Is Free Trade Fair?

Topics: International trade, Free trade, World Trade Organization Pages: 8 (2987 words) Published: September 19, 2011
1.  Is free trade fair?

You will need to explain what free trade is, which trade theories seek to explain free trade, and whether you assess free trade to be fair. You must use examples to support your arguments.

1) benefits
2) costs + criticisms
3)case study
4)member states
5)non member states
6) case study
7) yes or no
Free trade as defined by Hill (2009) implies that a country and its citizens can purchase goods from another country or produce and sell goods to another country without any government influence in the form of quotas, tariffs or duties. There are many theories explaining free trade, from Adam Smith’s theory of absolute advantage in 1776 to the new trade theory in the 1970s. As more and more countries adopt free trade policies, there are growing debates as to whether free trade is fair. Cameron (2007) claims that world trade is unfair and that the World Trade Organization (WTO) is one of the factors. The WTO is seen as an organization that favours the strong nations while exploiting the developing nations (Jawara & Kwa, 2003). For the purpose of this essay, free trade is defined as fair when everyone benefits from it, not just a selected group. According to Suranovic (1997), free trade always generates uncompensated losses in a country, which can be clearly identified, such as loss of jobs to another country, while its benefits are more subtle and indirect. This has caused a lot of criticism for free trade. From a national level, free trade is only fair when all participating nations of free trade enjoy benefits greater than uncompensated costs, implying a positive sum game. Whether that is true, the rest of the essay will explore that. Firstly, the theories explaining free trade will be analyzed. This is followed by discussion on these topics: the World Trade Organization (WTO), unfair trade practices, agricultural trade distortion, the cotton industry, WTO’s lack of credibility, economic integration agreements (EIAs), widening income gap in countries, foreign direct investment (FDI) and the benefits of free trade. Trade Theories supporting free trade

Theories that explain free trade include: theory of Absolute Advantage, theory of Comparative Advantage, Heckscher-Ohlin theory and New Trade Theory. Adam Smith’s theory of Absolute Advantage states that countries should specialize in the production of goods which they have absolute advantage in and trade them for goods produced by another country, so that both parties will benefit (Hill, 2009). A country should not produce goods domestically when it can buy them at lower cost from other countries. David Ricardo’s theory of Comparative Advantage improved on Adam Smith’s theory, saying that even countries with no absolute advantage in anything can produce and trade goods which they have least comparative disadvantage in, so as to ensure economic gains for parties involved (Hill, 2009). Thus, with free trade, all countries stand to gain more through greater consumption. The Heckscher-Ohlin theory states that comparative advantage is determined by differences in factor endowments like land, labour and capital; countries export goods which make intensive use of abundant factors, while importing goods which make intensive use of scarce factors (Hill, 2009). New trade theory is the most recent to emerge, stating that free trade between countries will increase the variety of goods available to consumers at lower costs, due to economies of scale made possible by larger combined markets (Hill, 2009). It also suggests that free trade enables countries to enjoy first mover advantages through economies of scale by capturing a large portion of the world’s demand, like in the aerospace industry for example (Hill, 2009). The traditional free trade theories are still being adopted by developing countries while the developed countries have moved on to new trade theories, generating different levels of trade activity (Sen, 2005). This implies that...
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