Freedom of Trade and Development 2019

Content Table

Serial Number Content Page Number

1. Introduction 2-3

2. A Brief History of Free Trade 4-5

3. Advantages of Free Trade 6-8

4. India and its Foreign Policies of Free Trade 9-10

5. Global Perspective Of Free Trade 11

6. Types of Tariff 12-14

7. Conclusion 15

8. Reference 16

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Introduction
International Economics is the study of branch of Financial and economic interdependence.
International Economics deals with

1. International Economics analysis flows of goods and services, money and payments.
2. Policy directed at regulating these flows.
3. Impact of these polices on the nation’s welfare.

Why countries Trade with each other?

1. Countries differ in respect of demand of goods and services.
2. Inabilities of countries to supply goods and services.

Trade has right from the creation of an organized market been an integral part of the economy of
a Nation or Business. No economy beginning with the early Mesopotamian civilization has
survived and prospered without actively taking part in Trade both internally and with other
foreign economies. International trade has not just helped nations to develop economically but
also grow socially and culturally. Exposure of various foreign social cultures and practices
brought forward by International trade has in many instances helped economies develop as a
whole.

However this concept of gaining mutual benefit from exchange of goods and service had held
two contrasting ideologies regarding the level of control placed on trade. They are Free Trade
and Protectionism. Both concepts have been in use in one form or another from times
immemorial and each hold their advantages and downfalls. There continues to be a debate as to
which trade policy is better suited in helping in the growth of an economy. However, like any
economic ideology, Both Free Trade and Protectionism are dynamic concepts and each of them
has had its place in history and with changing times and economic situations, policies of both
ideologies have helped nations move ahead. In contemporary times, with rapid globalization and
the unprecedented growth of the world economy in a short period of time, Free Trade policies
are preferred as they help in maintaining a steady stream of resource both intellectual and
material to be exchanged and mutually benefitted upon. An attempt to try and understand each
aspect of these ideologies will never cease to exist and with changing situations, the applicability
and usage of each of these concepts will continue to develop and change.

What is Free Trade?

“It is the maxim of every prudent master of a family, never to attempt to make at home what it
will cost him more to make than to buy. If a foreign country can supply us with a commodity

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cheaper than we ourselves can make it, better buy it of them with some part of the produce of our
own industry, employed in a way in which we have some advantage”. It was this insight by the
18th century economist Adam Smith which concisely explains the seminal principle of Free
Trade. Trade is one of the most essential economic activities in the 21st century and no state can
effectively stand to develop without actively taking part in it.

Globalization, especially after the Second World War has allowed businesses and nations across
the world to market their products and services with other economies leading to a rapid growth in
international trade. The development of communication and travel has ushered in an era of
countless new trends, services and commodities all with endless possibilities. All this has
resulted in a rise in human interaction and has lead to the opening up of world economy. Trade
without restrictions has brought in the era of globalization and human advancement. The main
idea of free trade is that it follows a laissez-faire approach, with no restrictions on trade and it is
a type of policy that allows traders to act and transact without interference from the government.
Countries which engage in trade internationally without trade barriers form the fundamental
basis for free trade. It is an established fact that Global trade allows countries to use their
resources be it labour, technology or capital more efficiently. Free Trade encourages greater
efficiency among local establishments, leads to greater product choice, and price reductions
while encouraging local firms to expand and export. The main purpose of free trade agreements
is to allow faster and more business between the two economies so that they maintain the stream
of mutual benefit.

Free Trade as a concept bases itself on the two theories of the Classical theory of Absolute
advantage by Adam Smith and the Comparative Advantage Theory by David Ricardo. Smith, in
his study recognized that fewer the impediments to trade, the richer everyone would become. He
criticized the royal charters, tariffs, cartels, monopolies and his opposition to restraints on trade
made Smith the progenitor of Free Trade. Ricardo expanded on the free-trade idea of Adam
Smith by explaining why international trade is essential. According to him, each nation has a
competitive advantage as everyone has something they do best and if they trade with each other,
both parties will live better.

