Benefits of Free Trade


Many intellectual streams opposing free trade, on top of which are variations of alter-globalist movements, believe that the reality of trade is dominated by the most influential and rich governments and well organised and rich companies and corporations, all ruled by some sort of 'shadow elites' which has been always an issue concerning free trade or in fact any trade. The mechanisms of the above are clearly explained by renown Antropologist, Prof. Janine R. Wedel in her book 'Shadow Elite: How the World's New Power Brokers Undermine Democracy, Government, and the Free Market' where she describes the cohesion of private and public and informal networks, that influence what governments actually do. The point I would like to make in this paper is that there is a chasm between the idealistic vision of free trade floating on top of the sea of reality. Both debaters, Prof. Jagdish Bhagwati and Prof. Ngaire Woods clearly present a sensible and true point of view. Protectionism often is a tool in hands of governments to protect the mentioned informal networks of government and business and free trade apart from the main idea of overall development seems to be a solution to this problem. On the other hand there is an enormous disproportion of wealth around the world and free trade is inseparable from the idea of using capital of the rich and developed to multiply gains by adding value to someone's work in the developing, poorer country. Prof. Immanuel Wallerstaein in his research on the world-system theory refuses the notion of a 'Third World', so naturalised in our language, and reminds, that there is only one world that is connected by a complex network of exchange economic relations.

There is no doubt that the idea of free trade under the GATT/WTO system is a good move towards development. It also reduces the ontological state of anarchy in international relations by creating a forum for dialogue on trade issues and resolving disputes. But the reality is that power of states is gained by their own effectiveness and trade is a 'zero-sum game'. Individual state interests prevail over egalitarian idealism, which proves that utopianism equals autocracy. It is important that the idea of fairness and voluntary cooperation in the WTO is protected and in practice the WTO seems to work in situations of violation of rules in an persistent manner. This is what pushes states into an IGO (Brown, Stern in 'Concepts of fairness in the global trading system'). The idea of complete structural fairness seems impossible in such differentiation of power. Trade negotiations have been all about gaining market access and not about creating a structure for global trade based on fairness. On the other hand development can be achieved by freeing markets and this is the mainstream goal for free trade: Creating a win-win global flow of capital. But it all comes to the capacity of a nation to produce enough goods to sell them and increase consumption in reward for the gain. In developing countries this is very important, but is the doctrine of growth universal? Do developed countries need infinite growth? Is trade not homogenising culture and are we not trading culture for growth? One way of interpreting free trade is by comparing it to a magnifying glass for domestic produce. But there is a requirement to it. The produce must be unique enough, advanced enough or cheap enough. The summed value of produce, that can fulfil this regime is the capacity to lead in free trade. Proportionally the most disadvantaged are the most exploited in the global race for gain. In reality Pareto Optimality to which Jagdish Bhagwati is looking up in his arguments seems like another utopia in the worlds history.

Laura T. Raynolds and Siphelo U. Ngcwangu in their article 'Fair Trade Rooibos Tea: Connecting South African Producers and American Consumer Markets' expose the results of their research proving, that fair trade initiatives not involving structural changes or enforcement mechanisms often are a bluff. Here Ngiare Woods is absolutely right, there needs for a political push towards a structural change and a fairer market, which possibly will not change from grass-root movements. Although free trade is undoubtedly proving positive influence on development as repeatedly stated by Jagdish Bhagwati, there needs to be a stronger push for improvement as free market cannot dictate insensibility to humanity.

So what is pushing us into free trade? Prof. Bhagwati, recalls, that the last 30 years gathered much proof for free trade being a good condition for growth, and that none of the states neglecting the idea of free trade has presented much growth under an alternative model. Countries set many policies that promise maximisation of a nations aggregate wealth as efficiently as they can. Many political economists say, that liberating trade is in the interest of every state economy and hardly in any other area of economics there is such consensus and unity. Economy is about trade-off's and most economists agree that the free trade idea is a superior interest to a nations wealth. As Paul Krugman had put it: 'If economists had ruled the world, there would be no need for WTO'. Ngiare Woods seems to internalise and gradually agree to this thought though out the debate. But all this sounds easy in theory. We can see that reducing protectionism is in many cases only a fascade. The political costs of such actions is strategically more persuasive to policy makers.

