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February 22, 2019 0 Comment

NAME: OLAGUNJU BOLANLE STUDENT ID NUMBER: U1772958
MODULE CODE: BME 0003
QUESTION 1: FREE TRADE: AN INTRODUCTORY FRAMEWORK
The world market economies have witnessed an increasing level of integration in the past 50 years indicating that no country exists independently of the other. All areas of a countries economy comprising of its service, work allocation and goods sector are somewhat related to that of its trading partner in form of exchange and flows of goods and services, labor, investment funds and technology. Carbaugh,2005
The need however for conducive economic activities through integration led to the discussion on free trade which {Johnston, Gregory &Smith,2011, free trade}, refers to as a trade where countries carry out economic activities of moving goods, capital, labor and culture across borders without hindrances or protectionist activities such as tariffs, and other non-trade barriers which includes import, export duties, quotas or any form of barrier to market entry.
The resultant effect therefore, is pressure being mounted on developing nations to use it as its bedrock of economic and political policy The question of the benefits of free trade to developing/emerging markets is still of immense interest and the basis of ongoing debate among top economist with various arguments put forward
McCulloch, Winters, & Cirera, 2001 iterated the benefits of trade openness which includes cheaper consumption as a reduction in trade barriers allows for a fair play in the market considering the availability of alternatively cheaper foreign goods or a reduction in domestic prices so that the market is not totally lost and invariably keeping domestic industries on their toes. Free trade allows for the exploitation of new ideas and innovation embedded in foreign goods therefore enhancing a country’s mechanical capacity and production.
{Carbaugh, R. J. (2009} likewise specified that the specialization that occurs as a result of openness, allows for efficiency, creativity and the proper channeling of a country’s resources towards its area of comparative advantage.
Even though free trade has long been seen as an important element of sound economic policy, demands have still grown for protectionism as against liberalization because of issues relating to job loss because of cheaper foreign labor and the inability of domestic industries to favorably compete with foreign counterparts, the loss of economic freedom countries had to accept some politically costly trade terms imposed by multi-country trade agreements referred to by ‘summer 1999’ {McCulloch, Winters, & Cirera, 2001} as a ‘trilemma’ of economic incorporation combined with appropriate public administration and national power.
Notwithstanding the problems of measuring openness, the debate over free trade is in essence, a debate about the costs and benefits of openness and it is therefore important to note that there are usually two players in every form of trade.
TRADE THEORIES The debate on trade has been one of major concern as far as 1500 -1800 during the evolution of early economists referred to as the mercantilists who supported government trade regulations of restricting imports and encouraging exports in order to gather enough revenue in gold terms which was referred to as PROTECTIONISM.
This view was however debunked by the classical economists starting with Adam Smith in his {1776 by Adams Smith’s Wealth of Nations} publications where he stated that the wealth of a nation isn’t fixed and international trade allows countries to exploit specialization and the division of labor which constantly increase a nation’s wealth.
The case for Free trade therefore has its origin in the works of the classical economists, which was an evolution of ideas in economic thoughts when Adam Smith introduced Absolute Advantage using terms such as ‘Invisible Hands’ as a show of support for free trade and minimal government interference. Adam Smith stated that nations could gain from trade if they concentrate on producing goods they could make more efficiently and cheaply than the other nations and therefore trade for items in which they have an Absolute disadvantage assuming labor as the only factor of production. This idea was captured upon the ‘Labor Theory of Value’ which states that differences in absolute cost with regards to labor is what rules trade. Carbaugh,2005.
This theory of Absolute Advantage however faced criticisms by one of Adam smith’s disciple David Ricardo in his text on the (Principles of political economy and taxation D., 1772-1823) where he argued that exchange doesn’t occur based on Absolute Advantage or efficiency in production as proposed by Adam but rather on production based on a lower ‘comparative cost’ as this allows competitive advantage to be maximized while fostering growth. Grimwade, N. (Ed.) (2000)
Ricardo went further to say that the whole idea of free trade is built on the principle that if more people are freely involved in mutually beneficial exchange, this would mean that the world’s resources are used more efficiently, people will become more wealthy, and that countries can economically specialize in what they produce at a lower opportunity cost and trade around the world for goods that they don’t have or can’t produce more efficiently this he referred to as the theory of Comparative advantage which has since been the core of free trade theory.