Free Trade today is essential for any economy’s growth and survival.

Maintaining international trade relations not only brings economic benefit but also brings that
economy closer to the rest of the world both socially and culturally and almost all economies in
the world today are dependent on other economies for resources both human and material.

The development of science and technology has made the world smaller in terms of travel and
better informed in terms of information and this has led economies while being fiercely
competitive to also be cordially cooperative. Trade mechanisms like the NAFTA and WTO have
been designed by the major world economist to help in maintaining a healthy trading relationship
between businesses or economies.

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A Brief History of Free Trade

The development of trade and its role in the development of the world economy is deep rooted
and goes back to the earliest of civilizations. The need to coexist and maintain trade relations
with other economies for goods and services was realized millennia ago by the founding fathers
of our great civilizations. Trade was a major component of not just the economy but also the
society and much was at stake in order to maintain trade relations with other nations and
economies. Economists who had advocated free trade believed that trade to be the reason as to
why certain civilizations prospered economically. This was illustrated by Adam Smith when he
pointed out that increased trading had helped in the flourishing of not just the Mediterranean
cultures of Egypt, Greece, and Rome, but also of East India and China. It was during the
medieval ages when European nations such as England,

France and Portugal started competing and building trade empires across Asia. These nations
recognized the potential of the valuable spices and other exotic commodities found in India,
China and other south East Asian countries went after them. These traders and trading
establishments were highly competitive and they aggressively lobbied against trade restrictions.
Most of the European Trade Cartels succeeded in establishing massive trading ports complete
with factories by influencing the small kingdoms and their rulers using persuasive tactics and
politics and amassed huge fortunes in a very short time. However, Free Trade has held more
significance from the beginning of the 19th century when trade was the engine of economic
growth. The advent of capitalism and industrialization along with gold becoming the universal
choice of currency led to many countries dropping restrictions on trade. While Britain
maintained its position as the factory of the world, nations like United States and Germany
quickly benefitted from free trade and rapidly industrialized around this time. Many liberals in
Britain and United States came to believe that Free Trade promoted peace. The British economist
J. M. Keynes suggested that free trade so long as it was combined with internationally
coordinated domestic economic policies to promote high levels of employment, and international
economic institutions meant that the interests of countries were not pitted against each other.
This view was however temporarily put to rest with the advent of the First World War and the
subsequent collapse of Wall Street which led to collapse of many major world economies.

The Great Depression ushered in a new era of Protectionism with most major world economies
severing their Free Trade policies and reverting back to protectionist measures. This depression
continued into the late 40’s and countries like Japan and Germany were reeling under severe
inflation and economic downturn.

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This forced comparatively stable economies like the United States to open up their economies
and lower their trade barriers. The General Agreement on Tariffs and Trade (GATT) was formed
in 1948 and it was the result of 23 countries getting together to sign an agreement to reduce
customs tariffs. The GATT ushered in a new era of globalization and increased trade between the
major economies of the world. This agreement was the first of the many agreements which were
to follow and which made an attempt to reduce trade barriers and protectionist policies and
promote free trade. The Uruguay Rounds from 1986 to 1993 were one of the most ambitious
trade rounds and they are directly related to the establishment of the World Trade Organization
(WTO) in 1994. The WTO super-ceded GATT and is now the highest international authority
which looks after Free Trade across the world. Other more regions bound free trade policies like
the North American Free Trade Agreement or NAFTA were also created after the 19 to assist in
creating better Trade.

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The Advantages of Free Trade

A famous economist providing motivation about free trade accurately summed up the concept of
free trade in the phrase, "If you do something good for me, I will do something good for you."

