Tuesday, July 29, 2008

Free Trade Policy and Paradox

Free trade is one issue that seems to create a diverse polarity of views. There is a powerful political movement which decries the injustice of free trade. In many people's eyes, free trade has become synonymous with inequality and exploitation of the West over East. Whilst on the other hand, economists speak passionately about the benefits of free trade as the best tool to overcome global poverty. Who is correct?

Protectionism hurts the Developing World more than anything.

One striking issue is how opponents of free trade seem to ignore the damage of tariff protection on poor countries. The developed world have an unhealthy amount of subsidies on their declining agricultural sectors. The EU, has had massive external tariffs on food imports. The US also subsidise agriculture more than any other industry. The effect of these tariffs is to harm developing countries, especially food exporters.

EU tariffs mean that developing countries cannot export their products to the EU. If there really was free trade in agriculture, it is developing countries who would benefit the most. They would have more opportunities to export their agricultural exports. True, a few European farmers would lose out on artificially high prices. But, if you want to help reduce poverty amongst developing world farmers, it is free trade which will help the most. Agricultural subsidies and tariffs in the EU and the US have done more to harm poor farmers than free trade ever could. If campaigners for the developing world put their efforts into overcoming the powerful and selfish agricultural lobby, they would achieve some real benefits. As it is, by generating an instinctive mistrust of anything to do with free trade and globalisation, they create an impression of being ignorant political ideologues, unable to assess issues impartially on economic merits.

Does This Mean Free Trade is Always Good?

Just because free trade is usually beneficial and a powerful source of global growth, it doesn't mean that Free trade is always the answer for every country in every circumstance.

Developing countries may benefit from tariff protection to diversify their economy. If a country earns 80% of its export revenue through exporting raw materials, this does not reflect a balanced economy. It makes sense to try and diversify, even if current comparative advantage only lies with commodities. To diversify, tariff protection may be necessary, at least in short term.

There is a danger tariff protection may encourage inefficiency. But,
  • Most developed countries had tariff protection during their development.
  • Tariff protection should be short term and removed over time, like in many Asian economies.
This is where opponents of free trade may have a point. There is a justification for developing countries to have some tariff protection when developing new infant industries. To insist developing countries should always have free trade is hypocritical given than most developed countries used tariffs in their development period.

We can't assume free trade always will improve economic welfare for every country. But,generally speaking, developing countries will benefit most from the removal of tariff barriers, not the addition of more.

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