Trading towards Globalisation: Evolution of the Paradigm Through The Investigation of Free Trade
...will represent free trades biggest benefactors. Nationally, consumers are the beneficiaries of free trade. Now, let us have a slightly less obvious insight. A country may benefit from free trade even if it is less efficient than all other countries in every industry. It makes sense that one firm would be more successful than another firm in a local market if it could produce its output more efficiently, that is at lower cost, than the second firm. If the two firms produce identical products then the less efficient firm is likely to be driven out of business, generating losses. If we extend this example to an international market then it would make sense that a more efficient foreign firm would absorb business from a less efficient domestic firm. Finally, suppose all firms in all industries domestically were less efficient than all firms in all industries in the foreign countries. It would seem logically impossible for any domestic firms to succeed in competition in the international market with the foreign firms. International competition would seemingly have only negative effects upon the less efficient domestic firms and the domestic country. The Ricardian model of comparative advantage refutes this seemingly logical conclusion. Ricardo demonstrated the surprising result that less efficient firms in a country can indeed compete with foreign firms in international markets. In addition, by moving to free trade, the less efficient country can generate welfare improvements for everybody in the country. Free trade can even benefit a country that is less efficient at producing everything. The Ricardian model numerical assumes that countries differ in their production technologies such that one of the countries is absolutely more productive than the other in the production of each of their particular goods. If these countries specialize in their comparative advantage good then world production rises for all the goods. Increased output occurs even though there is no increase in the amount of labor input in the world, thus specialization can raise world production efficiency. Because of the increase in output it is possible to construct a terms of trade between the countries such that each country consumes more of each good with specialization and trade than was possible under when each country was self-sufficient. Thus both countries can gain from trade. The surprising result from this example is that a country, which is technologically inferior to another in the production of all goods, can nevertheless benefit from trade with that country. Based on this, it can be clearly seen that countries such as the US and Britain would benefit tremendously by trading with smaller (weaker economically) countries such as Pakistan and Vietnam because if Pakistan and Vietnam concentrate on their specialization, in this case, the textile industry, then they would ultimately lose out to the bigger (stronger economically) countries who are autarky to begin with but who choose to import to guarantee an export market for their own goods. This subsequently brings about the argument that trading freely will enviably cause some countries to lose out. 4.0 Losers of Free Trade Free trade theories have always been advanced by the major developed countries to further their own interests. This is particularly true that during their own development and industrialization processes, these countries protected their domestic industries behind tariff walls. Tariff liberalization took place when the home industries were sufficiently strong or efficient to stand up to competition from imports. Developing countries face two major types of problems that hinder their effective and beneficial participation in international trade: pressures to liberalize their imports, affecting local production units in various sectors, including industry and agriculture; and the lack of adequate export earnings, export capacity or opportunities. Many developing countries have taken measures to rapidly liberalize their imports, and these have caused a surge in the inflow of imports. However, the growth of export earnings has lagged, due to a combination of factors, including a decline in commodity prices, continuing barriers to industrial exports and supply constraints. As a result, there have been greater imbalances between imports and exports in many developing countries, adding to their trade deficits and external debt problem. The difficulties caused by import liberalization and the hurdles faced in attempts to expand exports are dealt with below, followed by the consequences of poorly planned trade liberalization. The following sentiments by Malaysian Prime Minister Dato’ Seri Dr. Mahathir Mohd. at UNCTAD-X (Feb 2000) exemplifies this: “If you want to make globalization an effective instrument for the development of all countries and peoples, it is imperative that you take serious notice of the fears felt by developing countries about what is happening to the world's economy, the world's financial system in this era of interdependence and globalization. What we do know is that the path to development has never been easy even at the best of times. Despite out efforts we see rising inequality between developed and developing countries, with continued high levels of poverty and unequal and inequitable benefits from globalization. We see increasing uncertainty of the global economic environment... greater marginalisation as a result of the globalization process.. growing inadequacy of global institutions to deal with developmental problems.” Countries such as the Philippines who depend on continuing their right to trade freely concentrate on crops as major sources of export, but at the expense of sombre future of its’ environment; agrochemicals that are used may not only affect the environment but enviably its users as well. Developing countries will be the biggest losers of free trade today. Developing countries that do not have a say in the interpretation and shaping of the new forces that the globalized world is unleashing will be the biggest losers of free trade today. It is fair to conclude that one of the ways to halt this paradigm is to not let developed nations trade with developing nations on a level trading ground. This statement is purely justifiable due to the important fact that developing countries will fundamentally have no say in the guide to future trading. Thus, the emergence of the World Trade Organization as an immediate remedy will seem to be a welcoming sight. 5.0 Origin of WTO The General Agreement on Trade and Tariffs was formed in 1947 with the intention to operate while observing the following principles: that no country is to give special trading advantages to another or to discriminate against it, imported goods entering the market are to be treated as equivalent to domestically produced goods, the encouragement to protect the domestic industry and the introduction of agreed fixed individual tariffs. The World Trade Organization was formed at the 8th negotiating round of GATT in Marrakesh, Morocco. The WTO however embodied the principles of GATT and sought to promote a trading system that is fair, non-discriminatory, liberal and helpful to less developed countries. The WTO is different from GATT in that it was a provisional, multilateral agreement negotiated by its contracting parties but never ratified by their parliaments. The deal in Marrakesh though was signed by ministers from most of the 125 participating governments at the meeting. The agreement establishing the WTO was ratified by member governments and stipulates rules according to which the organization functions. The three multilateral agreements which make up Annex I of the WTO charter include: the GATT 1994 (the updated version of GATT 1947), the General Agreement on Trade in Services (GATS), and Trade-Related Aspects of Intellectual Property Rights (TRIPS). Annex II - the Understanding on Rules and Procedures Concerning the Settlement of Disputes, Annex III - the Trade Policy Review Mechanism (TPRM), Annex IV - the Plurilateral Agreements, and the multilateral agreements among members along with Annex I, constitute the WTO framework. One of the most significant differences between the WTO and the GATT involves the dispute settlement process embodied in Annex II of the WTO Agreement...