In 1776, Adam Smith while questioning the mercantile assumption that a country’s wealth
depends on its holding treasure (Holding treasure is the amount of gold a country’s treasury has
rather than the amount of goods and services) said that a country had absolute advantage in the
production of a product when it was more efficient than any other country in producing it.
Therefore, Smith reasoned that if trade was restricted each country could specialize in products
that gave it a competitive advantage. This specialization would increase their efficiency as
Labour would be skilled by repeating the same tasks and all and long term runs would provide
incentives for development of more efficient working methods.
In the 21st century, there are many important reasons as to why voluntary exchange is good not
only for the contracting parties but the world as a whole. The first being that trade improves
global efficiency in resource allocation. A glass of water may be of little value to someone living
near the river but is priceless to a person crossing the Sahara. The bottom line being that trade
delivers goods and services to those who value them most. Next, trade allows partners to gain
from specializing in the producing those goods and services they do best and when producers
create goods they are comparatively skilled at, such as Germans producing beer and the French
producing wine, those goods increase in abundance and quality. Finally, trade allows consumers
to benefit from more efficient production methods. For example, without large markets for goods
and services, large production runs would not be economical and large production runs, in turn,
are instrumental to reducing product costs therefore Lower production costs lead to cheaper
goods and services, which raises real living standards. Free trade also fosters in a sense of
competition and therefore scope for innovation. These instances along with empirical evidence
support the idea that nations more open to trade tend to be richer than those that are less open. In
a study conducted by prominent economists Jeffery Sachs and Andrew Warner in 1970 to
measure the relationship between economic growth and international trade and how the
‘openness’ of an economy helps in its economic development, they found that while open
economies grew at a rate of 4.49% per year, closed economies only grew at a rate of 0.69% per
year.

This study clearly indicated that free trade seemed to produce higher levels of economic growth
and standards of living.

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However, no idea, policy or concept is complete without its contrast and criticism and no policy
can ever be implemented without understanding the contrasting concept. Each concept holds true
in its own right and therefore it is absolutely necessary to understand every aspect of it to create a
complete picture. Protectionism is held in contrast to Free Trade and it is important to understand
the significance and development of it to help in increasing the efficiency of an economy.

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1. Supporting investment in regional value chains and promoting inter-regional trade
can expose and unlock the comparative advantages of economies. It can also facilitate
regional distribution of agricultural inputs for increased agricultural production and
profitability. Working through regional industry associations, the USAID Regional
Agricultural Trade Expansion Support (RATES) project established a market information
system, harmonized regional trade policy, and laid the foundation for a structured trading
system to engage in increase cross-border trade, access regional markets, and increase
food security.
2. Harmonizing regional policy through legal and regulatory reform can give domestic
and international investors access to larger markets on a regional basis, supporting
economies of scale and cost competitiveness. The USAID Southern Africa Trade Hub’s
support for the regional Single Administrative Document reduced transport costs by
introducing a single, standardized document for customs clearance throughout the region
and supporting the establishment of a Free Trade Agreement in Southern Africa.
3. Investing in technical and vocational education and training can help upgrade the
skills of the labor force to meet the demands of the private sector. In Rwanda,
decentralized vocational education and training programs, such as the Higa Ubeho
project, are providing training in plumbing, electricity, cooking, welding, construction,
masonry, automobile mechanics, and public works to supply needed skills to continue the
country’s rapid economic growth.
4. Building the capacity of institutions in investment promotion and export
development can help implement needed enabling environment reforms and sensitize the
private sector to barriers lifted and opportunities created. In the West Bank, the USAID
Investment Climate Improvement (ICI) project simplified the tax payment structure and
greatly streamlined the business registration process, making it easier and less risky for
investors to start operations and for the government to collect revenue.
5. Sector-based support for industries that have a comparative advantage will promote
systemic changes for greater impact than supporting specific firms. The Afghanistan
Regional Agricultural Development (RADP) programs are supporting fruit, nut and
vegetable agribusinesses in new product development, processing, and packaging
technology. They are also establishing export market linkages to help build
competitiveness and exploit opening regional markets for agricultural products.
6. Entrepreneurship programs have proven to spur new sectors, especially in the services
industry, which many economies still lag behind on, in comparison to other regional
countries. Under the Egypt Competitiveness Project (ECP), the roll-out of the U.S. State
Department’s Global Entrepreneurship Program actively promoted entrepreneurship
development and the start-up of new businesses by creating awareness of how to
transform creative ideas into business realities.

