Free Trade Barriers in Modern Economics

Introduction

The expansion and connectedness of production, communication, investment of funds and expertise by business organizations across the globe through interlocking economic and cultural activities continue to widen the gap between low and high-income nations. In other words, the purported free trade has increased the gap in terms of development between industrialized nations and the poor countries. In essence, globalization has led to increased dependency of poor countries on established economies with capital strengths and technological advancements (Schuerkens, 2010). Most importantly, even though the World Trade Organization (WTO) has made significant steps in opening up the development of international trade through free trade model, massive inequalities exist between the rich nations such as the US and UK compared to their counterparts from less developed countries (LCDs) in terms of trade barriers and market access.

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A number of arguments have been advanced to support or disapprove principles of free trade. To begin with, classical economists contend that free trade is significant in augmenting international produce due to specialism among nations. In addition, free trade enables faster rate of growth among different states through free transfer of expertise. Free trade also increases the availability of goods for consumption compared to the produce accessible under autarky conditions (Kwa, 2002). Further, through liberalization of trade, different nations come together and share mutual trade relations as well as increased social interdependence leading to the elimination of conflicts. Conversely, free trade has come under a number of unwarranted condemnations.

For instance, economists such as Friedrich List argued that the open market trade in resources is an ingredient for development retrospective. In essence, nations that have valuable raw materials such as diamonds and gold embrace autocracy correlated to the availability of resource prosperity (Kwa, 2002). Moreover, open market trade only benefits the established economies in relation to less developed countries because of capital advantage. The increased capital enables firms from wealthy nations to produce goods at lowest expenses, which augment competitiveness in the global market.

The supporters of economic nationalism as well as mercantilism argue that the rich economies use the concept of free trade to impose imperialism on the less developed economies. Rich nations such as the US and Britain use the conception of open market to advance their influence and ideological policies through specialization. In principle, the rich nations have used free trade to sustain their economic dominance over the poor nations (Wade, 2003).

The World Trade Organization (WTO) principles

The formation of WTO in 1995 was to enable free trade in the international market through the reduction of trade barriers in agriculture, services and intellectual property rights. The organization’s principles revolve around non-discrimination of foreign or domestic firms, reciprocity and transparency in trade negations and processes as well as special and differential treatment of developing countries due to unevenness in trade with the developed nations (Wade, 2003).

Relations of rich and poor countries in trade

The development of free trade policy was based on the postulation that the entire globe gains from economic development through reduction of poverty and disproportion. However, this is not the case. Economic growth and development of the poor countries depend on the adoption of the political models of the western countries. In fact, Poor nations continue to experience escalating poverty levels as well as inequality in international trade. Moreover, the developing economies are “continuously being constrained in their development policies by proliferating regulations formulated and enforced by the international organizations” (Wade 2003, p. 622).

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In other words, the WTO’s Dispute Settling Mechanisms (DSMs) have been incapable of countering biased trade policies applied in the international market by the rich countries shrinking the participation of poor countries in open market trade. In addition, the intents of supporting trade development by rich nations are to influence the commercial practices and beliefs of poor nations (D’Arista, 2000). For instance, the attack on World Trade Center was blamed partially on augmented levels of poverty and unfairness in poor countries as well as American trade policy. Generally, the imbalances of economic, political and information aspects between the rich and poor nations are the consequences of unfair negotiations and conflict resolutions mechanisms in trade.

Reality difference of free trade between the rich and poor nations

The concept of free trade is just a delusion used by rich countries to impose their economic ideas, beliefs and imperialism on the poor nations. In fact, the widening gap between the wealthy and poor nations results from barriers and strategies applied by rich countries to gain control of trade in the international market. In addition, the rich economies such as UK and USA restrict the developing countries’ participation in the international trade by propagating regulations regarding world trade (Wade, 2003). The developed nations utilize such regulations to block developing nations from aspirations of operating in the world market through introduction of numerous tough conventions.

The developed nations collaborate with multilateral economic organizations and global treaties as well as bilateral agreements to legitimize invasion into the economies and politics of the poor nations. Such actions are based on the rhetorical commitment to market liberalization and privatizations, which minimize the space for diversification and advancement of policies as well as self-determination (Pettis, 2001). In essence, the international treaties and agreements restrict developing nations from gaining level playing field in trade. Through the collaboration of G7 states consisting of the US, Germany, UK, France, Japan, Italy and Canada, the rich nations are capable of amassing economic, political as well as military supremacy in the heart of the international market. Several strategies have critical implications on the effectiveness of free-market economy between the rich and poor countries.

