Development Of Free Trade example essay topic

In principle, most countries should not worry about cheap imports, and any policies designed to limit competition from low cost foreign countries will be detrimental to the economic interests of individual countries and the global economy in the longer term. "We must not forget that the path of open trade and open capital markets that we have travelled in the last 30 to 40 years has brought unprecedented growth, greater opportunity and a better life for people across the world". (Byers: 2000) There are, however, a number of short-term considerations that may constrain the policies of different trading nations, or groups of trading nations, in permitting unrestrained importation of cheap products and services from low cost countries. To avoid having to implement these policies, governments and businesses need to harness increasing efficient manufacturing and distribution systems, so industries are able to outsource products and services which can be produced more cheaply in low cost countries, bringing down the total cost of the end product to the benefit of the consumer. With the introduction of subsidies and incentives for producers to export, it does not create a fair, competitive trading system as it becomes self-defeating and results in wasted value resources.

A prime example of the benefits of a strongly outward free trade policy, rather than an interventionist, inward orientated trade policy is demonstrated between South Korea and Ghana where in 1970 the standards of living were very similar. Ghana's government, at the time, implemented policies to protect the domestic market and increased export prices of their main product cocoa and became more dependant on subsistence of essentials products that they could not produce at a favourable efficiency. Ultimately Ghana turned from being one of the most profitable and prosperous countries in Africa to the poorest, while South Korea encouraged international trade refining their policies to suit their development in the global marketplace. Between 1950 and 1980 South Korea gradually lowered barriers of trade abolishing quotas and import tariffs resulting in an average GNP of $9,700 in 1995 (compared with $260 in 1970) in contrast to Ghana whose average GNP was only $390 in 1995 compared with $250 in 1970. Therefore to understand an effective use of resources on a global scale, examples that epitomist the values of free trade must be illustrated to emphasise the benefit they create on for the domestic market as well as the global market. The US automotive industry is a prime example of using methods of outsourcing to produce the most competitive and value based products like General Motors and Ford who have production in every corner of the world incorporating the free trade mechanism to optimise its efficiencies through national differences and finding where each part of the automobile would be most effectively made.

Therefore in turn being able to customise to suit customers' needs. This point is vital in a free trade economy as the consumers' needs are more important than the governments or producers' needs. Swiss watches are an example of products that are not customised locally, but outsourcing of the production where the labour is cheapest whilst labelling them as brand-based products enables for the most efficient use of resources to achieve the final desirable end result with very high profitability. Countries should concentrate on what they are best at and using the freest and most open market to exchange goods and services to produce the most effective and competitive final product. Densely populated under-developed countries should concentrate on labour intensive productions making best use of their domestic resources.

Whereas low population highly developed countries specialise in value-added products involving high levels of innovation and enterprise. This needs high-levels of education within the country and a highly established competitive market with consumers' needs addressed and met, which is unsuitable for a poorer less developed country. This enables poorer countries better access to wealthier markets without penalty which in turn encourages wealth creation in their own countries and greater demand for goods and services from the more developed trading nations- thereby further stimulating global economic growth. In order to understand these constraints it is useful to review the historical context of the evolution from mercantilist (i.e. protectionism) trading regimes of the 19th and early 20th centuries towards the global liberalisation of trade that we have witnessed in recent years. It is vital to understand the history of trade and theories associated with it over the last 200 to 300 years as it enables an understanding for the future of international and free trade, as well as explaining the necessity of certain restricting policies to ensure the stability of many nations. Before the historical context of free trade and interventionism is addressed there is one important continuing constraint which has faltered the economic development of the global economy and continues to, namely the tremendous challenge of totalitarianism.

War, of course, has wasted resources, capital and time for thousands of years of our history, but at least the benefits of increasing efficiency through the pressures of war has made a small but significant impact. The communist "ruling parties of the West do not venture to preserve the system of free enterprise that gave their nations the highest standard of living ever attained in history " (Ludwig von Mises: 1953). The totalitarian regime, which believes in the collective interest rather than the individual, has been contradictory in its beliefs as it is the modern economic system of the free, capitalist market (e.g. USA) that has proved a benefit to the collective as well as encouraging free enterprise and individual achievement. Communist countries such as Hungary have planned and controlled economic and political systems resulting in an isolated, stagnated economic development with state-owned companies becoming either failures or inefficient monopolies leading to a progressively worsening standard of living.

Mercantilism was the first theory of international trade emerging from England in the mid-16th century, and it indicated that a country should export more goods than import in order to sustain a trade surplus. Prices and inflation would fluctuate depending on the quantity of gold and silver circulating the market and a balance-of-trade surplus would cause inflation and at the opposite end a reduction in prices. Jarl Hagel stam applied and furthered the theory to the present day and an example of a neo mercantilist in Japan, whose government publicly supports free trade while seeking to protect certain segments of its economy. This is most evident with its security procedures at airports that insist to check every package delivered by the American express parcel forces FedEx and UPS, which ultimately stops these companies reaching their deadline pushing them out the Japanese market.

Through the 17th and 18th centuries various theoretical approaches where established showing the benefits of free trade- among those which gained the most credibility was Adam Smith's theory of absolute advantage which relied on the market mechanism and a laissez-faire approach to free trade. It states that a country should produce what it can most efficiently and import what other countries can produce more efficiently, and visa versa. With this approach to free trade, the classical economist view was being heard and reform of protectionist policies in England was improving leading to the studies of Robert Torrens and David Ricardo who formed the theory of comparative advantage. This was a continuation of Smith's theory emphasising that "potential world production is greater with unrestricted free trade than it is with restricted trade". Free trade started to make sense to even the sceptics and common sense prevailed with the statement that international trade benefited everyone, especially the consumer who not only got the best price for goods, but also had the benefit of dynamic economic growth that procured the creation of wealth and heightened standard of living. These theories were all very well on the assumption of economic stability, but tariffs and imports barriers to protect economies and industries were stunting the growth of international growth, but were an inevitable process of development during the early years, and of course different countries would develop at different speeds.