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India and its foreign trade policies

India has not been far behind in reaping the benefits of globalization and it has after the
1990’s or the so called “Post Liberalization Era” extensively participated in trade with the
other economies of the world.
Improved Export Import policies along with lower tariffs and the establishment of
Special Economic Zones (SEZ) has attracted a huge amount a foreign investment and that
has led to the rapid development of both rural and urban areas. The IT boom and India
featuring as the most potential investment destination has ushered almost every major
multinational corporation to invest heavily in India. I
However, India while steadily opening up its economy has still maintained restrictive
investment and trade norms. It has retained its power to ‘protect’ when needed and this
has been very effective in cushioning the impact of the recent economic downturn.
Nonetheless, the government’s stand on trade and investment policy, in recent years has
displayed a marked shift from protecting ‘producers’ to benefiting ‘consumers’. This is
reflected in its Foreign Trade Policy for 2004/09 which states that, "For India to become
a major player in world trade ...we have also to facilitate those imports which are required
to stimulate our economy." It is clear that India is now aggressively pushing for a more
liberal global trade regime, especially in services. For instance is that it has assumed a
leadership role among developing nations in global trade negotiations, and has played a
critical part in various trade negotiation rounds including the ever important Doha
negotiations. India has been aggressively moving ahead on the global stage and has
signed various trade agreements with its neighbours and is seeking to establish trade
relations with new ones including many East Asian and European countries. Some of the
important existing trade agreements include the The India-Sri Lanka Free Trade
Agreement, India-Nepal Trade Treaty, and The Comprehensive Economic Cooperation
Agreement (CECA) with Singapore and Framework Agreements with the (ASEAN).
Being an active member of the WTO, India also has trade agreements with China, South
Korea, Brazil and many such major economies of the world. Trade pacts with the
European Union and United States are also in the pipeline.
The 123 Agreement with the United States in 2008 can be considered as a founding stone
to renewed trade relationship with the US.
It is therefore evident that India is very much a vital player in world economics and trade
and it has its GDP and growth indicators to back it up. India is one of largest and fastest
growing economies among the developing world and it is considered as one of the largest
markets for commodities and services from around the world. With reforms to create a
more flexible trade policy, India’s economy is bound to grow at a faster rate and lead the
country to greater heights of economic and social prosperity.

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The Global Perspective on International Trade

As highlighted earlier, globalization had enhanced and renewed the will of the economies
of the world to trade and benefit from each other. Major leaders of the world economy
like the United States of America, Japan and
Germany have all aggressively participated in world trade and have benefitted
enormously from it. The United States and the European Union are the most active
advocates of Free Trade and they have benefitted enormously by limiting their trade
barriers. Even the latest economic collapse has only acted as a speed breaker in
continuing and expanding trade relations. With signs of recovery around the corner, the
major capitalist economies of the world are beginning to resume their tradingactivities
with the same pace as was observed before the economic collapse. The European Union
or the EU and the United States with their aggressive trade pacts such as the NAFTA for
the Americas and internal trade pacts and standardization of currency for the EU have
permitted these economies to trade with virtually nonexistent trade barriers that have
allowed these countries to expand their industries and commodities all over the globe.
China, too after its gradual opening to trade has probably the most aggressive participant
in global trade. International Trade has resulted in unprecedented rates of growth and
China is the most important future super power of the world. One of the most significant
steps China had taken towards Free Trade was to finally join the WTO in 2001 after 15
years of negotiations. This resulted in major economies like the United States, France and
Germany investing heavily in China. China is now the preferred destination for most
investor’s and it stands to overtake the
United State as the world’s largest Economy in a few years.
The World leaders at the recent G8 talks at L’Aquila, Italy called for attention towards
the growing Global Food Crisis and suggested a possible review of the current free trade
policies towards the production and trade of food grains. Agricultural development has
take centre stage at world economic summits after severe food shortages in spite of
sufficient production. Discrepancies in the allocation and unethical trade practices of
many business and economies have come to light following this and a call has been
sounded for world economies to tackle this problem quickly and efficiently. While some
call for international trade and reduction in existing trade barriers to tackle this problem,
others argue that excessive trade and unethical trade practices arising out of free trade
such as dumping to be at the root of the issue. Only a concentrated study of the situation
and an honest effort by the major world economies into this problem can determine and
subsequently tackle the actual cause of the growing crisis.

