Trade Liberalisation is Good for the Poor
Trade liberalisation refers to the reduction of barriers and the free practice of trade among countries. The barriers include tariffs, quotas and non-tariff business obstacles.
As a result of the reduction or total elimination of business barriers, business efficiency, sustainability and cost effectiveness are enhanced while free trade is improved (Lall, 2000). Trade liberalisation has continued to have a profound impact on the manner in which business operations are undertaken.
Whether or not trade liberalisation is good for the poor is a debatable issue (Rodrik, 1989: 1-16).In the United Kingdom, trade liberalisation has for a number of years ensured that entrepreneurship accounts for more than 60% of the country’s national income.
This fact has been made possible by ensuring that the cost of consumer goods is bearable to the poor and that the level of efficiency in the production and distribution process is enhanced. This concept also ensures that a country’s overall economic growth and development are enhanced (Anderson, 2009).
Thailand is a good example of a country in which free trade has led to the expansion of its manufacturing sector. The country has a very open and objective trade policy.
Sadly, trade liberalisation in the country has led to a decline in the agricultural sector thus leading to the suffering of poor people and rich ones benefiting more from the ever expanding manufacturing sector (Ng & Yeats, 1997).
Nevertheless, Thailand’s poor population has been improved due to trade liberalisation which has led to economic growth, reduced dependency levels, reduced cost of goods and improved quality of consumer products (Akapaiboon, 2007: 1-3).
Though its income inequality levels are still high, Thailand’s cost of both food and non food components is very low.
As evidenced in African countries such as South Africa, Zambia, Lesotho, Nigeria and Angola, trade liberalisation encourages improved productivity in the business environment. Subsequently, more goods and services are made available in the market.
The business competitiveness strategies are also streamlined leading to the improved quality of goods being offered to the market. As is the case of Zambia, trade liberalisation has resulted in the production of cheaper yet high quality goods thus enabling the poor to lead a relatively decent lifestyle (Rodrik, 1998).
To the poor in society, trade liberalisation has the benefit of bringing in more affordable goods to the market. It has the risk of exposing the public to low quality goods and services. Unless the operations of a free market are closely monitored, Smith (2009: 23-34) argues that it is possible to fill the market with sub-standard goods and services.
The failure of goods undergoing quality check-up process leads to poor people in the society getting inappropriate goods. While this concept has the risk of increasing the cost of goods and services, it helps to ensure that the health standards of the citizens, whether poor or rich, are accorded the greatest possible priority.
Bhagwati (2002: 41-53) explains that in China, Europe and the United States of America, trade liberalisation has proved to be very significant to the rich and the middle class citizens as it has continued to enhance increased trade output, lower cost of goods and services due to increased business competition and improved quality of low cost goods.
The results have not been very favourable to the poor population (Amiti and Freund, 2010). Free trade contributes to the increase in GDP. Countries like South Africa and China have proved that these business approaches expose the poor to substandard products.
In the UK, trade liberalisation has enhanced business openness and access to the costly basic needs. African countries’ poor populations have continued to suffer due to the same.
In line with the comparative advantage theory, Iwanow and Kirkpatrick 2009 explain that though it has a number of challenges, trade liberalization if well managed gives the poor in society an opportunity to live a more fulfilling life. Unfortunately, these benefits are limited to the poor citizens living in developed countries.
Based on the above analysis, it can be concluded that free trade is good for the poor.
Reasons for the decline of the import substituting industrialisation strategy and the widespread endorsement of a strategy that promotes open trade
Reduction in some countries’ foreign sales is a major contributor to the decline of the import substituting industrialisation strategy. The strategy of replacing foreign imports with local productions has been hindered by the lack of manpower and technological knowhow on how best to undertake some production strategies.
Certain countries do not have industrialised manpower to locally produce vital products within their territories (Iwanow and Kirkpatrick, 2009).
