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Free trade is the process of liberalization of market from governments’ interventions. Under free trade policy, all economic resources from all countries involved are subject to price as a reflection of supply and demand, thus making price as the sole determinant for resource allocations.
The characteristic of free trade are:
1. Trade of goods without taxes or any kind of barriers
2. The free movement of labor between countries involved in the agreement
3. The free movement of capital between and within countries involved in the agreement
4. Free access to markets
Free trade ensures the same playing rules for a competition, although does not necessarily ensures a fair competition for all the parties involved.
FREE TRADE IS NOT FAIR TRADE
Free trade creates an equal business environment. By signing the agreement, countries will put their private sectors to compete with other countries’ private sectors in equal terms. For poorer countries, it means their private sectors – whom are relatively weaker – will compete against much stronger companies. The regulation may be equal, but the players capabilities are certainly not. It would be like a football match between Manchester United and Malaysia National Football Team – there might be a level playing fields, but Manchester United will still win every time.
Without the government intervention, the private sectors, commonly farmers or small companies, will fail to protect their production. It happened in Senegal, when it open its market, and should lower the tariff of tomatoes during 1994 to 2001. The country was producing about 73,000 tonnes of tomato concentrate by 1990. In 1996/7, hitted by the imports from EU, the production decreased to 20,000. The EU’s exports of tomato concentrate to Senegal increased from 62 tonnes in 1994 to 5,348 tonnes in 1996 due to the increased access to Senegal’s market (an 8625,81% increase). Since then, there has been stagnation in Senegal’s tomato processing industry with declining prices of tomato concentrate and a lack of credit and investment resources available to processors.
The EU farmers, on the ther hand, have easy access to credit and qualified labour compared to the Senegalese counterparts, and they are able to produce tomatoes more cheaply for the European processing industry. Moreover, in 1997 alone, the
EU paid out US$300 million in export subsidies to tomato processors. This example of Free Trade comes to show how countries that does not have an equal competitive advantage are expected to play against a more stronger player and, in the process, failled miserably.
However promising the benefit of Free Trade the richer country claims, the reality shows that inherently. Free Trade is never a fair ground to compete and therefore should be abandoned.
COSTLIER FREE TRADE
The price for a free trade is more expensive than the benefit it brings. The practice of free trade agreements will undoubtingly give market access to much richer country. This then will, so they claim, give chances for poorer countries to attract investment and improve growth prospects, and in some cases, even expand their own corporate sector – a fine answer for all the problems in this world.
However perfect it may sound, the hypothetical condition can only be valid in a circumstance where particular industries in the poorer countries has comparative advantage. In truth, most of the companies does not have (if any) comparative or competitive advantages. Being so, these companies whenever a free trade agreement is applied, left alone to compete without government’s protection, will never develop and then in the long run will die.
Harsh reality portrays that after a country opens their market, the first sector to suffer is the employment sector. Poorer countries will find their skilled workers moving to greener pasture (Seeking higher wage) thus leaving the workforce inside the country being cheap labor (the main attraction for foreign companies). Meanwhile foreign corporations will also compete for commodities with higher financial capital and stronger purchasing power, raising the living standard of the whole poorer country’s society.
No matter how beneficial it might seem by getting access to the new market, the practical thing can differ so much because free trade premise is based only on the potentials that can be reaped, but not on the technical requirements that need to be fulfilled before it can reap the potential.
The economic indicator of Thailand after the FTA
1. Inflation rate in Thailand rose every year from 2003 – 2007
2. Growth rate of the GDP decreased every year
3. Thailand’s account balance decreased from 8 trillions USD to deficit 4 trillion USD in four years (a 150% decrease of their account prior to the FTA)
When in contrary China enjoyed a steady increase in their account balance of 400% in those same four years.
While Thailand, sadly to say did not increase their GDP.
It is not only about poor countries who should not engage in FTA but for countries in general who are poorer compared to their trading partners.
If it is more about poor third world countries having an equal trading terms with the U.S or the E.U for the promise of economic growth, HOW will FTA succeed in this. Because when it comes to economic freedom regarding the development of a country including all of its citizens, promises and assertions will not stand. There is little or no evidence to support claims that free trade lifts people out of poverty, and it is the burden of the opposition to prove otherwise.
The EU – Mexico Free Trade Agreement
In the year 2000 Mexico signed a “Global Trade Agreement” with the EU, which the WTO applauded as “the first, the fastest and the best” FTA agreement in the world. In the agreement the EU managed to persuade Mexico to deregulate 95 % of their goods and service industry. The EU at that time claimed the agreement not only as a representation of trade but for “regional development” in South America. Mexico circa 2000 AD was becoming the beacon of social and economical success by opening itself to the EU.