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Types of Tariff Barriers

Despite all the obvious benefits of international trade, governments have a tendency to
put up trade barriers to protect the domestic industry.
There are two kinds of barriers: tariff and non-tariff.

Tariff Barriers
Tariff is a tax levied on goods traded internationally. When imposed on goods being
brought into the country, it is referred to as an import duty. Import duty is levied to
increase the effective cost of imported goods to increase the demand for domestically
produced goods. Another type of tariff, less frequently imposed, is the export duty, which
is levied on goods being taken out of the country, to discourage their export. This may be
done if the country is facing a shortage of that particular commodity or if the government
wants to promote the export of that good in some other form, for example, a processed
form rather than in raw material form. It may also be done to discourage exporting of
natural resources. When imposed on goods passing through the country, the tariff is
called transit duty.

Tariffs
1. Ad Valorem: This kind is most commonly used; it is calculated as a percentage of
the value of the imported goods - for example, 10, 25 or 35 per cent. This duty is
imposed at a fixed percentage on the value of an imported commodity. Here the value
of the commodity on the invoice is taken as the base for the calculation of the duties.
3% ad- valorem duty on the C&F value of the goods imported. In the ad-valorem
duty, the percentage of the duty is decided, but the actual amount of the duty changes
as per the FOB value of a product.

2. Specific: Is a tax of so much local currency per unit of the goods imported (based on
weight, number, length, volume or other unit of measurement). Specific duties are
often levied on foodstuffs and raw materials.
A specific duty is a flat sum collected on a physical unit of the imported commodity.
Here, the rate of the duty is fixed and is collected on each imported unit. For example,
Rs 800 on each TV set or washing machine or Rs.3000 per metric ton of cold rolled
steel coils.

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3. Compound: The "specific" part of the compound duty (called compensatory duty) is
levied as protection for the local raw material industry. A tariff is referred to as a
compound duty when the commodity is subject to both specific and ad-valorem
duties. It is imposed on manufactured goods that contain raw materials that are
themselves subject to import duty.

Non Tariffs
1. Import Quotas: A quota is a limit on the number of units that can be imported or the
market share that can be held by foreign producers. For example, the US has imposed
a quota on textiles imported from India and other countries. Deliberate slow
processing of import permits under a quota system acts as a further barrier to trade.

2. Voluntary Export Restraint (VER): A country facing a persistent, huge trade

deficit against another country may pressurize it to adhere to a self-imposed limit on
the exports. This act of limiting exports is referred to as voluntary export restraint.
After facing consistent trade deficits over a number of years with Japan, the US
persuaded it to impose such limits on itself.

3. Technical Barriers: Countries generally specify some quality standards to be met by

imported goods for various health, welfare and safety reasons. This facility can be
misused for blocking the import of certain goods from specific countries by setting up
of such standards, which deliberately exclude these products. The process is further
complicated by the requirement that testing and certification of the products regarding
their meeting the set standards be done only in the importing country.
These testing procedures being expensive, time consuming and cumbersome to the
exporters, act as a trade barrier. Under the new system of international trade, trading
partners are required to consult each other before fixing such standards. It also
requires that the domestic and imported goods be treated equally as far as testing and
certification procedures are concerned and that there should be no disparity between
the quality standards required to be fulfilled by these two. The importing country is
now expected to accept testing done in the exporting country.