As a result, the countries are compelled to depend on others. While it is crucial for a country to minimise its dependence on foreign sales, it is equally vital to ensure competitiveness in the trade processes being undertaken.
A competitive approach would in turn lead to increased efficiency and cost effectiveness of the goods and services being produced.
Desire to achieve cost effectiveness in the goods being offered and enhance specialisation in countries’ industrialisation processes greatly contribute to the decline in the import substitution industrialisation strategy.
The strategy that encourages the spread of open trade is focused on popularising the significance of trade (Lall, 2000: 337-369). Renewal and establishment of new regional and global trade organisations that foster trade dependence have greatly contributed to the decline of the import trade industrialisation strategy.
Global and regional trade organisations such as the African Union, East African Community, European Union, OPEC, EFTA, CEPAL, ALALC, HTA, AGOA, RTPO and NAFTA have continued to encourage import trade and interdependence among countries.
The need to achieve a reduced level of import tariffs in order to enhance price based competition on both the national and international scope remains to be a key factor in the reduction of the import substituting industrialisation strategy (Iwanow and Kirkpatrick, 2009).
This demand encourages most of the developing countries to re-align their trade industrialisation strategies in line with those of their trade partners.
Good strategies promote open trade which in turn boosts both domestic and international employment. A business strategy that promotes open trade has the benefit of preventing the establishment of an inward-looking economy.
This fact helps to avoid trade challenges of increased business inefficiency that are commonly witnessed in India due to the continued practise of import substituting industrialisation strategy (Sen, 2002: 318-331).
In France, India and South Africa, import substituting industrialisation strategies have increasingly been eliminated due to the belief that they are major barriers to the practise of open trade.
According to Feenstra and Hanson (1996), the decline is attributed to the belief that free trade minimises creativity and innovativeness in a country’s industrialisation sector due to lack of specialisation and focus on a specified line of production.
The realisation of direct economic benefits, enhanced economic development levels among countries, elimination of employment discrimination and improved trust levels among countries, readily available information and improved levels of mobility are some of the benefits accrued from the practise of open trade (Anderson, 2009).
Open trade thus enhances trade security, sound business environment, low or totally eliminated trade tariffs, quotas and other related trade barriers and streamlined business communication strategies.
Organisations like the African Union and European Union are best known for their profound ability to minimise trade restrictions among countries under their jurisdiction.
As a result, the countries have been able to provide quality and cost effective products and services to all their citizens (Akapaiboon, 2007: 5-27; Smith 2009: 17-45).
Endorsement of strategies that promote open trade has also been in existence due to the appreciation of the fact that open trade eases business transactions, enhances openness, boosts security levels in the business environment and also encourages faster and well orchestrated business infrastructural development.
Main Arguments on the Protection of Infant Industries and Their Justification
Protection of infant industries refers to the implementation of a business tariff in a certain business segment which in turn leads to an increase in the business output and a subsequent reduction in future operational costs.
Consequently, this allows the infant business entity to survive in circumstances in which it would have otherwise not thrived. Protection of infant industries is often disregarded by non-infant business players. Infant protection should be undertaken in line with the industrial dynamics and the internationally recognised business standards.
The protection as explained by Rodrik (1989: 9-13), should be aimed at ensuring that infant businesses develop and grow into well respected and effective business entities.
Protection is crucial as it helps the emerging industries to quickly and strategically close the wide business gaps between them and their established and technologically advanced business competitors.
Unlike well established internationally recognised industries, infant industries need to be protected and safeguarded in order that they are not affected by unfair competitive strategies that may be employed by their established foreign partners.
The protection aims at ensuring that new business investors do not attempt to use free trade pricing as it would automatically disqualify them from the competition.
This fact is best explained by the 1994 United States of America’s protection of its steel industry through government subsidies and tax waivers and India and Pakistan’s protection of their manufacturing industries in 2004 and 2005 respectively.
