Free trade in the world economy

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In recent years, free trade has been an important element in the process of integration with the world economy. Free trade is often speeded up on the basis of potential benefits to developing countries. However, the world always involves the disparity between developed and developing countries. How realistic is free trade in the real world? How is the role and impact of trade on developing countries? What makes people pessimistic about the prospects of global growth and development in the future? This essay will focus on examining these problems critically.

Freetrade is defined "the lowering and eventual elimination of barriers to trade between nations" (Daniel Griswold, 2005). There are many free trade agreements in the region and in the world like WTO (World Trade Organization), NAFTA (The North American Free Trade Agreement), APEC (The Asia-Pacific Economic Cooperation), AFTA (Asean Free Trade Area), CAFTA (The China-Asean Free Trade Area) in which a number of trade barriers as taxes, import quotas, subsidies, and other forms of support to domestic producers are dismantled. Free trade encourages international cooperation with freely exchanged goods, citizens, competition and innovation.

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Free trade has helped efficiency and growth of economy. Tariff reduction promotes export. Trade liberalization led to a rapidly export increase in developing countries. In 1980, manufactured goods only occupied a quarter of exports from developing countries. In 1998, it gained over 80%. Exports of developing countries increased from less than 20% in the 1980s to more than 40% by 1995 (Paul Collier, David Dollar, 2002). Nevertheless, free trade doesn't ensure effectiveness of export strategy. Argentina's liberalization in the 1980s and 1990s and Chile in the early 1980s reduced the export growth by the real exchange rate's appreciation.

Besides, between a strong and weaker country, the stronger countries often get more benefits. Developing countries can hardly access the increased markets. Developed country protection is in the form of tariff peaks, quota arrangements, specific duties and production subsidies. For example, Mexico increased fruit and vegetable exports by 50% when NAFTA agreement was signed but its corn imports from US increased three times and over 500% for soybean, wheat, poultry and beef. Mexico's imports were much more than exports and caused unemployment of 1.7 million rural jobs. America didn't reduce the agricultural subsidies, making its products be sold at a price under production cost whereas Mexico reduced its tariff to zero. Subsidy reduces the national welfare and the economy's efficiency. Developed countries can find other ways to block developing countries' exports. America imposed the anti-dumping tax on Vietnamese industries in catfish export to US since 2003. Or Vietnam has faced barriers of selling shoes to EU. Moreover, developed countries' tariff imposition on agricultural products is different between developing and industrial countries. The average level of tariff on agricultural import was 15% for industrial countries, 20% for Latin America and 35% for Europe and Central Asia (Paul Collier, David Dollar, 2002). Developing countries are often hampered in important areas: agriculture, textiles and labor intensive manufactures. So, "Most of the gains from trade liberalization don't come from the removal of trade barriers in the industrialized countries rather the biggest source of gains to developing countries is the removal of their own barriers to trade" (Mark Weisbrot& Dean Baker, 2002)

Developed countries' restriction on international labor immigration to developing countries hinders the economy's efficiency when free trade can't move labor force to more efficient markets. Immigration restriction of developed countries reduces a source of capital inflow of developing countries.

Intellectual property's standards are too high for developing countries to perform because developing countries' cost of implementing can reach $60 billion annually, exceeding the gains developing countries get from other areas. Intellectual property causes inefficiency for the economic development. It creates the monopoly for companies owning patents and copyrights, hampering local companies to access the technology. Monopoly is one of the worst inefficiencies in the economy, which denies access to life saving drugs such as AIDS epidemic. Intellectual property regime hasn't worked efficiently in developing countries.

The way of trade openness is extremely important. Why were there successful countries such as Taiwan, Korea, China while Argentina, Mexico, Russia failed? This question will be cleared in two cases of Argentina and Taiwan.

In Argentina's public debt crisis in 2001, the first mistake of Argentina was the completely state banks' liberalization in localities across the country and sold some of medium and large financial institutions for foreign investors, the second was the elimination of most custom barriers and tax reduction from the average level of 45% in the 1990s to 11% in 2000. The third was the privatization of public aspects (aviation, electricity) without strong and complete regulations, leaving the budget source nothing except tax. Moreover, the fixed exchange rate regime (one dollar for one peso) made Argentina's export lose competitiveness following the Brazilian devaluation in 1999. The currency board allowed Argentina's public companies to borrow excessively in the international capital market. Lacking of control policies in the financial market led to massive capital outflows. When the economy fell into the recession, fiscal easing was not the option, instead of tightening policy induced by Washington Consensus "a set of economic policies advocated for developing countries in general by official Washington, meaning the international financial institutions" (John Williamson, 2004).

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Conversely, in Taiwan, the government set up the environment reform as "Nineteen-point Reform" program in 1960, the simplification of administrative procedures, the liberalization of regulations related to economic matters. Investment subsidies were in the form of tax incentives like the "Statue of Encouragement of Investment" in 1960, giving "sweeping extension" about the tax credit system for investment. The business income tax was reduced from 32.5% to 18%, tax time for new investments was extended from three to five years, payments of import duties on plant equipment were delayed and paid in installments after starting operation. The PVC plants were built under government supervision in 1966 and merged in a joint venture with the Chinese petroleum corporation to get ethylene using production efficiently (DaniRodrik, 1994).