The only way in which a deal could be stuck was between countries equally reducing tariffs between them in order to encourage the continuing evolution of free trade. Legacies of the 19th century colonial trading pattern where colonial powers exploited raw materials of the colonial territories in exchange for developing a local infrastructure caused unequal growth and development and two successive World Wars for a time inhibited development of free trade because nations were determined to keep a high degree of self-sufficiency of essential goods and services. This led to a greater level of government control over key industrial sectors, which might otherwise not have attracted sufficient private sector funds. Over this period a number of protectionist issues arose on a domestic level encouraging development within countries rather than between them. That of course was the response of many countries to the financial crash and depression of the 1920's and 1930's that proved so destructive for the world economy, compared with the situation with the long period of growth in the US and Europe as trade barriers came down in the 1950's and 1960's. Though The Infant Industry Debate proved an important issue for young and rising nations in gaining the skills and experience which other countries have developed earlier in order to protect it in its early stages, but John Stuart Mill emphasised that the tariffs or barriers used to protect it must be reduced as soon as possible.

This debate was met with scepticism by many capitalist and could only be justified if the future benefits from the industry exceeded the current costs of protection. The real issues of government intervention became evident as the world economy developed and progressed: these issues evolved around stable, fair and competitive markets which took consideration of environmental, social and macro-economic objectives for each particular government with national security becoming less of an issue. The evolution of UK's industry was a prime example of how necessary government interventionism was needed when there was a structural change from manufacturing to tertiary. Protectionist measures were needed to smooth blips in the economy by protecting producers and the domestic market, as well as keeping low inflation, low unemployment and higher growth. Merit goods such as health and education issues came to affront with the need for extensive development of public services and quasi- public goods.

This resulted in higher taxation and import barriers to accumulate investment for these goods and services, but the management of these services by the government has proved costly and very inefficient. This ultimately means that the government should provide support to these projects, but allow private ownership to retain a competitive and efficient system which does not rely on taxpayer's money supplement its ineffectiveness; therefore a reduction in government intervention, apart from regulatory measures. From the words of Stephen Byers the Former Secretary of State for Trade and Industry: the government's role "should be to lead people through the process of change. With support retraining and updating skills and helping companies identify and then diversify into new markets and products".

With a period of more than 50-years of relative peace, nations have felt more relaxed in directing policies towards progress liberalisation of trade and have initially formed regional free trade zones (e.g. EU, NAFTA, MERCOSUR, ASEAN / APEC). Beyond that the WTO has established a regulatory framework for global liberalisation of trade following GATT agreement that provided the basis for lowering trade barriers and protective import tariffs on a global basis. A financial framework provided by the World Bank and IMF addressing the issues of global growth and development has in turn supported this. The essential answer to the problems of the moment is not less globalisation- not new national structures to separate and isolate economies, but stronger international structures to make globalisation work in harder times as well as easy ones.

The mistake, which has continually been made by many countries, is resorting to policies to limit competition in times of hardship rather than using free trade to stabilise economic shortcomings. The imposition of tariffs of up to 30 per cent on many categories of steel imports, by the US government, puts at risk decades of progress in international economic relations. "By resorting to trade protectionism, the Bush administration has driven a coach and horses through the foundations of the economic philosophy it preaches to the rest of the world". Through history the US has shown the world the benefits of free trade by its free enterprise and low barriers and tariffs with the free movement of goods, services, people and capital. The EU has suffered much with its over-regulation, high taxation and industrial protectionism and as a result might never close the yawning productivity gap with the US- now at its widest for 40 years. These steel tariffs are a huge blow to the principle of free trade, but free trade economists have accepted that interventionism is essential for a fair and stable global market to perform, and environmental and social issues have become more and more important in the recent decades.

Such issues as imposing tax on fuel to reduce environment consequences and ensuring that child labour is not encouraged in producing cheap products are essential in the development of the world. So in conclusion the ability of the more developed economies to absorb cheap imports low cost foreign countries still ultimately depends on domestic policies relating to generating flexible labour and capital markets capable of constantly adapting to the provision of increasingly high technological goods and services and constantly improved productivity. Proportion of government funding and involvement with national infrastructure and public services (transport, health and pensions) and quality of educational systems to enable the labour market to perform with ever-improving efficiency is also essential. Also foreign policy constraints encompassing the social issues and anti-dumping policies are vital to maintain a stable, economic environment. In 1985 the EC imposed 53% anti-dumping duties on Yugoslavia for surplus copper sulphate it produced as it broke competition rules. Also to gain an understanding of the global situation one must appreciate that countries are at different stages of development so there is a need for an acceptance of the evolutionary process of achieving total global free trade.

Different forms of protectionism are inevitable in not only developing countries, but also developed countries to be able to achieve a smooth transition between stages. One must also understand that cheap foreign imports not only come from developing countries but also developed countries, so governments should not worry about them, instead use their advantages and make best use of the global marketplace to further the domestic economy as well as the global economy. Free trade is an essential and simple theoretical approach which must be aimed for until a more appropriate approach is established, and government intervention must be thought as necessary as an evolutionary tool.