Trade liberalization policies and their fairness for developing nations

Protectionism and Free Trade

Principles of Economics:

A Discussion on Protectionism and Trade Liberalization

In the convoluted world of discussion over the future of developing countries, rich nations seem to make all the decisions, regardless of whether they benefit or harm the former group, or so it seems. This supposition is debated heatedly by those concerned and by external actors, especially when it comes to deciding whether trade liberalization is the right modality through which to aid the developing world, and especially when it is conducted through financial means, such as those involving the International Monetary Fund (IMF) loan programs. What is certain is that developing nations must fulfill quite a rigorous number of criteria to even begin to even start the qualifying process of joining the rich nations' club. The gatekeeper is, of course, the IMF, an organization that ensures that trade liberalization is complied with in order for developing countries to qualify for financial aid, or loans. This policy, regardless of intent, is unfair to some, especially in light of the history of developed countries (i.e. formerly protectionist nations), and many posit whether trade liberalization is, in fact, something that all must undertake, given the different and unique structures each country contains. And hence the debate cycle continues.

This paper will analyze the various 'hoops' through which developing countries must jump in order to meet the standards imposed upon them by the wealthy world, and will strive to give an answer to the question of whether current trade liberalization policies are fair, and if so, to what extent. In order to begin to answer the above-stated question, one must undertake an analysis of the various components of the argument presented in this paper. First, a history of the economics of trade will be described, with a few theories intertwined. Second, a short description of IMF policies and how they have affected developing countries will also be provided. Lastly, case studies that illustrate success or failure of these policies will also be described, in order to see whether trade liberalization, protectionism, or a combination of the two is the right recipe for success.

Historical Basis: Economics of Trade

The world has changed dramatically since the 18th and 19th centuries, when most of today's developed countries were developing. During the times when the United States and the United Kingdom, as well as many countries in Europe and Asia, some of whom are today's economic and financial frontrunners, were striving to survive, there was no helping hand, no advice imparted, and certainly no 'one size fits all' model to help these countries succeed. Yet they have succeeded nonetheless. The question to ask, then, is what has made these countries so successful on the world stage, and what they can do to help those in need today develop and achieve the same kind of growth and stability.

The answer is somewhat simple, yet in order to understand it, one must understand the way history has treated not just such concrete cases, but also how theories have developed to bolster inefficient or successful enterprises. Of course, in order to truly understand the specificities of the above-stated model, one must analyze each country in particular, complete with its unique characteristics, and build a model upon which one may then be able to assert or deny certain claims of success or failure. Due to time and length constraints, however, this would not be a successful enterprise, and will be limited to a short history of theory and practice, beginning with the latter. Thus, this section will begin by describing the economics of trade, as they have developed since the times of Adam Smith, the father of political economy.

Mercantilism

To begin, one must go back to Adam Smith and must first note that before this man's revolutionary ideas changed the world, mercantilism, a philosophy that stressed government control over foreign trade, reigned supreme. Mercantilism was believed to be of the utmost good for a nation for a few reasons. First, it ensured a balance of trade, and due to times when mercantilism was in favor (i.e. when gold reigned supreme), this made sense (LaHaye, 2008). Thus, during the centuries in which mercantilism controlled business ideals, most nations dealt with gold rather than money, for obvious reasons (i.e. banks could not be trusted). A second reason for why mercantilism was favored from the 16th and until the 18th century was because many believed it gave an advantage to more powerful, more populous countries, or those countries that ruled the world, such as England and France (LaHaye, 2008). Yet another reason for why mercantilism was so widely accepted was because it protected, for better or worse, the domestic economy and allowed those who controlled it to get richer and richer (LaHaye, 2008). Furthermore, during a time when allies were not to be trusted and technology or industry did not truly exist, keeping things domestic was, often, the only thing a merchant or businessman could do to not go out of business.

Free Trade

As logical as the above theory seemed, Adam Smith, and his free trade philosophy changed it all. Smith is considered the father of modern economics for a very clear reason: he simply created it all. Smith is also the reason why the UK and the U.S. are, for reasons mentioned above, leading the world of today. In order to delve into the very core of what Smith was trying to say, one must simply understand that this man concocted the justification for free trade in a time where nobody else had even thought of such an option. In his masterpiece, The Wealth of Nations, Smith not only provided an understanding of economics of the time, but also aimed to find better ways in which to enrich his country and thereby enrich others with whom his country would potentially trade. Furthermore, Smith also coins concepts such as the division of labor, a thing which today enables countries to engage in free trade with great benefits are results (Smith, 1776). Lastly, Smith provides a scathing but logical critique of mercantilism, and for good reason. He states that mercantilism conflates value, due to its use of precious metals (i.e. bullion), and thus cannot truly show the wealth of a nation, which should be measured with good s and services created by said nation (i.e. gross domestic product, GDP) (Smith, 1776). Lastly, to drive the point home, Smith argues that by limiting oneself to mercantilism one limits his markets or his horizons and, thereby, his wealth. However, with free trade, the wealth potential is limitless, for one can engage in free trade with any country (Smith, 1776).

