Free Trade and Developing Countries: A Blessing or a Curse

Introduction

This paper determines whether free trade has helped or hurt developing countries. It is worth noting that, for a very long time in history, there has been strong evidence for and against free trade towards empowering less developed countries (Goldstein & Jon 179). The development of free trade models became known because of its ‘presumed’ benefits. However, among economists, there are those primarily through the infant industry argument that strongly doubt the benefits of free trade as noted by (Ferrante, 71). Such arguments have left several countries in a dilemma of whether to embrace free and fair trade.

Free Trade

Free trade is a term embraced by several countries across the globe. It is labeled as a system of trade policy that enables countries to trade across their national borders without meddling by individual governments. Bhagwati (54), however, argues that free trade involves building on the law of comparative advantage, the strategy documents trading partners’ common gains from trade of goods and services.

In free trade, prices of goods and services are a real reflection of supply and demand. Supply and demand in free trade conditions is the reason that determines resource allocation. Bhagwati (69) asserts that free trade is distinguished from other methods of trade policies, where allocation or distribution of trading commodities between trading nations are favored by artificial prices that may not express the true nature of supply and demand. The artificial prices rise because of protectionist policies. This is where governments of individual countries intervene in the market by supply checks and adjustments (Creswell, 99).

Central Argument & Causal Analysis

Since the first economic downturn, man has concentrated on ways that could stabilize the world’s economy. Free trade was an aim in solving world economic problems. Free trade has been the focus of discussion throughout the 19th to 21st century where most economists are in favor of the idea (Pugel, 86). However, there are those who strongly argue against free trade largely because of its effects on developing countries. In this paper, I will attempt to argue the benefits of free trade by introducing two case study models.

A developing base country will be chosen, in this paper. Saudi Arabia will be the developing base country (Bhagwati, 54). Besides, the base country will be fitted into two case study models; the first model will connect the base country to a country with which it has positive economic connections and a favorable political stance. In the second case study model, the base country will be linked to a country in which it has a negative economic connection with and semi-hostile political stance (Absolute hostility between would largely eliminate trade between them). The casual reasons included in the model will include:

  1. Economic indicators
    1. Free Trade Barriers (e.g. Tariffs, quotas, Embargos)
    2. Free Trade Incentives (e.g. Elimination of barriers)
  2. Political Stance

A strong link is apparent between the two sets of causal factors as they are very highly correlated. These factors will be incepted into the model and appropriate analysis will then be implemented in the base country.

Case Study 1: Saudi Arabia (Base Country) vs the United States of America (Positive Economic Relations/ Friendly Political Stance)

The United States and Saudi Arabia have built strong trading relationships lasting for years. Most consultations between the two countries have focused on trade and development processes in Saudi Arabia, the East, and Gulf region (Stiglitz, 76). The strong trading relationship has been made possible because of Saudi Arabia’s huge resources of oil reserves. Saudi Arabia is a major exporter of oil to the United States. It takes more than 1 million barrels of oil per day to the U.S market (Stiglitz, 93).

Saudi Arabia has endeavored to maintain its trade surplus since 1967 with most exports concentrated on oil products. The United States has been at the forefront in formulating trade policies and strategies to cement trade and promote economic growth in Saudi Arabia. With the help of the United States, Saudi Arabia has joined international and regional treaties that guarantee fair competition and reduced tariffs and trade barriers. Some of the regional trade policies that Saudi Arabia has become a member of are the Middle East Trade Area Initiative (MEFTA) scheme. This is a strategy of advancing Middle East countries to escalate with others in the world trade and investment with others and the US in the world economy, with a goal of creating a regional free trade agreement (Pavenik, 2009). The initiative’s main aim is to ensure member countries and the elimination of trade barriers such as quotas, import licenses, and voluntary export restraints practice fair play.

Hurrell & Woods (33) illustrate that US involvement with Saudi Arabia has been through strong economic ties. The US has been involved in coordinating and implementing programs such as Bilateral Investment treaties, Comprehensive Free Trade Agreements, Trade, and Investment Framework, and other appropriate relations. The chief reason for US involvement is to strengthen Saudi Arabian economic systems whereas pursuing its political interests in the region (Hurrell& Woods, 33).

The United States has supported every effort of Saudi Arabia’s bid in joining the WTO. This was finally achieved in 2005 (Korten, 122). Being a member of WTO, Saudi Arabia has strengthened economic ties with other trading partners hence accessing a wider variety of markets with lower trade tariffs. Besides, accessing commodities such as foreign goods and services as a member of WTO has been simplified (Hurrell & Woods, 76). Moreover, more trade initiatives such as the Saudi Arabian General Investment Authority were formed in 2000 and Trade International Agreement (TIFA) signed in 2003 with the US. All these initiatives have been tailored in attracting foreign and direct investment in the country (Hurrell & Woods, 113).

Besides the United States playing a major role in these trade initiatives, the Saudi Arabian government has enforced actions to protect the copyrights and avert counterfeiting of US firms and their goods. The government has outlined harsh punishment to deter the vice. In addition, Saudi Arabia has embraced the protection of Intellectual Property Rights; this has been significant progress in protecting knowledge (Korten, 89). Saudi Arabian initiatives have embraced the US. Thus, the US has permanently removed Saudi Arabia from its “Special 310 Watch List (Korten, 123). This, therefore, has established a healthy environment for free trade.