The production and exportation of products in which a nation has comparative advantage form the basis of export-oriented industrialization policy (Pettis, 2001). The feasibility of this approach occurs in the absence of free trade barriers such as import quota and tariffs. Therefore, nations in possession of resources such as minerals, skilled and inexpensive labor as well as favorable climate conditions have comparative advantage. In this regard, developing countries exploit the production of such minerals in cost-efficient ways and export the output in the international markets. However, in the international markets, the rich nations exploit the poor nations through introduction of import tariffs and quotas.

Consecutive negotiations concerning free trade have achieved significant steps in the reduction of import duties. Precisely, such discussions have led to the reduction of tariffs to about 4% from 40% experienced during the World War II. However, tariffs still affect international trade tendencies (Rameshan, 2008). The establishment of tariffs on imports by the rich countries increases the prices of products for consumption in developing nations. In addition, the tariffs shield the uncompetitive companies in rich countries through the alterations of prices of products.

The price alterations are pronounced in poor countries leading to imbalance of free trade between developed and developing nations. Further, duties on agricultural products are at approximately 15% in rich countries compared to 44% in poor countries. In essence, the structure of tariffs jeopardizes effective implementation of free trade (Rameshan, 2008). Actually, the agricultural products including tobacco, cotton, cocoa and paper produced in developing economies are subjected to higher tariffs.

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Instruments of free trade barriers

Advanced countries continuously utilize trade agreements to make the most of poor nations. Actually, the rich countries utilize such barriers in economic segments in which they have comparative disadvantage compared to the developing nations (Rameshan, 2008). The unfairness in free trade has led to increased deterioration of economic prospects of poor countries. Although free trade barriers utilized by the rich nations on developing nations are not distinct under the canon of fair dealing, several instruments are used on poor nations to obstruct free trade. In addition, the instruments have been used to propagate dependency on developed nations as well as domination of world trade.

Subsidies

Subsidies provided by rich nations to their firms have significant negative influence on poor economies. In essence, the benefit packages that are part of subsidies make poor nations dependent on rich countries. In other words, expenditures on cash equivalents as well as diminution of income taxes, reduces the obstructions experienced in trade by native firms. Supporters of subsidies contend that the benefits are instrumental in decreasing living expenses to achieve self-sufficiency in a country.

However, this is not the case as subsidies have been utilized to increase dependency of poor nations on developed economies and to compromise the developing markets in poor nations (Rose, 2002). For example, the US, which has been on the forefront advocating for free trade practices across the globe continue to offer high subsidies to its domestic firms to augment their competitiveness against the products from poor countries. Precisely, the $24 billion worth of subsidies that the US government utilizes in the domestic cotton industry decreases the prices of cotton in the world market thereby hurting cotton exporters that are mainly from poor countries.

Further, the US government provides high subsidies to the domestic agricultural and steel industries thereby increasing barriers to foreign industries dealing in textiles and garments. In essence, the textile industries in the USA are vulnerable to competition from imported products and are supported by the political system through subsidies to augment competitiveness. On the same note, the European Union has also failed to live to the expectations and standards of the Doha agreement that called on the developed countries to lower subsidies on the domestic industries to ensure free and fair trade with poor nations.

Quotas

Advanced economies normally inflict rations on foodstuffs produced by developing countries. As such, the developing countries are denied the opportunity to export their products to the rich nations. In essence, the competitive fields in trade have not been leveled for the poor nations. The execution of import quotas by the developed states prevents the importation of excess units of products and services from poor nations. The imposition of import quotas increases the prices of foreign goods and services (D’Arista, 2000). In this way, domestic producers are barred from purchasing foreign products due to higher prices and are compelled to buy the domestic prices due to low prices making them better off. Essentially, import quotas makes domestic products and services highly competitive in the local market because of insignificant competition from foreign firms. Advanced economies continue to exploit poor nations by imposing import quotas in industries that are fragile and unable to compete efficiently (Rose, 2002).

Tariffs

The imposition of taxes on imports increases the cost of imported goods. The developed nations often impose revenue and protective tariffs on poor countries. The former is meant to augment the government income and wealth. The later aids in increasing prices of imported products to enable domestic goods compete with imported goods. In general, tariffs are critical in building up new local industries for competition with foreign industries (Pangestu, 2002).