Trade Theories Summary

The history of trade theories presented above and exemplified by two of the most important ones that have shaped both history and practice today, is important to mention here. Since history is known to repeat itself, for instance, one can truly see examples in which both these theories shape our world. For instance, mercantilist ideas are present in today's working classes, especially with regards to the auto industry, and free trade is advocated by the U.S. And other rich nations in order to expand their markets and help others expand as well. Yet this latter statement must be further analyzed and verified, which is what the next section will undertake.

Pros and Cons

When opening up a country through trade liberalization, one must also, always, weigh the pros and cons before enacting a policy. Though a mix of liberalization and protectionism is advocated in this paper, this section will weigh these two camps accordingly, for theoretical purposes. The 'pros' of trade liberalization involve the fact that a country will grow economically. This will happen because of inertia (i.e. open economies always grow faster than closed ones). Yet without checks and without proper policies in place, this honeymoon phase will be phased out, and a country may enter an even uglier phase than that with which it started. Thus, one must ask whether the 'pro' is worth it, or whether it is simply too costly. Another 'pro' is that a country will be open to competition, which will lead its manufacturing sector to develop creatively, yet in many nations, this has driven people out of business. Once again, the question of whether this is truly a 'pro' is of some debate. Lastly, one may want to analyze the question of short-term adjustments. As experts state, "even though an economy is likely to benefit from the process of economic liberalization over time, certain short-term adjustments may not be so positive. If availability of imports causes a local company to lose its market share, there could be a short-term impact in terms of layoffs of workers," and a country may go way down before it goes up (Pondent, 2012).

Answering the Question Once and for All

Trade liberalization is, as repeated through the previous section, not always justified. Yet the IMF continues to provide benefits, despite much criticism, that trade liberalization is the solution to all problems and as seen above, provides clear steps as to how to achieve this and obtain a loan in order to 'save' one's country through the same steps as another's. This is expanded upon in the organization's website factsheet, which states, among other things,

"Policies that make an economy open to trade and investment with the rest of the world are needed for sustained economic growth. The evidence on this is clear. No country in recent decades has achieved economic success, in terms of substantial increases in living standards for its people, without being open to the rest of the world […]" (IMF Staff, 2001)

While these ideas may work in some parts of the world, such as South and Southeast Asia, as well as in some Latin American countries, the problem of underdevelopment persists in Africa, providing that this seemingly overarching positive statement is not always true.

Instead of advocating the one-size-fits-all model, complete with trade liberalization for all, the IMF ought to follow the policies of its richest countries, many of which have applied a mix of protectionist and liberal policies in order to function, grow, and be successful on the world stage. This is exemplified in the U.S. By free trade in various sectors, such as auto manufacturing and IT, and protectionism in others, such as agriculture. It has been exemplified by Japan and South Korea, both of whom are protectionist in some respect yet quite liberal in others (i.e. car exports and electronics) (Shafaeddin, 2005). Thus, a mix is often the right answer, and the IMF must take note.

Conclusions

Explaining what a country must undertake in order to achieve the kind of success seen in today's developed world is quite a task, especially since no country is alike. This paper has striven to prove three points:

1) the theories of the past are of utmost importance in today's developing world, as well as in today's policy-making states, for these theories have the power, if utilized correctly (incorrectly) to benefit (or harm) a society;

2) no clear positives or negatives could be provided for either mercantilism (protectionism) or free trade (trade liberalization), for it has been established that only a mix of these two ideas can be undertaken in order to truly help a country succeed in its quest for development;

3) the developing, as well as the developed world, should modernize its 'one size fits all' ideas, rules and regulations, and should rather undertake very specific and focused studies, in order to see what a country truly needs in its quest for modernization, for it is only in this way that such a country can achieve success.

This paper has also established that certain examples, especially successful ones (i.e. South Korea), have utilized a mix of liberalized and protectionist policies and have been growing constantly and rapidly. Furthermore, trade liberalization, though justified in certain instances, must only be enacted in those cases in which liberalization will lead to specialization (i.e. electronics industries in Japan), for even the most ardent advocates of free trade, such as the U.S., have protectionist policies that protect sectors, such as the agricultural field, in order to help all areas of society survive and grow.

Works Cited (in order of citation):

LaHaye, Laura. "Mercantilism." Library of Economics and Liberty. The Concise Encyclopedia of Economics, 2008. Web. 22 Jan. 2012. .

Smith, Adam. "Smith: Wealth of Nations." Library of Economics and Liberty. 1776. Web. 22 Jan. 2012. .

Ferraro, Vincent. "Dependency Theory: An Introduction." Mount Holyoke College. Web. 22 Jan. 2012. .

Staff, IMF. "Factsheet -- IMF Lending." IMF -- International Monetary Fund Home Page. 2011. Web. 22 Jan. 2012. .

Oatley, M. "Access: American Interests and IMF Lending: International Politics." Palgrave Macmillan Journals. 2004. Web. 22 Jan. 2012. .

Pondent, Corr S. "Pros & Cons of Liberalization." EHow. Web. 22 Jan. 2012. .

Staff, IMF. "Global Trade Liberalization and the Developing Countries -- An IMF Issues Brief." IMF -- International Monetary Fund. 2001. Web. 22 Jan. 2012. .

Shafaeddin, S.M. "Trade Liberalization and Economic Reform in Developing Countries: Structural Change or De-Industrialization?" Macroeconomics Department -- UNCTAD. 17 April 2005. Web. 22 Jan. 2012. .