In the real world, trade liberalization is a gradual and sequential process over a period of decades rather than some years. Gains from openness must accompany by the institutional reforms. Korea and Taiwan combined their outward orientation with unorthodox policies: high tariff and non-tariff barriers, export subsidies, directed credit, tax time, public ownership of banking and industry, which didn't follow trade rules by IMF or World Bank.

Since the crisis in 2007, the world economy hasn't recovered completely.The credit crunch of sub-prime lending is the major cause for American crisis. The high unemployment decreased the consumption, lower domestic demand, influencing the economy growth. Consumer spending, standing for 70% of American economy, will be hindered by unemployment when people need savings more. Besides, American deficit is estimated to gain $1,480 billion in 2011, equivalent to 9.8% GDP of this country (Financial Times), the highest deficit in history. However, the government still has no action to improve this situation but keeps easing monetary policy.

In Europe, public debt problem is extremely serious. Nations here fell into deficit due to borrowing excessively for the government's spending. The IMF and EU gave the rescued package of 110 billion EUR to Greece and 85 billion EUR to Ireland, accompanying with tight policy as tax reduction- Ireland's advantage for promoting its economy. The public debt crisis can spread Spanish, Portugal and even Italy. The common currency has the ability to collapse if this state is not improved.

In China, CPI is predicted 10% and the inflation rate is 5% in 2011 (Chinese Statistic Department). Excessive real estate market development, easing policy with excess in issuing money causes depreciation and high inflation, increasing the price of primary commodity. Inflation tends to rise in other Asian countries. The tight policies may be used to prevent the inflation. Furthermore, macroeconomic instability due to fluctuations in the currency market can cause the detrimental to recovery of the global economy.

Japan's disasters (Earthquake and Tsunami) cause a big loss for the world economy. Japan is a big partner in Asia, attracting the majority of FDI here. Asean growth will decrease in the short term. American economy will also be affected because export area occupies by 10% GDP of America in which export to Japan accounts for 5% (Info TV).

It appears that trade liberalization doesn't improve poverty. How much do the poor benefit from globalization? Although number of poor people living under 2 USD and 1.25 USD a day tend to go down, there is the increase of people falling into poverty (at least 80% of people live on less than 10 USD a day) (World Bank Development Indicators 2008). In 2006, around 40% of 6.5 billion people in the world lived in poverty (increased 36% from 1981), 877 million people lived in poverty endings. The worst poverty was in Africa, poverty rose from 41.6 % in 1981 to 46.9% in 2001 (Shaohua Chen, Martin Ravallion, 2004). Even, "The average cow in Europe receives a subsidy, in excess of 2 USD a day" while "some 40% of those in developing countries live on less than 2 USD a day" (Joseph Stiglitz, 2007). Inappropriate policy reforms as privatization, subsidies, cutbacks in the public expenditure are partly for this. Fast privatization can quell local industries and cause unemployment, affecting the workers' life, increase poverty. Massively agricultural subsidies in developed countries decrease developing countries' income and increase poverty because seventy percent of population in developing countries relies on the agricultural export. The poor can't even afford to buy the imported life-saving drug, which is so expensive caused by intellectual property. Each day, about 22,000 children die due to poverty. And "they die quietly in some of the poorest villages on earth" (UNICEFT). Painfully, most developing countries are too poor to have social safety net to ensure the poor's welfare, to remove workers to another job when unemployment occurs. Even they must cut the public expenditures on health and education decreasing the budget deficit to receive aids from IMF.

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The inequality between the richest and the poorest countries is more and more increasing. The gap between the rich and the poor tend to widen, reflecting the adverse side of globalization, is only beneficial for a group of countries. 40% of the poorest in the world represents 5% of global income while 20% of the richest represents 75% of world income (World Bank, 2008). Moreover, in global economy, skilled workers are more used than unskilled workers by foreign firms in developing countries, increasing wages of skilled labor relative to those of unskilled labor. Technological development induces the productivity growth, requiring more and more skilled workers, consequently growing inequality.

Population rising influences the environment critically. Rapidly growing population in rural area will lead to the shortages of land, water and fuel while in urban area, lacking of sanitation and clean water causes health problem for citizens. Slow population growth will loosen the environmental problem. However, this relies on the government's commitment to economic and institutional conditions of limiting population.

One serious problem caused by globalization is global warming. The Earth becomes warmer, accompanied with the high surface temperature, Arctic ice meltdown, sea level rise, carbon dioxide increase. Excessively economic growth causes serious effects on the environment and human life. New industries in China and India continue to release carbon dioxide, big factories dismiss industrial garbage directly to the rivers and streams without processing system, destroying the environment severely. America does nothing to cut the emissions of greenhouse gasses, a main reason for global warming which needs a big expenditure because this affects American's GDP growth. The cooperation of developed and developing countries is extremely important in resolving this problem.

In conclusion, free trade is good for economic growth and development but in fact, free trade is a myth, an injustice between developed and developing countries. To apply free trade successfully, developing countries need to combine with national institutions and standards. Trade is only a means to achieve the society's goal: prosperity, stability, freedom and life quality.