However versatile and perfect the Ricardian theory seemed, the rise of the Neoclassical economists Eli Heckscher and Bertil Ohlin pointed out that the Ricardian theory failed to cement its explanation on why relative efficiencies and comparative costs should differ among nations. This they explained using the theory of factor endowment saying that the different components of factor available to each nation determines their relative prices. They concluded that for trade to be beneficial, countries should focus on exporting goods that use their cheap and abundant factors of production and import goods that use their scarce resources. This birthed the Heckscher Ohlin theory or the Theory of Factor endowment {H-O theory} which now forms the basis of present day free trade argument. Grimwade, N. (Ed.) (2000)

It should however be noted that trade theories seek to answer two questions one which is how and what nations gain from trade and the other is concerned with the trend of exchange and specialization which was thoroughly dealt with by the classical and neoclassical economists
WTO POLICIES; IMPORTANCE AND CRUCIAL ROLE ON THE GLOBAL ECONOMY
Continued liberalization of trade and investment has basically occurred as a result of multilateral trade negotiations and this has been championed by the principal agent of free trade which is the World Trade Organization{WTO} established in 1994 and started working 1995.
This was formerly known as GATT {General Agreement on Tariffs and Trade} a system that was intended to be for negotiations between nations on issues of favoritism between nations and promotion of global efficiency by allowing the principle of comparative advantage to determine trade patterns. There were however weaknesses such as the issue of ‘Free Riders’ in which some countries were passive in trade negotiations but were enjoying benefits of liberalization and the problem of weak dispute resolution which left most countries unsatisfied. Carbaugh,2005
Needless to say that the weaknesses of GATT birthed WTO which was a more structured organization a decision that stemmed from the very last round of GATT which was the Uruguay round shifting the burden of negotiation between countries to WTO while maintaining GATT rights and disciplines and applying its rules Grimwade, N. (Ed.) (2000)
The organization had a far wider scope than GATT because it enhanced the methods by which international trading rules were carried out and provided a means whereby countries could benefit from residential passive consent for welfare expanding reductions in trade barriers. This organization however was one in which developing countries had a means of expression. Chang, H. (2007)
The functions of WTO are: {i} Remove trade and non-trade barriers especially in the agricultural sector, through the creation of a stable access to world markets for exporting nations
{ii} To settle trade disputes creating hindrances to free trade flow by creating a structure through which nations could better negotiate trade terms. Grimwade, N. (Ed.) (2000
{iii}It also incorporated the issues of trade in service {GATS}, property rights{TRIPS}, and investments measures {TRIMS}
{iv}Ideal trade should be fair and non-discriminatory inculcating the idea of the Most Favored Nations {MFN}but might include a form of protectionism when needed
THE DOHA DEVELOPMENT AGENDA
A critical analysis of one of WTO’s trade negotiations is the Doha round talks that took place in Qatar the Doha capital in 2001comprising of so many medium – low income countries.
It was the first multilateral trade negotiation specifically dedicated to improving the trading environment for developing countries in the area of goods and services especially agriculture because prior to this time, growth in agriculture was very slow. The sector also represents a major part of developing economies export and it is the key area for nearly all poverty analysis. This market was usually the most distorted in the world and so the government was keen on securing them because of the large spillover effects. Carbaugh,2005. It also included discussions on Intellectual Property Rights, Trade in Service and Investment.
The broad aim was to negotiate what could be done to accomplish a real change of the universal exchanging framework through lowering barriers on agriculture in areas such as textiles and making global trade stronger and fairer to benefit developing countries as developed economies like Europe, North America and East Asia were exporting high technology goods. Chang, H. (2007). It was also keen on eliminating non-tariffs and giving non-agricultural market access{NAMA}on products of interest to developing countries
AN ANALYSIS OF THE AGRICULTURAL SECTOR}
Increased protectionism in agriculture and distortion of world prices by the activities of developed nations was a major problem that needed to be addressed under the Doha round of negotiations because prior to that time, advanced economies did not only use tariffs to protect their farmers, they also made subsidies available for them thereby discouraging agricultural imports from developing countries.
For example, Rice and Cotton farmers in West Africa complained of how U.S and European export subsidies affected world prices and made competition impossible even in their own market. U.S subsidies reduced the price of rice and cotton to foreign buyers and made West African countries go bankrupt because rice was being sold for below their production cost.
