globalization [Accessed 10 Apr. 2019].
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