The impact of a given industrial policy is dependent on the existing business environment and the industrial dynamics. Full protection of infant industries enables them to quickly adopt and be self sustaining in a shorter period as opposed to when partial protection of infant industries is undertaken.
According to Rodrik (1989), protection of infant industries would be rendered irrelevant if the protection strategies employed do not help to enhance the competiveness of the industries in question.
Rather than simply protecting infant industries from incurring losses, protection should be focused on ensuring that the businesses are self sustaining after a certain predetermined period.
An example of effective protection of infant industries occurred in the United States of America in the year 2007 when the U.S government opted to protect its motorcycle industry. Japan was reluctant to bear the cost of sustaining America’s infant motorcycle industry by absorbing partial price increases due to tariff imposition.
The U.S bore the cost of protecting the motorcycle industry. The industry is currently self sustaining.
Ederington and McCalman (2008: 419-438) argue that most strategies of protecting infant industries act as export and import promotion strategies through the reduction of a businesses’ marginal costs as is the case with the European Union’s protection of its agricultural sector and the protection of memory chips infant industry in the U.S trade industry.
Kaplinsky and Morris (2009: 561-564) make it clear that for business industries that are characterised by the flexibility in the firms’ population, the protection of the industries does not alter the rate of technological adoption. To the contrary, the adoption only increases the probability of an industrial shakeout.
In practise, it is evident from the above argument that technological diffusion results of any form of infant industry protection are fully dependent on the specific life cycle attributes of a given industry.
With regard to the technological trade diffusion, it is worthwhile to note that technological diffusion is less significant compared to the impact to traditional business models (Ederington and McCalman, 2008: 427-431).
Failure of Fair Trade in Addressing Fundamental Inequities
Fair trade works best for the poor people in society and the consumers in general. Fair trade is a vital business strategy that aims at helping producers in the developing countries to market and enhance efficiency in their marketing strategies (Rodrik, 1998: 5-9).
As an organized social movement, fair trade aims at limiting the challenges that could otherwise be faced by the producers in the developing countries.
While the sustainability of business strategies undertaken by developing countries is of importance, Ross (1999: 297-322) reveals that a number of challenges in which business processes are undertaken do exist.
Other than payment of either higher or fair prices for the goods exported, it is vital for fair trade practices to focus on enhancing reliability, greater level of transparency, equity, cost effectiveness and high ethical values in developing countries. Fundamental inequality in the distribution of goods still persists.
According to Bhagwati (2002: 3-10), fair trade has the increasing threat of brain drain in the developing countries.
Expertise in the developing countries has continued to be adopted by different professions and job opportunities in the developed countries thus making it impossible for the developing countries to effectively undertake their production and distribution endeavours.
This fact is evident in the manner in which Fair Trade USA, Fair Trade International, World Fair Trade Organizations and European Fair Trade Association undertake their management strategies.
While fair trade enhances solidarity of business practices, it has continuously failed to enhance transparency in the pricing strategies being undertaken.
In the marketing of bananas, coffee, tea and cocoa, fair trade marketing has not enabled countries such as Peru, Uganda and many Sub-Saharan African countries to implement fair labour costs.
Through the practice of fair trade in the marketing and sale of coffee, the fundamental issue of fair remuneration and repatriation of profits on a fair scale has always been ignored (Jerome and Carimentrand, 2010).
As a result, countries such as Tanzania, Guatemala, Uganda and Costa Rica have not been helped by major importers such as Netherlands, United Kingdom, China, Switzerland and Germany to develop their infrastructure (Rodrik, 1989: 4-11).
The fundamental inequality of the penetration of various technologies needed to enhance fair business competition is an issue that has often been ignored.
Agricultural sustainability has therefore remained a very costly venture due to the high cost of information technology and systems as well as transport and communication infrastructure needed to streamline business operations.
