Free Trade For Developing Countries Essay Example | Topics and Well Written Essays - 2000 words

Free Trade For Developing Countries - Essay ExampleBefore delving into the arguments concerning broad guile in developing countries, it is important to define what barely free trade is. Free trade refers to unrestricted international trade. In other words, it is trade free from barriers such as subsidies, tariffs, quotas as well as NTBs (Non-Tariff Barriers) (Neale, 2010). Thus, free trade is based on the principles of free securities industrys and prices under free trade are determined by demand and supply. Furthermore, the principles of Comparative Advantage, as laid down by David Ricardo, govern free trade (Victor, 2002). Free trade assumes perfect information between buyers and sellers and free movement of labor and capital. The arguments that inclining in favor of free trade for developing countries are based on economic, social and moral grounds. This is best illustrated by the case of Jordan and U.S. Jordan is categorized as a developing nation with a limited local market and surrounded by various other developing economies, thus limiting opportunities for its market growth (Victor, 2002). Without exports, there is limited potential for market growth for the country. However, if it enters into free trade agreements with developed nations such as the U.S, it can enjoy access to a much larger market which shall lead to greater utilization of the Jordans potential source of relative advantage than without trade where resources would lay idle (Victor, 2002). To this end, free trade encourages a fuller utilization of a developing countrys resources than would otherwise be possible. Research conducted by Frankel and Romer are suggestive of the point that free trade brings about a rise in income or GDP whether it is within the region nor international (Victor, 2002). Countries that have large domestic markets persist to support large interregional trade, and thus have higher income levels compared to small countries. These researchers have justified fre e trade for developing countries on the grounds that the exports component of trade proves to be an engine of growth for the country (Victor, 2002). By gaining access to foreign markets, such countries can benefit from increased efficiency due to optimal surface of the plant and gains from economies of scale that cannot be reaped from their local markets (Victor, 2002). The theory pertaining to international trade suggests that specialization ought to be done by countries in which they have a comparative advantage compared to their partners in trade. The Factor-Endowment theory proposed by the Heckscher-Ohlin (H-O) model incorporates the theory of comparative advantage (Victor, 2002). However, a potential disadvantage of this model is that it simplistically assumes that all countries have convertible production technologies as well as similar customer tastes and preferences (Victor, 2002). Although true for nations at the same level of economic development or those enjoying simila r cultural, phantasmal affiliations, this assumption does not hold true for majority of the cases (Victor, 2002). The assumptions certainly do not hold true for trade between developed and developing nations. In case of developing countries, the concept of free markets is often aborted when forces such as corruption, bribery, uncertainty, lack of transparency and lack of opportunities can hamper productivity (Victor, 2002). However, to this end the H-O model, which forms the backside of free trade, has been reformed to