Scribd
Upload
28 views

Effects of Free Trade in Developing Nations: Nahid Sultana

Free trade can provide economic benefits to developing nations such as increased economic resources, improved quality of life, and specialization. However, developing nations may also face issues promoting industrialization due to a lack of capital markets and difficulty appropriating social benefits. While protectionism could help industries, it risks inefficiency and retaliation. Overall, free trade still benefits developing nations when combined with domestic policies to support capital markets and correct market failures.

Uploaded by

najia.tasnim.nt
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
28 views

Effects of Free Trade in Developing Nations: Nahid Sultana

Free trade can provide economic benefits to developing nations such as increased economic resources, improved quality of life, and specialization. However, developing nations may also face issues promoting industrialization due to a lack of capital markets and difficulty appropriating social benefits. While protectionism could help industries, it risks inefficiency and retaliation. Overall, free trade still benefits developing nations when combined with domestic policies to support capital markets and correct market failures.

Uploaded by

najia.tasnim.nt
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 6

Assignment on

Effects of Free Trade in Developing Nations


Course Title: International Economics
Course Code: ECON 303

Prepared For: Prepared By:

Nahid Sultana Name Roll


Nadima Din 447
Associate Professor Najia Tasnim 452
Department of Economics, Rubaiya Jahan Mim 453
Shahrin Siddika Chaity 454
Jahangirnagar University Rifah Tasfia Ishadi 468
Savar, Dhaka- 1342 Mst. Nazmin Akter 475

Department of Economics
3rd Year (hons.)
Date: January 22, 2020
46 Batch
Jahangirnagar University
“Outline the benefit of trade to developing nations.
Does this mean that free trade will be beneficial?
Present your argument”
1

Trade between countries has always been a reason to be efficient in providing


welfare maximized globally as a whole. To grow faster, improve productivity and
provide higher income and more opportunities to people, each nation tends to
enjoy their fair share from the trade placed between countries. We may discuss
the specific stake of developing countries from a very specific lens of free trade.
Free Trade: Free trade is a theoretical policy under which governments impose
absolutely no tariffs, taxes, or duties on imports, or quotas on exports.
Developing Country: A country with little industrial and economic activity with
low levels of economic resources and where people generally have low incomes,
i.e. low standard of living can be identified as a developing country.

Benefits of Trade
Developing countries faces some specific crisis and limitations of their own some
of which can be minimized by free trade agreement. Such benefits can be
categorized as such:

A. Economic Advancement
Increased economic resources: Free trade opens a whole frontier of increased
total amount in a country which leads to increase quality of life through utility.
Small economy like developed countries have lower resources on their own.
Through free trade this constraint becomes volatile.
Improved quality of life: Developing nations can import goods that are not
readily available within borders. Increasing area of the consuming basket of
imported goods increase utility and quality of life.
Improved production efficiency with Spillover: Lack of proper knowledge or
proper resources can make production inefficient of developing nations. Free
trade allows to fill the gaps of their production process, import intermediate raw
materials and share crucial information of production method.
Reduced price: Importing goods can reduce the price of consumption which
creates welfare gains for consumer in importing nations. If this is larger than
income changes, welfare gain is positive.
Exporting frontier: Labors of exported goods may experience further welfare
gains in addition to gains through cheaper consumption goods.

Specialization: Free trade allows specialization in a certain exporting sector to


flourish at its best in the developing country with highest political opportunity to
catch the largest possible market internationally without quota imposed.
2

Efficiency case for free trade: Govt. intervention through tariff/quota causes net
loss to the economy by distorting the economic incentives of producers and
consumers both. A move to free trade can eliminate these distortions and increase
welfare.

Figure: The efficiency case for free trade.

Economics of Scale: Free trade allows developing nations to enrich industries by


connecting to the international industries thus, enriching itself through external
economics of scale.

