Is Free Trade Fair Trade

      McConnel and Brue define free trade as “the absence of artificial (government imposed) barriers to trade among individuals and firms in different nations”. Free trade has long been thought as the desirable model of trade that brings about prosperity to nations practicing it. However, I beg to differ and believe that free trade does not materialize its theoretical promises. Critical analysis of free trade theory reveals that free trade is anything but fair trade.

     I have attempted to analyze the classical and neoclassical models of free trade theory and identify inherent problems within the very concept of free trade. Careful analysis reveals that when applied to the contemporary world economy, the very postulates of these theories favor developed countries over the developing countries.

     David Ricardo has showed that relative cost difference is an important determinant of the theory of international trade. He founded the principle of comparative advantage, which suggests that under competitive forces, countries will ultimately produce goods, which provide them comparative advantage in terms of cost. This serves as the classical approach towards free trade and implies that countries should specialize in producing those commodities in which they possess a relative cost advantage. They will be more productive in making these goods and can trade them for other goods in which they do not possess a comparative advantage.

     On the other hand, neoclassical free trade theory described in the “Heckscher–Ohlin theorem: A country will export the good that uses intensively the factor in which it is relatively abundant”. This model exerts the conclusion that countries differ in their relative productivities because of the difference in factors of production available to them. Countries utilize factors in which they have abundance and produce commodities accordingly. In theory, production and trade would help countries encash such abundant resources because excess output will be exported. Whereas, goods that require factors scarce in an economy can be imported.

     In effect, comparative advantage implied that countries possessing advantage in producing agricultural or other simple products should relocate resources within the economy to focus on producing a specialized set of goods and vice versa. Following this dictate, many developing economies that were mostly agrarian channeled their resources to produce food commodities. On the other hand, their developed peers focused efforts on producing value goods, as they were more skilled at it. This theory had predicted that “trade between dissimilar countries implies a positive welfare effect on both countries since they can exploit their absolute and comparative advantages. Only costs of transporting goods between countries can keep them from exploiting those advantages”.  However, in practice developing nations focused themselves on producing goods that had lower international market value. Whereas, developed nations focused on further developing their technologies and produced goods with greater international market value. Therefore, developing nations stayed at a comparative disadvantage as compared to their developed counterparts.

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     Similarly, factor endowment theory concluded that trade brings gains to countries. It assumed that all countries have similar access to technology. It also predicted that “international real wage rates and capital costs will gradually tend towards equalization”.  However, the realities are different, as technology available to the developing and developed nations is different. Therefore, developing nations do not have much to encash on. The prediction of equalization of real wages and capital costs also never materialized. In effect, the difference between wages of employees of developed countries and developing countries has only increased over the years.  


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