Free Trade and Poor Countries

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Why free trade is in the interest
of the world’s poorest countries
Free trade has been a much discussed topic since the 1770s, when Adam Smith presented his theory on trade and absolute advantages. Most sources argue that free trade will benefit the poor nations in the long run (Anderson et al. 2011; Bussolo et al. 2011; Madely 2000; Winters et al., 2004). How-ever, the size of the benefits will vary in terms of which trade reforms are made, who the poor are, and how they support themselves (Winters et al. 2004). The purpose of this paper is to discuss why and how free trade is in the interest of the world’s poorest countries. The essay will commence by a description of the traditional trade theories, followed by a discussion of the advantages and the im-pact free trade has on the poorest nations including different theories and findings.

There are two classic elements in the definition of trade. The first is Adam Smith’s rule of ‘mutual gain’, assessing that for two countries trading with each other both must gain. Furthermore Adam Smith argues that trade is based on ‘absolute advantages’, which means that free trade will benefit all nations, if they specialise in producing the goods in which they are most efficient. The countries will then be able to produce at a lower price and trade the surplus for goods where they are less effective. This will allocate the world’s resources in the best possible way (Dunkley 1997; Irwin 2002; Madely 2000; Smith 1776)

The second element to trade is Ricardo’s (1817) argument that trade and specialisation is based on ‘comparative advantages’. If one country has the absolute advantages in all goods com-pared to another country both nations can still benefit from trading. The country with the absolute disadvantage should specialise in producing the goods in which the absolute disadvantage is small-est and then import the goods in which the absolute disadvantage is largest.

In the perspective of comparative advantages,...
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