The developing countries therefore demanded that the rich ones should open up their market for agricultural products by slashing subsidies but apparently this became a big issue for the developed countries as countries such as the US was still keen on protecting its textile industry from foreign competitors like India who were cheaper producers of cotton and textile
TRADE-RELATED INTELLECTUAL PROPERTY RIGHTS {TRIPS}
The persistent rise in the number of infringers and industrial piracy such as in the pharmaceutical, computer and other industries where idea duplication is easy led to the aggressive demand for the protection of intellectual property rights such as patent rights, copyrights and trademarks. Intellectual property right focuses on giving government registered innovators ideas, inventions and products a lone opportunity to use their innovation for a valid period before it can be sold or duplicated. {Carbaugh, R. J. (2009}
The introduction of this into the WTO negotiations created a wide margin of protection for the developed economies because of the 20 years’ minimum standard time before the innovation can be shared making it difficult for developing countries to penetrate the market to access certain necessities and invariably knowledge acquisition became difficult. (Wade, R. H. (2003)
Growing concerns on the issues of public health and access to certain drugs in developing countries made TRIPS a topic of discussion in the Doha negotiations An analysis of the pharmaceutical companies has shown how developing countries such as south Africa who were adversely suffering from the increased price on drugs for the treatment of HIV/AIDS resulted to buying duplicated products from competing industries in countries like Brazil who could provide drugs at a lower price as to what USA and other countries were offering and this has adversely affected human health but the African government however seemed not to have done anything about this such as patent cancelling or compulsory licensing . Chang, H. (2007).
However, during this debates, pharmaceutical companies said no patent means there would no more be drug availability because private individuals will be discouraged from investing in the development of new vaccines. This is because pirating reduces the profit accruable to the innovating companies which invariably affects the general welfare of the people. {Carbaugh, R. J. (2009}
This is however still of major concern till date.
TRADE RELATED INVESTMENT MEASURES {TRIMS}
The need to analyze the link between trade and investment and secure a transparent, stable and conducive environment for long term cross border investment and trade led to the discussion on Trade-Related Investment Measures (TRIMs)
The decision is concerned with the domestic directions a nation applies to foreign investors regularly as a feature of an industrial policy. The focus was therefore based on avoiding trade related distortions and ensuring that developing countries access the benefits of a closer multi-lateral cooperation for the purpose of technical assistance policy analysis and institutional development (Wade, R. H. (2003).
Countries were however supposed to open up their borders for foreign direct investments

GENERAL AGREEMENTS ON TRADE IN SERVICES {GATS}
The post war periods have witnessed a transition from the manufacturing sectors to the services sectors. It is therefore important to take into consideration the service sector of every economy and not just the trade in goods as a large proportion of the GDP for developed and some developing economies is largely contributed to by the service sector. Grimwade, N. (Ed.) (2000)
Subject to recent technological changes, GATS agreement therefore extended to services such as medical, banking &insurance, educational and other related services that were consumed either domestically or across borders. The point of call for GATS therefore was about opening the market for a free flow of foreign investment in services and following the most favoured nations principle to ensure that there are no limitations to the operations on foreign investors in order to boost foreign direct investments. (Wade, R. H. (2003)
Despite the freedom for government to shelf some GATS rules aside and protect some listed sectors, the rule of MFN still impeded developing nations from controlling activities within its borders between its service sector and the foreign competitor as law makers couldn’t restrict the number of service suppliers entering into its country thereby posing a major problem to domestic service providers
WTO SUCCESSES
Despite the loopholes identified in the doha round, Tripti Malhotra (2012) however stated that credit should still be given to WTO for:
{i}facilitating stable trade to by eradicating trade and non-trade barriers and encouraging sustainable growth development and facilitating fundamental eforms in agriculture
{ii}constructively and peacefully settling disputes and reduction of inequality through the MFN principle thereby giving opportunities for developing nations to thrive.
{iii}increasing developing nations access to world markets in which a country like china transitioned from been underdeveloped to been an emerging economy
China was able to take advantage of openness to enhance trade and invariably better its country’s growth because of its large market which made bargaining possible with the developed economies. It also focused on investing on infrastructure, the efficiency of border administration, the capacity to facilitate the flow of goods over borders to their destination unlike other developing economies and gradually, its progress began. However, china’s growth has come at a cost to its economy as its transition from state control has meant, bad water, no proper health care, lay off of government workers and a widened gap between the rich and the poor in its country. Chinas boom has also made trading with other developing countries less attractive as their ability to produce cheaper labor and products because of a large population has impeded the growth of other developing nations.
