Perspectives on International Trade Liberalization - the Contrasting Perspectives and Interests of Developed and Developing Countries

Global Trade Liberalization

The Contrasting Perspectives and Interests of Developed and Developing Countries

TABLE OF CONTENTS

TABLE OF CONTENTS .......................................................................i

INTRODUCTION ..............................................................................1

DISCUSSION ....................................................................................1

A. The Growth of Global Trade and Classic Economic Trade Theory ........1

B. The Rise and Impact of Global Trade Liberalization .........................3

C. Global Trade Liberalization: The Perspective of the Developed World....6

D. Global Trade Liberalization: The Perspective of the Developing World...9

CONCLUSION .................................................................................12

REFERENCES .................................................................................14

GLOBAL TRADE LIBERALIZATION

The Contrasting Perspectives and Interests of Developed and Developing Countries

INTRODUCTION

Global trade liberalization is a double-edged sword, bringing different risks and rewards to both developed and developing economies. Western economies promote free trade with developing countries while at the same time, engage in protectionist policies. Globalization, in the short run, seems to increase economic inequality, and its outcomes in the developing world have been mixed, with some few developing countries gaining rapid growth while others have stagnated or declined. Structural barriers to economic growth remain strong in much of the developing world, and new policy responses on the part of the developed world are required if globalization is to achieve its promise of increased economic welfare worldwide.

DISCUSSION

A. The Growth of Global Trade and Classic Economic Trade Theory

Trading across geographic and economic communities -- and indeed, across the world -- is not a new or modern phenomenon. The Phoenicians were engaged in extensive maritime trade by the 10th century B.C., (Phoenicians International Research Center, 2011) and this trade was noted and analyzed by Herodotus. (Herodotus, c.440 B.C.) Across the ages, businesses, artisans, merchants, landowners, and other economic and commercial interests have looked to trade beyond their home region or country as a way to increase their markets for surplus production beyond what could be consumed locally. At this time in early modern history, it was individuals as both producers and consumers who determined markets, initially trading freely in their local communities without much regulation by the larger government.

With the rise of the early nation states, governments began to regulate trade. Governmental desire to foster local economic growth and to increase national power through trade superiority led to the development of trade policy and strategy at a national level, fostering the formation of hard currency, monetary policy, world exploration, colonial expansion, piracy, and other outcomes which have marked the development of the modern world. The rise of the national government's focus on trade as a national interest initially led to a policy of trade barriers. The philosophical underpinnings of this mercantile period were articulated by Adam Smith in his classic work (1776, 1937) The Wealth of Nations. Smith proposed that when nations engage in international trading, productivity increases. Smith's work also reflects the common belief during the seventeenth and early eighteenth centuries that trade between countries was a "zero-sum game" (Cullen and Parboteeah, 2010). This philosophy, known as mercantilism, encouraged nations to accumulate hard assets -- gold and silver -- by promoting exports while also discouraging imports through tariffs and other means. Economists call this surplus of exports over imports a favorable trade balance (Cullen and Parboteeah, 2010).

Smith's theory attempted to explain trade patterns with the concept of "Absolute Advantage," which arises "when the production of a good in country X takes fewer units of labor than production of the good in country Y." (Smith, 1776, 1937) For example, in the eighteenth century, China had an absolute advantage in the production and export of tea, which grows readily there, versus England, where it does not grow well and where demand for the product is high. Therefore, for many years China was the only exporter of tea and remains one of the largest exporters to this day. Following the belief that imports weaken the national economy and should be discouraged, England attempted to reduce demand for imported Chinese tea by tariffs, imposing them on importation both to Great Britain and its colonies. Of course, these tariffs, on tea and other imports, were one of the economic bases of the American Revolution. Then and now, clashes over trade can result in armed conflict.

The eminent British economist David Ricardo (1817, 1966) definitively attacked mercantilism and became an early leading voice in favor of global trade liberalization. Writing in the early 19th century, he was one of the first to argue that the gains from trade exceed the losses regardless of whether trading partners are more or less economically advanced, as each nation shifts to where it has a comparative advantage, defined by Ricardo as the relative advantage in production efficiency that one nation has internally over another. Comparative advantage relates to the idea of opportunity cost (Cullen and Parboteeah, 2010). Consider the example of saffron and rice. Iranian farmers can produce rice, but their efficiency is lower as compared to Thai farmers. On the other hand, Iran can produce saffron with lower cost and higher efficiency than can Thailand. Therefore, it is most efficient for Iran to export saffron to Thailand, and for Thailand to export rice to Iran. According to Ricardo, trade is not a zero-sum game, but a system of mutual advantage reflecting the difference in assets (natural resources, availability