The issue of negative attitudes and belief that products from developing countries are inferior has not been effectively handled in the fair trade practices (Kaplinsky and Morris, 2009: 558-569). This concept has continued to give the developed countries a major perception advantage over their developing counterparts.
Volatile prices of goods imported by developing countries, unfair global competitive strategies and the fact that fair trade organizations are rarely recognized partly explain the reasons why cocoa and coffee companies and roasters such as Katz Coffee, Divine Chocolate, Chocolove, Theo Chocolate, Invalsa Coffee Importers, Larry’s Beans, Starbucks, Green & Black’s and Pure Vida Coffee do not fairly compensate developing countries farmers.
Jerome and Carimentrand (2010) argue that the high prices paid for fair trade goods never help the poor. The prices only help to continuously widen the gap between the rich and the poor in the developed and developing countries respectively (Patibandla, 2000).
Through secret business deals, imposition of political analogies, use of unethical sales and marketing techniques, use of misleading business volunteers, inability to keenly monitor products’ standards and political resistance, fair trade has not managed to achieve its originally intended goals.
Akapaiboon, N 2007, Trade Liberalization – Is it Good for the poor? An analysis of Thailand. Department of Economics, University of North Carolina, Gardner Hall.
Amiti, M & Freund, C 2010, The Anatomy of China’s Export Growth, in R.C. Feenstra and S J Wei (eds.), China’s Growing Role in World Trade, University of Chicago Press, Chicago.
Anderson, J E 2009, Globalization and Income Distribution: A Specific Factors Continuum”, NBER Working Paper No. 14643, National Bureau of Economic Research, Cambridge.
Bhagwati, J 2002, Free Trade Today, Princeton University Press, Princeton.
Ederington, J & McCalman, P 2008, Endogenous firm heterogeneity and the dynamics of trade liberalization, Journal of International Economics, vol. 30 no. 1, pp. 419-438.
Feenstra, R C & Hanson, G H 1996, Globalization, Outsourcing, and Wage Inequality, American Economic Review, vol. 86 no. 2, pp.240-245.
Iwanow, T & Kirkpatrick, C 2009, Trade Facilitation and Manufactured Exports: Is Africa Different, World Development, vol. 37 no.6, pp.1039-1050.
Jerome, B & Carimentrand, A 2010, Fair Trade and the Depersonalization of Ethics’, Journal of Business Ethics, vol. 20 no.4, pp.39-50.
Kaplinsky, R & Morris, M 2009, Chinese FDI in Sub-Saharan Africa: Engaging with Large Dragons, European, Journal of Development Research, vol. 21 no.3, pp. 558-569.
Lall, S 2000,The Technological Structure and Performance of Developing Country Manufactured Exports, 1985-98, Oxford Development Studies, vol.28 no.3,pp. 337-369.
Ng, F & Yeats, A 1997, Open Economies Work Better! Did Africa’s Protectionist Policies Cause its Marginalisation in World Trade, World Development, vol. 25 no.6, pp. 889-904.
Patibandla, M 2000, Import Substitution with Free Trade: Case of India’s Software Industry”, Economic and Political Weekly, 8 April, p.1263-1270.
Rodrik, D 1989, Credibility of Trade Reform – A Policy Maker’s Guide”, World Economy, vol.1 no.1, pp. 1-16.
Rodrik, D (1998) Why is Trade Reform so Difficult in Africa, Journal of African Economies, vol.7no.7, pp. 5-36.
Rodrik, D (1998) Why is Trade Reform so Difficult in Africa, Journal of African Economies, vol.8 no.10, pp. 43-69.
Ross, M L 1999, The Political Economy of the Resource Curse, World Politics,vol.51no. 2, pp. 297-322.
Sen, K 2002,Trade Policy, Equipment Investment and Growth in India, Oxford Development Studies, vol. 30 no. 3,pp.318-331.
Smith, A 2009, An Inquiry into the Nature and Causes of the Wealth of Nations, Digireads Publishing, Boston.