Free Trade in the Global Context

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Table of Contents

Introduction
Background
Summary of Past and Current Policies
Recommendations
Conclusion
References

Introduction

The concept of free trade in the era of globalization defines trade relations between participants in the world market for goods, services, resources, and labor. Even though the idea of free trade was proposed by the United States after World War II partly as a way to maintain a leading position in the world market, European countries have adopted this concept. Moreover, the European Union’s creation was the culmination of the idea of free trade, although it was initially assumed that all world states should participate in it.

The history of relations between the South and the North deserves special attention, as well as the relations between Western and Eastern Europe, as well as the United States, Europe, and countries that never fell into colonial dependence, such as China, Japan, South Korea, and the Persian Gulf countries. This paper aims to provide a meaningful discussion of the free trade relations regulation in the global context.

Background

The history of trade between countries originated with the emergence of states. The initial policy of states concerning international trade was based on the concept of mercantilism, or benefit to the country, and a policy of protectionism when states sought to maximize exports and minimize imports. Protectionism suggested that countries could impose tariffs on imported goods to protect the internal market and save more money for the government and military development. The Mediterranean countries enjoyed Roman commercial law and Greek maritime law until the end of the Middle Ages.

In the middle of the 18th century, the famous economist Adam Smith put forward the concept of free trade. The scientist said that free trade should be based on the fact that all market participants will abandon protectionism, which will allow the most efficient manufacturers with the best quality goods and at the lowest price to win the maximum market shares. According to the presented theory, the market and consumers would win in such a situation, which means that it would be optimal for all parties.

This concept was also complemented by David Ricardo’s ideas of competitive advantage, which helped resolve a situation in which many market participants were producing the same product. Despite the concept’s attractiveness, the European states did not dare to accept it and continued to trade, adhering to the protectionist model until the end of the Second World War.

In the 19th century, Karl Marx’s ideas about capital were also popular in Europe. Nevertheless, Marx’s concept of the exploitation of workers by capitalists and the appropriation of their labor products, which, he hoped, would naturally trigger a series of revolutions, was realized only in Tsarist Russia. Lenin suggested that the revolution in Europe did not occur because industrial companies began to use the labor of the inhabitants of the colonies for the most part. At the same time, Lenin achieved the establishment of the communist system in Russia and created the Soviet Union, which ultimately rejected capitalist values.

The United States was in a relatively advantageous position to European countries in the early to the mid-20th century. The First World War, the Great Depression, and the Second World War had enormous devastating consequences for the European states. At the same time, by the beginning of the 40s, the United States was considered a hegemon state in military and economic development. To correct its image in the eyes of other developed countries and correct the past mistakes, the United States decided to implement the concept of free trade for the benefit of all market participants.

In 1944, 44 states participated in the UN Monetary and Financial Conference, which resulted in the Breton Woods system. This system implied the establishment of the World Bank and the International Monetary Fund. The World Bank took the responsibility to make loans for European countries, which faced severe destruction during WWII. The loans were planned to be used to revive state and municipal infrastructure – the construction of roads, bridges, and ports.

It was also planned that World Bank would later make loans for post-colonial states, with a similar aim. At the same time, IMF was created to loan money to support the firmness of national currencies. Later, in 1947, a General Agreement on Tariffs and Trade – GATT was signed by the 44 countries. In 1995 this agreement was replaced by the World Trade Organization – WTO. These regulatory organs have made the most significant contribution to creating the free market by ensuring that all member countries adhere to free trade rules.

In 1947, the US also proposed the Marshall plan, according to which the United States allocated $ 14 billion to restore the European economy. The Europeans accepted the money and spent it as intended. However, the Soviet Union, which was under the rule of Stalin’s dictatorship, refused financial assistance, which marked the beginning of the Cold War. However, after the collapse of the Soviet Union in 1989-1991, the ideas of communism proved to be ineffective, and the post-communist countries also became participants in the free market and signed the Free Trade Agreement. Thus, a conditional division into the countries of Western and Eastern Europe arose.