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Rich nations utilize tariffs to exploit poor nations through the implementation of high tariffs making the developing nations highly dependent on the advanced countries. In addition, the presence of high tariffs enables firms from advanced countries to acquire economies of scale as well as influence the economies of the developing nations. Moreover, tariffs have been used by developed nations to increase the competitiveness in sectors where poor economies have comparative advantage. As such, tariffs have been applied by rich nations to unjustly dominate developing countries through unbalanced trade.

Trade agreements and treaties

Trade agreements play major roles in shrinking the development space of free trade. Wade (2003) argues that trade agreements have been applied by the developed nations to handicap the development capabilities of the upcoming economies using economic and political instruments. For instance, the agreement on Trade-related Investment Measures (TRIMs) has constantly restricted the development of the economies of poor countries. In fact, the TRIMs agreement outlaws requirements relating to trade equilibrium and exports leading to lack of free trade (Rameshan, 2008).

The European Union and the US have been advocating for the restriction of performance needs in trade such as transfer of expertise as well as research and development. Such requirements prevent poor nations from engaging effectively in free trade with the developed countries. In essence, TRIMs have been applied by the developed nations to “economically handicap poor countries through the market for knowledge” (Wade 2003, p. 624). Similarly, TRIPs have been used politically through inappropriate regulations of rights and obligations of the developing economies.

The general Agreement on Trade in Services (GATS) also has implications on free trade in the context of rich and poor countries. Even though the agreement is based on market liberalization in service trade, many established countries continue interfering with trade in services through placing numerous restrictive barriers between nations. For instance, the GATS stipulate equal treatment of members in the market as well as unlimited marketplace accessibility. However, many rich nations contravene such stipulations by limiting the number of service suppliers and outlets in the international market. Such actions make poor nations recede international trade (Pettis, 2001).

Generally, the agreements hinder free trade between rich and poor countries in a number of ways. For instance, the agreements are not defined precisely. As a result, the developed nations utilize the indistinctness of such agreements in threatening poor nations through initiating castigatory cases before the dispute settlement mechanism of the World Trade Organization (WTO). Further, the agreements have adverse policy implications on poor countries in relation to the policies adopted by the developed nations.

For instance, developed nations such as the US, Japan and Germany embraced protectionist trade policies in the past until when free trade became a public plan. On the same note, poor countries that are still in initial stages of development should be allowed to constrain trade liberalization policies through partial protections in industry where they have comparative advantage to provide level playing grounds for competition with rich nations (Wade, 2001). Developed nations often press for bilateral investment treaties to protect themselves from competition from developing nations.

Western textile and apparel economies continue to be protected from competition by Multi Fiber Agreement (MFA) through tariffs and quotas. The domestic industries in western economies also enjoy high agricultural subsidies preventing increased competition from competitive agricultural industries in developing states.

Unpromising politics

Politics play significant roles in restricting free trade. In fact, ideological beliefs as well as corporate lobbying are critical influencers of trade agreements and practices. For instance, the coalition of US service industries, the European Services Forum (ESF) and the UK’s Liberalization of Trade in Services (LTS) were instrumental in the formation of GATS. The developed nations use the trade agreements to achieve own protectionist interests at the expense of developing countries thereby restricting free trade (Kwa, 2002).

Conclusion

In conclusion, it is evident that developed nations play significant roles in restricting free trade with poor countries through import quotas, subsidies and tariffs. Additionally, trade agreements and politics have been exploited by the development nations to dominate the economies of poor nations as well as prevent competition from developing economies. As such, there is need for inclusive integration of all countries in trade irrespective of economic status to ensure free trade. Further, the multilateral and regional economic organizations and agreements should be redefined to ensure a friendly environment of trade for countries irrespective of economic status.

References

D’Arista, J 2000, “Reforming international financial architecture,” Challenge, vol. 43 no.3, pp.44-82.

Kwa, A 2002, Power politics in the WTO, focus on the global south, Chulalong-korn University, Bangkok.

Pangestu, M 2002, Industrial policy and developing countries in development, trade and the WTO, Washington DC, World Bank.

Pettis, M 2001, The volatility machine: emerging economies and the threat of financial collapse, Oxford University Press, Oxford.

Rameshan, P 2008, WTO, India, and emerging areas of trade: challenges and strategies, Excel Books India, Delhi.

Rose, A 2002, “Do we really know that the WTO increases trade?” The World Economy, vol.14 no.3, pp.299-309.

Schuerkens, U 2010, Globalization and transformations of social inequality, Routledge, New York.

Wade, RH 2003, “What strategies are viable for developing countries today? the World Trade Organization and the shrinking of ‘development space’,” Review of International Political Economy, vol.10 no. 4, pp.621-644.

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