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To What Extent Free Trade is Fair and Benefits The World Economy
Adam Smith, coined rightfully as the Father of Modern Economics, in 1776 in his book ‘The Wealth of Nations’ laid the foundation of the concept of free trade. Though by no means a novel concept, it had been informally practiced throughout British colonies as well the Ottomon Empire, he formalised this economic concept. Famously opposing the mercantilist approach, he is quoted as saying ‘It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.’ To summarise, one of his main arguments for free trade was why buy what you can import for cheap. According to him, this would allow countries to specialise according to their natural strengths and then trade for the rest of their needs from what complementary countries do best. The Scotsman further stated ‘By means of glasses, hotbeds, and hot walls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?
Free trade is also considered to be a vehicle of peace. Frederic Bastiat is attributed to have said ‘ ‘When goods cannot cross borders, armies will.’. History has seen examples of when the USA President Hoover signed the Smoot Hawley act, hiking tariff, eventually leading to extreme protectionism, the Great Depression and then World War 2. Finally, in 1947 the General Agreement on Tariff and Trade (GATT) was signed with objectives of encouraging international trade, and reducing tariff as possible. A more recent example is the USA imposing trade sanctions on Iran, following and leading to hostile relations between the two countries.
The modern world consists of multiple free trade agreements with most countries’ members of more than one. These are blocs formed geographically or according to a country naturalised need. They can be bilateral or multilateral. Oftentimes international trade can be a political tool, a symbol of goodwill for some nations and hostility in other cases. The World Trade Organisation is a notable example with many member countries and a comprehensible framework. In case of peaceful neighbours, bilateral relations are common, reducing transport and other costs associated with the physical transfer of goods.
Specialisation is one of the main articles of free trade. David Ricardo and his theory of comparative advantage was a key proponent of free trade. He theorises that Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. By raising the productivity of national economies, international specialization increases the output of goods and services. This is its economic justification and the principal justification of the international trade that makes possible such specialization (Franklin R. Root, 2000).
No country is self suffice in all their needs and to attempt to do so, shut themselves up in this endeavour, would cause great economic inefficiencies as well as scarcity for a great fraction of the people. Also, trade increases the importance and usefulness of a commodity for a country. Saudi Arabia with its oil reserves would not amount to much if they could not trade it in for their needed imports, a vast array of items scarce in a dessert country.
So is free trade the end all of the worlds commodity distribution and rotation ? While most liberal and western thinkers and economists think so, the conservatives have sometimes cited a different stance. Many also argue that free trade in its complete sense is almost impossible to implement and it would be the natural tendency of those e who have the clout to offer some degree of protectionism to their home industries. A famous Republican stance from USA, from William Mc Kinley states that :’Under free trade the trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man. It is said that protection is immoral […]. Why, if protection builds up and elevates 63,000,000 the U.S. population of people, the influence of those 63,000,000 of people elevates the rest of the world. We cannot take a step in the pathway of progress without benefitting mankind everywhere. Well, they say, ‘Buy where you can buy the cheapest’…. Of course, that applies to labor as to everything else. Let me give you a maxim that is a thousand times better than that, and it is the protection maxim: ‘Buy where you can pay the easiest. And that spot of earth is where labor wins its highest rewards.
Opponents of free trade argue that while Ricardo’s theory of comparative advantage is non trivial and theoretically true there are factors that undercut its plausibility, namely the flight of capital and labour. Henceforth, wherein ethical and social regulations may not come into full force, countries and companies pursue absolute advantage, to the undue and reckless exploitation of the producer. Paul Krugman once stated that, ‘ If there were an Economist‘s Creed, it would surely contain the affirmations ‘I believe in the Principle of Comparative Advantage’ and ‘I believe in Free Trade’.
Intellectual and political opponents of free trade cite many reasons for their stance and in some cases even portray developed nations indulging in free trade as a mafia of sorts. Western literature tends to skim over the negative effects of international trade and outsourcing, or possibly many researchers don’t get there. Ethnocentric biases seem rampant. Furthermore, it can be pointed out that there are in practice many discrepancies and uncertainties, both economic and political which cannot be included in an economic model.
Free trade puts all participating global players on the same playing field. Ideally one has complete information and access to all commodities for sale. Essentially this would mean that manufacturers and sellers who are newer into the market or on a smaller scale are at a start disadvantage. An infant industry may not be able to stand up against an established one. This leads to Krugman (2008) suggesting that since these are not normal conditions protectionism may be prudent to nurture less industrialised nations and for industrialised nations the case of protectionism is weaker. Even if smaller nations manage to stay afloat they will have lesser margins, taking less advantage of economies of scale and may even be operating at a social if not only financial loss. In an ideal situation this competition would drive innovation and efficiency but in practice one sees smaller scale producers losing dearly. Newer industries simply don’t have the resources, human and physical capital and the information to be able to survive. Wherein they endeavour to do so it is often at the cost of labour and environmental exploitation, with free trade doing them much more harm than good. Many countries have criticised the WTO for not doing more to levelise the dealings of the North (developed nations) and the South (developing nations). This is a major criticism of the free trade concept.