Trade Barriers

Despite much involvement of both countries to ensure free and fair trade is in place, a few trade barriers have been a hindrance aspect for advancing between the two countries. One of the barriers is failure to implement the ‘New York Convention on Foreign Arbitral Awards. This is a commercial disputes settlement mechanism between trading members. Saudi Arabian government signed the initiative but it has stalled for a long without implementation. This has been attributed to the fact that most government agencies are often restricted to comply with the International arbitration council of ministers (Korten, 135).

In addition, attaining business visas for Visitors to Saudi Arabia has become a challenge. When a businessperson has to enter Saudi Arabia, they need to have a sponsor residing in Saudi Arabia. Sometimes, the Saudis who oblige to act as sponsors demand some legal obligations that include the personal initiative of the visitor (Korten, 137). In reality, visiting Saudi Arabia for business persons either to trade or assess a market or select a local business proxy needs due planning to meet costs of a sponsor.

Case Study 2: Saudi Arabia (Base Country) vs. Iran (Negative Economic Relations/ Semi-Hostile Political Stance)

Sour diplomatic and political relations with Iran have affected the prospects of free trade between these two countries. According to Bhagwati (89), Saudi Arabia has continually questioned the nature of Iran’s nuclear enrichment practices and has issued several warnings accusing Iran’s leadership of lack of information with International Atomic Energy (IAEA). Moreover, Saudi Arabia has worked hand in hand with the US and supported UN sanctions against the nuclear program in Iran. Thishas created hostility between the two countries hence limiting trade activities.

Iran and Saudi Arabia are two of the largest economies of the region (Bhagwati, 105). However, trade among them has been restricted because of limited diplomatic relations and hydrocarbon systems characterized by the nature of their economies and nuclear sanctions for its nuclear enhancement programs. Despite of these constraints, the two countries, have decided to move mutually into profitable ventures to strengthen cooperation and progress in the regional trade.

Comparative Analysis: Case Study 1 vs. Case Study 2

United States and Saudi Arabia tend to have common trading ties with elaborate mechanisms such as trade agreements and initiatives to regulate the trading process. Goodrich (76) alleges that, they influenced the United States in helping Saudi Arabia join the WTO. This is a positive move as WTO has streamlined Saudi Arabia trading policies by lowering trade barriers and tariffs.

WTO ensures members support no discrimination against each other in trading practices (Goodrich, 80). Discriminations such as countries discriminating trading partners, granting someone a favor such as reduced tariff rates give fair trading opportunities for partner countries thus ensuring fair trade is exercised. Further, the association between the two nations has spearheaded the development. This is because the WTO has minimized unfair competition, lowered tariffs and encouraged international negotiations (Goodrich, 124).

Though Saudi Arabia has endured to develop economically, the issue of United Supremacy still plays a major feature in controlling directing trade. In the real sense, it is not a freer trade, for instance, United States approves what should be done to remain a trading partner. For instance, America’s power to command protection of copyrights of US firms, counterfeiting, and creating deterrent punishments to the culprits. This clearly shows the mean position of United States. Trades between the two countries have been turned. Saudi Arabia has been favoring for Iran to drop its nuclear plans but Iran has stuck to the plan, therefore, this has increases hostility and hampered trust thus creating limited trade choices between the two countries.

Sanctions and embargoes instituted by United States in 1995 Iran have restricted trade between Iran and major world countries. Besides, Iran bid to join WTO has been frustrated several times by the United States; hence, this has been seen as suppression of developing countries (Evans, 124).United States has been using its hegemony powers to make a decision whom to trade with, accordingly erasing the standpoint of free and fair trade in developing countries.

Is Free Trade Beneficial to Saudi Arabia

Evans (98) alleges that, any country involved in free trade agreement accrues both negatives and positive aspects of trade. Free trade can offer substantial benefit to an ordinary consumer and businesses; because it leads to lower prices and increases opportunities. Saudi Arabia for instance has embraced free trade with its partner states such as United States (MacQueen, 89). The trade has brought about positive improvement.

One of the benefits that Saudi Arabia has benefited from free trade agreement is being exposed to greater opportunities. By giving lower barriers to trade, the free trade pact can deliver an additional opportunity to firms in the market of which, previously, had not existed. Fall in trade barriers has allowed Saudi Arabia to allow most of its companies to sell and distribute its products globally (Pavenik, 2009). Without this agreement, Saudi Arabia would be facing many hurdles.

Secondly, countries dependent on Saudi Arabia oil products such as United States have benefited greatly by buying the commodity at a lower cost. Hence, this has reduced the cost of the product thereby satisfying its citizens and business stakeholders (MacQueen, 156).

Besides strengthening economic ties, Saudi Arabia has built a strong security bond with the United States. For instance, A.U.S. military training formed at Dhahran in 1953 helps train Saudi armed forces (Aruni, 124). Besides, The United States has sold aircraft weaponry to Saudi Arabia military.

Free trade has helped strengthen Saudi Arabian companies. Saudi Arabian companies have enjoyed reduced barriers and trade tariffs allowing them to compete effectively with other economies (Geyndt, 135). The stronger economic development of Saudi Arabia is a clear indication of free trade that has established prosperity for ordinary citizens. This has been a result of lower costs of goods and services.

Conclusion

Free trade is an opportunity created to enhance mutual trade corporation between countries internationally. Free trade has significantly favored developing countries by providing a free and fair competitive market, reducing trade tariffs and developing home industries. However, lack of reliable trading partners, production of similar goods and over dominion by economically powerful states has weakened participation by most third world countries.

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