B. Political Advancement
Better foreign relations: This is an unintended result of free trade. Developing
strategic free trade relations with more powerful countries can help ensure a
developing nation additional protection from international threats.

Problems that Developing nations faces from free trade


Trade policy in developing countries is concerned with two objectives:

a) Promoting Industrialization: Government policy in these countries to


promote industrialization has often been justified by the Infant Industry
Argument, that new industries need a temporary period of protection against
competition from established industries in other countries.
The two major justifications of existing this problem are:
a.1. Imperfect Capital Markets: If a developing country does not have a
set of financial institutions (inefficient stock market, bank) that would allow
savings from traditional sectors to be used to finance investment in new
sectors, then growth of new industries will be restricted by the ability of
firms in these industries to earn current profits. US recession impact of 2008
and global crisis is a related example in this case. Without country’s own
strong capital stock, it can be influenced by global crisis via exchange rate
affected by trade.
3

Solution 1: First-best policy: First thing the country can do is to have a


stable capital market with enough reserve and bonds.
Solution 2: Second-best policy: To protect their new industries through
imposing tariff and quota on foreign. Thus, no global situation would be able
to knock down their industries.
Criticism: Economists are harshly critical of the results of import
substitution, in which domestic industries are created under import tariffs &
quotas, arguing it has fostered high-cost, inefficient production. They argue
about the infant industries dependent on protection forever and captured by
special interest while provoking many international diplomatic interests.
Infant industry argument is valid if only it can be cast as a market failure
argument for intervention.
a.2. Appropriability: Firms in a new industry generate social benefits for
which they are not compensated. Thus, no private start-up will be willing to
enter first as they have to be the starter and thus country lags behind.
Solution 1: First-best policy: The first-best answer is to compensate them
for intangible contribution. This will incentivize the starter ones.
Solution 2: Second-best policy: The second-best policy is to use tariffs so
that the social benefits doesn’t benefit the world market.

Distribution of the uneven development of the domestic


economy
The development that originates from trade largely benefits the export sector
within the country. Thus, increasing inequality becomes a big issue in balance of
payments as this also controls the socio-political climate of the country.
Economists propose other concerns such as –
• The larger income effects than price effects, i.e. less income because of trade
affects more than less consuming price;
• Danger from overdependence;
• Noneconomic arguments, like diplomacy and national defense
• Degradation of natural resources etc.
If we consider the first-best policies i.e., policies without tariff, not to be
feasible because of information gap and unpredictability of forecasting, still we
have following two major problems with the second-best policy which is to
impose tariff (even if in small amount),
1. We still cannot measure the best possible amount of tariff that would avoid
the risk of decreasing welfare from the retaliatory tariff, at the same time
attains highest possible terms of trade for the economy,
4

2. stake that diplomatically bounces back at the nation from a variety of


perspectives are not easily diagnosable.
For these concerns, economist suggests a good mix of trade policy which is
related to the home economy and supporting home industries, balance of
payments promoting income equality. Some welfare steps may prevent the
polarization problem created with one enriched export sector. But as trade
improves the whole consumption basket, improving competition among industry
and growth of the economy, free trade, i.e. trade with no government intervention
internationally benefits developing nations as long as pre-requisites like strong
capital market and government programs are at place.

Thus, we end up to the two lines of defenses for free trade finally-
i. Firstly, domestic market failures should be corrected by domestic policies
aimed at the problems sources.
ii. Secondly, market failures are typically hard to identify precisely and
economists struggle to prescribe appropriate policy. Meanwhile, the cost of
withdrawing free trade rises high with the inevitable tension threating political
harmony and social distribution. So, the political gains of free trades are–
• Conventionally measuring large cost of deviating from free trade;
• Other benefits from free trade add to the cost of protectionism;
• Pursuing deviations from free trade gets subverted by the political
process.

That’s why, developing nations should find it easier with free trade maintaining
a supportive restoration of its own industry and capital market internally.

You might also like