Many developing nations are agro-based or depend on a small range of exports. This leaves them more vulnerable to fluctuations in crop yields, international price hikes and currency fluctuations. Most ‘North’ nations buy these raw materials, add value and then sell them back to the South nations, creating more real wealth for themselves and widening the gap between the rich and the poor. The rich sell products, not the means to make such products, keeping the balance in their favour. It is similar to giving a man a fish vs. teaching him to fish for himself. For example buying raw cotton, then processing it and then selling back clothes to the originating country. At this point if one even starts a competing plant for cotton processing, with open trade it would rarely be able to compete on price or quality and without some protectionism involved would be a failed venture. Furthermore another social cost of free trade and globalisation is urbanisation. Farmers lose their farmland, move to urban centres where they may or may not do well and may contribute to increased crime rates.
As long as a poorer nation is forced to accept such free, unfair trade in essence larger countries are able to sustain a great amount of mercantilist theories under the cloak of laissez faire liberalisation. According to Smith (2003) they would be handing their wealth to the imperial-centres-of-capital of their own free will.
Furthermore free trade also encompasses, in practice, other discrepancies. It opens up barriers for the trade off of information and technology but at the same time it also opens up avenues for technological theft. Countries have different laws pertaining to privacy, patents and innovation and many a times even copy right laws implementation can take years. In this case the import of machinery and/or IT tools leave these vulnerable to copy and theft in the host countries. Engines have easily been taken apart and rebuilt, giving the host country and company technical knowledge to replicate what they import. Content such as music, art and books are pirated and sold widely in countries with the original authors and publishers having little way to track or collect any royalties. One may again argue that in the third world this dispenses education at a price that is affordable but ethically this is still debateable. Competitive advantages are dispelled and to any producer this could be a sizable blow. The purpose of business and economics is not philanthropy though mindfulness and responsibility is now a virtue.
Cultural identities also perceive a threat from free trade and its counterpart, globalisation. Many countries view these as white-washing or Americanising its culture with insensitivity towards their native values. There is a loss of local aesthetic and demand of local traditional products because foreign cheaper good serve the same purpose but in a cheaper more Anglicised way. To many citizens this is a loss of national identity and sovereignty. Since this is not quantifiable, many classical theories do not consider this component. Furthermore, traditional industries also become indirect competition to the foreign goods and more often than not lose out. Food vendors, with local street food lost out in most cases when a Mc Donald’s opened down the street. Flamboyant locally handmade cloth in India, which was initially a lengthy, rich process got reduced to more accessible, cheaper British cloth during the British colonisation and the after effects are seen to this day. Many artists and craftsmen became obsolete, losing years of expertise and hard work. Languages are also affected as are customs. Rice and roti eating nations started consuming bread and breakfast cereal. Their own wheat was exported and then re-imported made into processed snacks. The health of the local was affected, not all climates allow for rampant consumption of richer, heavier food and the slighter built East Asian had a paunch weighing down his frame. Traditional ways of life have been lost to the glamorised Western way of life which is not without its own pitfalls but is promoted and pushed on as the end all. The world as a while loses out on diversity, thoughts, varied points of view, heritage and culture. Free trade has also been used as a political tool. Countries can ‘favour’ each other with distinct deals in order to foster better relations. On the flip side however embargos are another way to show hostility. However on a separate scale, multinationals with political backing and manoeuvring are able to get lawfully and unlawful advantages regarding land acquisition, evading natural and national laws, bribery and corruption. More often than ever, developing nations with lax frameworks of social justice and security are the targets. It is now easier than ever for an MNC to go into a country, set up shop and while adhering to already lax laws, further get away with more exploitation simply by knowing the right people in the host country. Many developing nations do not have pressure groups with as much clout as the developed world, and the information gap may ensure that a company indulges in less than tasteful practices for years before the media catches on. The diamond industry in Sierra Lone, African exploitation are a classic example of this. These MNCs can then further on play a role in politics, aiding the candidates, in legitimate ways and otherwise, who will be most lenient to them. This will leave the common man of the developing nation at a further disadvantage, concentrating the wealth that investment brings into a few hands, before the possibility of capital flight.
Environmental degradation has long been a woe of people in industrialised settings. Developed nations are likely to have more comprehensive and strictly enforced laws in place. However, their corporations are not as careful where they get a looser reign. Irresponsible extraction of natural raw materials and improper disposal of waste and emissions into the environment are much easier to overlook in a foreign land. Proponents of free trade here argue that it is the responsibility of the host country to have better laws in place and to enforce them.
Nestlé’s baby formula scandal is an example of MNCs and their reckless clout. Despite the WTO Code recommending a complete ban on advertising and marketing of any breast milk substitutes in developing countries. The poverty stricken mothers of these nations assumed that they were doing the best for their children by giving them formula but at the same time they had no t been educated as to the correct usage, sterilisation of bottles etc. Mothers would dilute the formula as a measure to save more money. However, with insanitary conditions, gross mismanagement scores of children were lost. Nestle was far and wide criticised but it still took years to regulate.
Free trade is indeed a double ended sword. there is a vast discrepancy between its theoretical implications and practical applications. For free trade to be fair trade there would be a call for great benevolence on the part of countries and corporations which would be far-fetched to assume. It is support and special groups that oppose free trade and they are fighting for the in quantifiable gains and losses for humanity. In reality however, and as is seen now, free trade is far from fair trade. It is many developing nations striking deals that benefit them less than their counterparts, but they generally have no other way out. It would be up to individual organisations and entity to at least try to play nice, play a little bit fair.
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