Another global division was related to the relations between the North and the South, particularly the former colonialists and colonies, most of which declared independence in 1940-1980. After gaining independence, the South countries began to demand compensation and trade benefits, which became known as global socialism ideas. Still, the North was unshakable before the South’s accusations of neo-colonialism and offered them only participation in free trade relations on a general basis. Although these relations reflected the South’s dependence on the North, expressed in the dependency theory, the South countries were forced to accept the conditions since they had no alternative. The essence of the dependency theory believed that the North used the resources, raw materials, and cheap labor of the South but exported finished goods with high added value to the South.

Summary of Past and Current Policies

The South sought to oblige the North to invest in the development of their states for the common good, and in 1964 UN formed a G-77 group that defended the interests of 77 developing countries of the Third World. In 1988 the UN Conference on Trade and Development (UNCTAD) was held to protect the rights of the developing countries. Today, the UN’s most known body that protects the rights of the South is UNDP – UN Development Program. Interestingly, developing countries hoped to follow the example of the Organization of Petroleum Exporting Countries – OPEC, which grew their economies in the mid-1970s by selling oil to European countries and the United States at high prices. The rise of Asian Tigers – Singapore, South Korea, Taiwan, and, later – China, determined the evolvement of another group of independent market players.

Today, the developed countries hold G-20 summits, in which representatives of the most developed economies take part. The list of these countries includes the USA, Great Britain, France, Germany, Canada, Italy, Japan, Russia, Brazil, China, India, Mexico, South Korea, and Saudi Arabia. Initially, the list included only the first seven countries. But as Brazil, China, India, Mexico, South Korea, and other countries showed a growing industrial potential, they expressed their intention to participate in international negotiations related to the regulation of international trade relations based on the concept of free trade. These countries participate in the free market and comply with the trade rules prescribed in numerous international statutes and agreements.

It is noteworthy that compliance with free trade rules is regulated by regional trade agreements – RTAs. The European Union is the largest union of states whose trade relations are governed by internal regional contracts. It includes 27 states that comply with the general rules on the free movement of goods and labor within the union, the absence of import-export tariffs, general restrictions for conducting trade relations with external partners, and a single currency.

European Commission, European Parliament, and European Court of Justice have supranational authority over the 27 states. Another good example is NAFTA – North America Free Trade Association that regulated trade between the US, Canada, and Mexica.

The developing countries also participate in RTAs: there is a Central American Free Trade Agreement that regulates relations between the US and Central American Countries. The Association of South-Eastern Asian Nations – ASEAN – was established in 1967 and reorganized in 1992 and 2007. There is also an Asian Pacific Economic Cooperation – APEC in which 21 states of the Pacific Rim participate. African Union – AU – has 53 member states and empowers economic cooperation within the continent.

The existence of multiple regional organizations does not undermine the value of international relations; on the contrary, internal agreements between countries allow them to achieve greater economic efficiency and become more successful players in the free global market. South countries participate in the Global System of Trade Preferences among Developing Countries – GSTP, proposed in 1988 by G-77. The organization still has only 43 member states, even though at least 140 South states understand the necessity of regulated economic ties with the Northern countries.

Recommendations

On the one hand, there are enough tools to regulate global trade. On the other hand, plenty of issues still need to be considered. The emphasis should be put instead on the essence of the international trade relations between rich and developing countries, then on the forms of these relations. Today, scientists from all continents study the free trade issue, and this problem has various aspects, depending on the point of view of the interested parties.

For example, Chen et al. (2018) discuss the importance of port zones for China’s trade development. The scholars are developing ways to modernize six Chinese ports – Yangshan, Yantai, Xiamen Haicang, Guangzhou Nansha, Ningbo Meishan, and Tianjin Dongjiang free trade zones. Scientists believe that ports’ role in the Chinese economy is of strategic importance since they serve as an essential platform for opening up the Chinese economy (Chen et al., 2018). It is recommended to adopt the Chinese approach for India, Brazil, South Korea, and developing countries that have active sea trade ports. The implementation of international maritime trade law could provide a starting point for rethinking many developing Southern countries’ economies.