4. Anti Dumping Duties: Dumping is the commercial practice of selling goods in

foreign markets at a price below their normal cost or even below their marginal cost
so as to capture foreign markets. Many countries follow dumping practices. It is
harmful to less developed countries where the cost of production is high. Since these
practices are naturally considered to be unfair competition by manufacturers in the

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country in which the goods are being dumped, the government of the foreign country
will be asked to impose "anti-dumping" duties. Anti-dumping are special duties
additional to the normal ones, designed to match the difference between the price in
the home country and the price abroad.

5. Countervailing duty: Such duties are similar to anti dumping but are not so severe.
These duties are imposed to nullify the benefits offered through cash assistance or
subsidies by the foreign country to its manufacturers. The purpose of the duty is to
offset, or "countervail” the county or subsidy so that the goods cannot be sold at an
artificially low price in the foreign country and thereby provide unfair competition for
local manufacturers. The rate of such duties will be proportional to the extent of the
cash assistance or granted subsidies.

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Conclusion

Why Free Trade is more popular that Protectionism in the 21st century
Societies that enact free trade policies create their own economic dynamism which help
in fostering a sense of freedom, opportunity, and prosperity that benefits every citizen. In
recent years, many world nations have demonstrated the power of this principle. For
instance, by breaking the cycle of poverty, the most impoverished countries of the world
can begin to create their own dynamic toward prosperity.
Nevertheless, despite all the evidence to the contrary, the opponents of free trade will
continue to espouse the old arguments like that of "the jobs created by globalization are
often less sustaining and secure than the livelihoods abolished by it in developing
nations”. Such claims presuppose that some sort of agrarian utopia previously existed in
these countries and that their peoples will not reap the benefits of economic development.
To argue against the development carried by technology and innovation is akin to arguing
that the United States and Europe, to cite just one example, were better off before the
Industrial Revolution. The Revolution brought freedom of movement and increased
opportunity to all economic levels of society all over the globe. Only, some nation’s
derived more benefit quickly while others took more time to stabilize and reap its
benefits. A comparison of the economic growth between China and it break away
neighbor Taiwan illustrates this idea. The Taiwanese government in the 1960’s chose to
institute widespread reforms to guarantee private property, establish a legal system to
protect property rights and enforce contracts, reform the banking and financial systems,
stabilize taxes, distribute public land to individuals, and allow the market to flourish. The
Real GDP per capita of Taiwan and China was compared and tracked for the next three
decades. For India, Post Liberalization with reduced trade barriers and increased foreign
investment has set the stage for social and democratic progress of a magnitude that would
have been impossible earlier and although as history suggests that this new era of market
globalization may well be accompanied by new problems for which the solutions will
once again lie in the power of human ingenuity and innovation. Globalization has
presented the world with an unprecedented level of opportunity for people to achieve
economic freedom and greater prosperity.

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References

1. The Concise Guide to Economics by Jim Cox

2. MIT Open Courseware
3. The World Bank Resource Centre
4. FPIF.org (Foreign Policy in Focus)
5. Economic Policy Institute
6. The UN Millennium Project Resource Centre

Articles

1. Free Trade Benefits All by Marian Tupy, CATO Institute

2. The History of "Free Trade" By Jonathan Larson
3. The Benefits of Free Trade by Denise H. Froning, Centre for International Trade and
Economics
4. The World Trade Constitution, Harvard Law Review of 2000
5. Globalization vs. Protectionism by Alan Greenspan, Federal Reserve Board of the
USA
6. The High Price of ‘free’ trade by Robert E. Scott
7. Macroeconomics in the Global Economy by Jeffrey Sachs

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