However, as advocate of the FTA, making promises and unsubstantiated claims are always easier said than done. As reflected in the reality after the FTA, the condition speaks for itself,
1. GDP Growth in Mexico during the first three years of the agreement was only 1%
2. Mexico currently suffers from a growing trade deficit with the E.U
3. Mexico trade balance deficit has risen 80% since the EU – Mexico FTA went into effect
4. High concentration of investment from foreign investment now controls the economy
5. Lack of job creation by foreign companies kept the rural area of Mexico undeveloped, and
6. Basic service companies (water and electricity) has been denationalized to foreign corporation
7. The presence of European companies in strategic sectors such as water, electricity and banks has not promoted enhanced quality, rather, on the contrary, an oligarchic market with high prices and widespread abuse of consumers.
The example of Mexico also showed that although FTA opens the opportunity to enter a wider market (the EU) it is not in the same playing level, as the main export of Mexico is only oil and the main export of the EU are banking, electricity, water treatment, car manufacturing, and so on.
When using Mexico as an example, it becomes evident that the loss of their basic sectors, the lack of employment, the control of the economy by foreign corporation, and the deteriorating trade situation of Mexico is, plainly speaking, an expensive price to pay for the promise of “economic growth” the opposition uses as an argument. Instead according to the example stated, the promise of growth was non existent.
This example should be not only be a warning for the south american continent but for every country who are already or are in the process of joining a FTA.
Free Trade is not Fair Trade: Corporations reaps the benefit more than host country
When a FTA is signed both country’s market is liberalized, it is the corporation from the stronger country that will first move to take it’s position.
The FTA practice in a country is only as good as the corporation that enters the country. When we look at past experiences, we can all see that the conclusion is “not good”. These behemoth are not interested in the “regional development” or “democratic clause” both trading country committed into in the agreement.
These behemoths of trade saw these FTA as merely an act of taking maximum profit in a new emerging market.
a country can never deregulates its market for the promise of “economic development” then open it’s infant market to compete with big corporations. Especially when there has been rampant case of abuse by major corporation taking advantage of the FTA, whose sole purpose is to “make maximum profit”. This is a risk countries should take on assessing the benefit of FTA, where we clearly kwon that it cause more harm than the benefit it promised.
Free trade is not Free Trade : Labor welfare for the price of macroeconomic indicators growth
The free trade foundation is of comparative advantage. The countries that are involved should have a significant comparative advantage against its partner. This model should work perfectly if the agreement is exclusive between only two countries.
So, for example Country Y, which has a comparative advantage in commodity A, B, and C, while Country Z, which has a comparative advantage in commodity D, E and F, the two countries can sign the agreement and shares the advantage of global trading.
But Adam Smith, contrary to HC Andersen, could never guarantee a happily ever after ending, because unlike marriage, free trade agreement is not monogamy. Country Y, can also sign a free trade agreement with country X, which supplies commodity E, G, and H. It (Country Y) could also sign an agreement with Country W, which supplies commodity E, I, and J.
So now, country Z, X, and W will compete in the market of country Y for the same commodity (E). So there is now a competition between them. But, what is wrong with the competition, isn’t all trades involves competition?
The competition between country Z, X, and W will become a “race to the bottom”, where the condition causes the reduction of price to its lowest level. If they are richer countries that can subsidize their commodity there will be no problem. For poorer countries, to preserve profits while keeping its competitiveness in unreasonable price, the only option is to lower its labour wage.
Why Poorer countries should abandon free trade agreements?
Deregulation of markets forces medium and small business from different industries to compete in equal terms with big corporation. These will inevitably causes many business to shut down as they cannot compete with the much bigger corporation that already has an existing big markets to support their operation (as oppose to their smaller counterparts).
These liberalization of markets has caused unemployment, increase in trade deficit, account balance deficit, decrease in growth, and rampant abuse by foreign presence in the country.
FTA brings more harm than good to the economy (everyone should got this point by now) and it did not show any impact to development, and more importantly because the opposition failed to prove otherwise.
Free trade doesn’t moves international trading; instead it is the two things called the demand and supply. So, any country that has a product surplus should not be worry, because as long as there is a demand in international market, the commodity can be sold. If the demand is low, irrespective of free trade, the sale will not be high.
This leads to the second point, where the opposition placed tariff into a wrong logic. It is important to see, that it is not the cost that counts in trade, but the profit, in exchange to the value.
Tariff is not the burden of supplier, instead the customers bears it. It is true that customer can get a cheaper price from free trade, but it is not true that the supplier could get a higher profit margin. It is also not true, that because there is tariff the exporter will get lower margin. The profit margin is relatively the same, irrespective of tariffs.
The tariff barrier from the importer country will only take the import product at a same or slightly more expensive price from the local product. A slightly more expensive price will not cease sales, because of one reason, the demand is there. The importer country will not put unreasonable tariff, also for another reason, demand. The country should make sure that it is affordable enough for the customer, so the national demand can be fulfilled.
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