To fully understand benefits of free trade it is important to understand the notion behind comparative advantage: Producing goods that a country is good at and importing goods that for some reason a country is disadvantaged. Ricardo's Comparative advantage theory suggests that countries should specialise in the goods and services that their countries have comparative or absolute advantage, which reduces the 'dead weight'. This means that some developing countries should stay locked and dependant on their export of raw goods, half products and agriculture as this is the comparative advantage of many developing countries. Developed countries. On one hand the logic of free trade suggests, that countries should not put tariffs on such raw goods and half-products, as the import of them would mean transforming them into advanced goods, processing them etc. The practice is exactly opposite in many cases, just as Ngaire Woods states. Countries often protect their raw goods and agricultural markets by subsidising them, as in the example of the EU. Michael Kostecki and Bernard Hoekman used the prisoners dilemma to interpret trade and concluded: 'it is in each countries interest to impose restrictions, but the result of such individually rational policies is inefficient' (The Political Economy of the World Trading System : WTO and Beyond, OUP 2001). I would go further and continue this thought how trade has a tendency to fall into the 'tragedy of commons' (G. Hardin, "The tragedy of the unmanaged commons', 1994).

There are a few flaws written into the idea of free trade. One of them is that there is a disproportion in a governments support for interests as it creates preferences and an despicable asymmetry in consequence of forms 'loosers and gainers' within a local economy. This creates a discrimination for one occupational group, whilst extra-supporting another. This comes to the realm of politics and the fact that unpopular decisions would mean sloping poll's. Protectionism is far easier to promote in the political discourse. Also it is very important to note that young and unestablished strongly industries have no chance of surviving without protection of the government up to the point an industry can compete on the global market. Does this not raise a question? How many companies starting from the 20th wealthiest country downwards has industries strong enough to compete on the global market. Is comparative disadvantage not creating structural disadvantage?

If there is comparative advantage, there is also comparative disadvantage. In fact most countries only produce a fraction of goods that most developed countries do. Most of these goods are not advanced, so they are not highly profitable. That also means that their currency is low in exchange value. This creates a feudal relationship between countries as some developed countries free-ride on trade.

(report from phone)

Ms Woods emphasises on the fact, that developing countries continue to face briers that impede their access to richer markets. From a practical-non-theoretical point of view even flight tickets and hotel prices and advertising fee's together with all other forms of entrepreneurial networking, not mentioning infrastructure makes things unequal. Even when looking at manufacturers around Asia on alibaba.com it is visible, that manufacturers are victims of an 'digital divide' which itself is a huge disadvantage. Not mentioning the gap between GDP between countries, which currently is something like $600 versus $60 000 per capita. If we do want to have a global feudal relationship, we need some rules to make it as fair as possible, and not believe in a non-sense of an unfair but absolute laissez-faire system.

The minimum action that should take place to transgress the free trade into fairer trade is putting food security into the process of trade. Globally.

The reality is that advantages belong to the well organised, strong and settled. Governmental practice is still strongly focused on self interest, less on idealistic values. This is partially why the EU experiment started loosing coherence when it started looking up to more than trade between countries. Well organised governments often are structurally designed to protect their own pragmatic interest. They are incapable of any sacrifice and instinctively encourage mercantilism. There is an oscillating balance towards 'the passionate few' than towards 'the modest many'. Also there is an imperative of interest groups. Parent consumers want product safety, unions want labour rights, producers want tariffs (D. Hanson 'Limits to free trade' 2010). Some industries are addicted to subsidies. Behind each of these groups are individuals with families and are impossible to ignore within a country without major critique of the government in charge. Also these subsidised industries are nearly always providing jobs for a large number of people, often unqualified and difficult to shift to another career. A majority of the most developed states are social-democracies, with a strong expectation of their population to support the working class and middle class, and elected through promises of such support. These parties often fulfil these expectations, as they are dependant on the social fabric of their electorate. And want to be re-elected. This would explain why the US and EU remains so reluctant on the DOHA Development Round.

In a quest for solutions R. M. Unger in his book 'Free trade re-imagined' proposes three wide perspectives on how trade should re-frame for self-improvement. The first one is 'specialisation and discovery', the classical notion of free trade, that comparative advantage is important, but there should be more focus on improving this advantage towards even more advancements. Second one is 'when restraints on trade imply, no surrender to special interests or costly dogmas' and the third one is 'when free trade strengthens, the capacity for self-transformation'. Unger states that the theory created by Ricardo and further developed by years of discussion and advancements that are justification for free trade are incomplete (pg. 27, R. M. Unger, Princeton, 2007). He argues that it is all how well we can compensate for the 'idealistic' assumptions of a theory. It is worth continue this thought by adding that every theory is limited as much as it is universal. He also gives some possible biases, unveiling some problems with a universal trade system based on, as he puts it, a doctrine:

There are multiple efficient solutions, not one fitting set.
We make an assumption, that advantages within the economy are rather given than made.
Advantages have always been made by a mix of private enterprise with public action in hand, not by the market itself.

The third point is absolutely crucial to the debate on free trade and some form of intelligently applied intervention, in favour to supporting Ngaire Woods arguments in the opening statements of the debate.

Concluding this critical analysis it is clear, that it is going to take decades to crystallise international trade policies that work for all.

Source: Essay UK - http://turkiyegoz.com/free-essays/economics/benefits-free-trade.php


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