Free and fair trade: barriers, tariffs, and North-South economic differences

Free trade and the North-South divide

Globalization has been bringing along several concepts and ideologies and the concept of free trade has been growing in tandem with globalization though with several obstacles along the way. Basically, the meaning and context of free trade is a condition where international trade is facilitated making possible the exchange of capital, goods as well as services across international territories or borders without undue restrictions, conditions or controls. Free trade is significant for most nations since it significantly contributes to a good share of the Gross Domestic Product (GDP) of those nations. It is the type of trade that has been in existence for many decades and to date it is held as one of the most important kind of trade in facilitating the economic, political as well as social ties and interactions of nations of the world. Some of the aspect that facilitate the free trade between nations are the industrialization, advanced transport systems and the globalization forces (Brown Consultancy Services, 2012).

The need for a free trade environment has seen many countries get into treaties whose main aim is to ensure that there is an environment that is conducive for carrying out trade in a profitable manner without one party leveling undue restrictions over the other. One such example was the North American Free Trade Agreement (NAFTA) which was signed in 1994 between U.S., Mexico and Canada to facilitate free trade in the region. This has been one of the classical examples of a treaty that was meant to facilitate free trade and in the process met a lot of challenges. One of the main measures that were employed to ensure that there is protection of the emerging economy like Mexico in this agreement was the fixed exchange rate. The Mexican government feared that their low technology agriculture would be threatened by the fixed rate approach plus the importation of cheap grains from U.S. And Canada and this failure to have the fixed rate in place saw the devaluation of the Mexican currency during the crisis as Direct Selling Education Foundation (1998) indicated. One thing that was not appreciated by Mexico then was that the use of fixed rate would reduce the speculative tendencies which saw the value of the domestic currency dependent on the dollar and hence having the potential of the domestic economy of that nation suffering at the whims of the dollar.

This above example hence brings to the fore the issue of North-South divides in the attempts of establishing a free trade atmosphere within the different trade regions or even among nations of the world. The fear of the weaker economies suffering under the grip of the stronger economies in a free trade environment has curtailed several efforts to see trade thrive among the nations hence the conclusion by many developing nations that free trade environment is not a practical ideology.

The international trade or trade among nations needs to be conducted in a free environment for it to be fair and allow both the strong and weak economies to thrive. Undue restrictions from either side need to be toned down in order to create an environment where goods and services can easily move from one country to another. There should be even more confidence in the free trade environment at the international level bearing the fact that international monetary system policies are in place with the sole aim of facilitating free trade between different nations with the end aim of providing opportunities for investment to free take place between nations. The international monetary system policies are hence central in boosting the developing economies through encouraging foreign investment hence there is need to participate in the free trade rather than shying away since their global financial standings will be secured by the international monetary systems since it plays a central role in global financial markets.

One of the theories that come up strongly in support of the free trade between countries is the Adam Smith theory which was the first to theory to show that free trade can benefit a country. He indicated that a country can have absolute advantage if it produces great output than other countries and that the tariffs and the quotas should not act as a barrier to trade between countries. The theory of comparative advantage by Ricardo was further explained the importance of free trade between countries, he indicated that even though one country may be absolutely more efficient in production of goods that they are to trade in than another, they still were able to engage in trade in a mutually advantageous manner. He suggests, in this theory of comparative advantage that a country should specialize in the production and exportation of the goods and services in which it has relative cost advantage or comparative advantage as compared to the other partners and also import the services or the goods that the other partner countries have comparative advantage in. This kind or perspective between countries is the doctrine behind free trade as was highlighted by Ricardo. Therefore according to Ricardo the whole essence of international trade in not the absolute difference in cost which is hard to achieve in all sectors of production, but rather it is the comparative difference in cost (Costinot, & Donaldson, 2004).