Harrison et al. (2019) discuss the restrictions of the European Union related to labor regulations. According to scholars, these norms are now regulated by the Lisbon Treaty of 2007; nonetheless, they should be reconsidered due to the growing necessity of imposing free trade regulations on labor standards. Therefore, scholars discuss the further alignment of labor standards for the European Union countries and their trading partners. These standards should guide legal and political priorities and help level the deficiencies in critical provisions of treaties. In this light, the UN may be advised to pay more attention to the working conditions and salaries of developing countries’ citizens. Fair payments can be achieved if all 140 developing countries agree to higher minimum wage and better working conditions.

Jungherr et al. (2018) note the importance of supporting specific trade agreements instead of abstractly supporting free trade. Scientists propose distinguishing between the analysis of Germany’s social perception of free trade and its relationship to the Transatlantic Trade and Investment Partnership. Since TTIP has many aspects, scientists suggest that more attention be paid to each of them. In line with this observation, it can be recommended that the development of more detailed agreements on free trade for each of the 140 developing countries, in cooperation with their representatives, be introduced into the agenda of the relevant UN divisions.

It will allow renewed interest in regulated free trade and, in the long term, could reduce the level of crime and corruption if mutually beneficial conditions are developed. New personal agreements can consider relations between neighboring developing countries and, with the consent of the parties, make recommendations for the organization of internal alliances or agreements between these countries.

Obeng‐Odoom (2020) analyzes the features of the African Continental Free Trade Area – AfCFTA. According to scholars, this free trade area rejects classical, neoclassical, and Marxist trade theories, focusing on pan-Africanism. In particular, scholars criticize that the parties to the agreement promote the private appropriation of socially created land rent. Scholars propose an alternative model, developed by Henry George, based on the consolidation of land through land rent socialization. In this case, according to scientists, African countries will avoid a more significant division of the population into rich and poor.

Baier et al. (2020) analyze the effectiveness of trade agreements for different parties and conclude that the agreements matter more and involve more friction for the more involved parties. It is noted that the effectiveness of new trade agreements is less for parties that already have concluded trade agreements. In this regard, it makes sense to reconsider the approach to poorer countries’ participation in the global free market since they experience a more negligible effect on their economies from existing trade agreements.

Conclusion

Thus, a free trade relations regulation was analyzed in the global context. Today, there are many statutes, agreements, associations, unions, and other documents and organizations that uphold the principle of free trade. However, to ensure these agreements’ effectiveness, it must be borne in mind that all participants in the free market are in unequal conditions. Therefore, it is necessary to look for mutually beneficial cooperation models that would imply all market participants’ cooperation. Such models could be based on geographic and regional principles and require discussions with representatives of all parties.

Modern global economic development depends on the effectiveness of existing models, which need to be revised. In particular, it is recommended to revise international maritime law in the context of developing countries’ economic potential, revise labor standards for all market participants, and develop new personal agreements for smaller and poorer participants. It is also necessary to reconsider the position of the AfCFTA on land leasing and the transition of African countries to the model of socialization of land rent. Finally, it must be recognized that although free trade rules should be the same for everyone, they are less effective for countries with less economic participation.

References

Baier, S. L., Yotov, Y. V., & Zylkin, T. (2019). On the widely differing effects of free trade agreements: Lessons from twenty years of trade integration. Journal of International Economics, 116, 206-226.

Chen, J., Wan, Z., Zhang, F., Park, N. K., Zheng, A., & Zhao, J. (2018). Evaluation and comparison of the development performances of typical free trade port zones in China. Transportation Research Part A: Policy and Practice, 118, 506-526.

Harrison, J., Barbu, M., Campling, L., Richardson, B., & Smith, A. (2019). Governing labor standards through free trade agreements: limits of the European Union’s trade and sustainable development chapters. JCMS: Journal of Common Market Studies, 57(2), 260-277.

Jungherr, A., Mader, M., Schoen, H., & Wuttke, A. (2018). Context-driven attitude formation: the difference between supporting free trade in the abstract and supporting specific trade agreements. Review of International Political Economy, 25(2), 215-242.

Obeng‐Odoom, F. (2020). The African Continental Free Trade Area. American Journal of Economics and Sociology, 79(1), 167-197.

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