WTO FAILURES: THE DOHA ROUND CASE STUDY
The WTO Doha trade negotiation were incapacitated in light of the fact that neither developed economies like the United States and the European Union nor developing nations like China and India were ready to reach a compromise. Truth be told, most countries are not always ready to accept free trade totally as they always tend to protect their industries that are likely to be affected by foreign competition.
USA which was one of the major clamourer for free trade operated a form of protectionist policy by putting up stringent rules to protect its cotton farmers from foreign competitors like India who were cheaper producers of cotton and textiles. The EU also failed to remove export duties and countries like India denied signing intellectual property right rules. This has therefore led to the death or the slightly above zero level volume of agricultural trade among WTO member nations. TRIPS also made it impossible for developing countries to access certain technology.
At the beginning of the Doha round, developed countries agreed on creating trade agreements that will benefit developing countries without a need to reduce import duties to the same level as industrialized countries. Later on as countries like China and India, started to export more than they were importing, wealthier nations began requesting that they additionally bring down import without obstructions and reduce sponsorships to their farmers. China and India however refused and insisted on maintaining the initial standards.
Up to date the biggest challenge about agricultural tariffs and subsidies remains unresolved with the divisions clearly marked between developed and developing countries coupled with the issue of sharing gains from trade between WTO participants.
The New York times however reported on how countries decided to walk past the Doha round of negotiation by the WTO because of its inability to achieve a landmark success, handle troublesome issues like agricultural subsidies that were not settled in previous agreements, and help developing countries out of poverty as initially stated at the beginning of the round.
The inability to achieve this plans has however undermined the credibility of the multilateral exchanging framework as developing nations who were eager to export their goods to the developed ones were disappointed.

WHY COUNTRIES ARE SKEPTICAL ABOUT TRADE:
Despite the argument that trade makes the economy better off, study has shown that there is always a win or lose situation in every trade activity as free trade has most times been imposed on rather than chosen by developing countries. Therefore, National economic policies cannot be formulated without evaluating the probable impact of trade on the economies of countries which so far so good has not benefited the developing nations.
Chang, H. (2007) in his book Bad Samaritans cemented this by saying that free trade has given the rich countries a chance to further tighten their grip on the developing ones. He also referred to the International Monetary Fund {IMF} and the World Bank as bad Samaritans who got developing nations indebted during the ‘Third World Debt Crisis’ in the form of Aids and Grants before which WTO came to play.
Unfortunately, despite the massive trade openness most countries have gone bankrupt and have experienced major backlogs as a result of trade liberalization. Chang, H. (2007 went further to make an analysis of the Mexican economy that plunged deep into serious poverty and weak growth after signing a free trade agreement with USA a far cry from the level of growth the economy was experiencing prior to signing this trade agreement. The case of the Mexican economy proved that despite the availability of relatively developed infrastructures, the promised trade surpluses to Mexico turned out to be deficits, some hundreds of thousands of jobs were lost, wages fell and economic growth slowed down as most Mexican industries got phased out including its agricultural sector which got replaced by cheaper goods from the United States. Chang, H. (2007 therefore referred to Mexico as a striking case of the ‘Failure of Premature Wholesale Trade Liberalisation’
Despite proven that trade enhances global welfare and specialization because countries specialize in a sector where they enjoy cost advantages, there is a need to know there are a lot of ‘adjustment costs’ involved in trade which has plunged some economies into budget deficits as a result of reductions in tariff revenues. Grimwade, N. (Ed.) (2000)
All this factors put together has harmed the long term growth of developing countries as areas such as the educational, health and other vital sectors of the economy are usually affected which has therefore increased the demand of a return to protectionism as a bail out for developing countries because the period of protectionism as analyzed by
CONCLUSION
So far so good, we have discovered that the explanations behind increased trade openness has been the decrease in trade obstructions which however has influenced countries development faster as related to world output. This however has sky rocketed the level of reliance among nations making it difficult for countries to pursue an independent economic policy.
Producers in developing countries should therefore be given a period of protection from international competition through protection and other measures so they can construct their capacities to rival with foreign subsidiaries. After which protection can be gradually taken away for them not to vanish again.
Finally,Developing countries should learn to make regional agreements like some of the developed economies also instead of waiting for global deals that may never come because even though bilateral agreements are smaller in scope, they are still more achievable