Free trade has always been portrayed as a global economic goal. As countries start to integrate removing quotas and tariffs on goods and services passing between them is considered to have numerable benefits. Opening up global trade increases competition for industries which allows consumers to have cheaper products of a higher quality as more firms compete with their trade. Furthermore, a country’s own firms have an increased access to an export market and can increase their export-led growth, improving GDP growth without having a trade-off with the balance of payments deficits. In addition to this, it allows imports of cheaper capital allowing for a lower cost of investment making it far easier for companies to reach economies of scale. This is all true and a strong case can be made for trade liberalisation in a globalising world.
However, having read Cambridge Professor Ha Joon Chang’s book, “23 Things they don’t tell you about capitalism” I began to consider how applicable these ideas could be to developing countries. Chang argues that modern powerhouses such as America initially used the opposite of free trade to develop their industries. Protectionism allows developing countries to not be outcompeted with importing firms that have much larger access to capital and will always be able to undercut domestic firms on price without the imposition of tariffs. In a more modern-day context let us consider an emerging textile industry in Sub Saharan Africa. Without capital, it is likely that the work is time-consuming, but if trade was liberalized similar products could be imported from countries such as China where labour is cheap, and industry has more capital available to make the same fabrics at a much lower cost even with the landing cost. In this situation the domestic firm would fail due to the presence of internationals and it would be impossible for firms to develop to the size needed for them to benefit from economies of scale, forming a sort of poverty trap as countries cannot purchase capital as they currently lack the capital needed for growth to buy more.
Chang argues in his book that Structural Adjustment Policies implemented in the 1980s were detrimental. His argument is backed with macroeconomic data showing that growth fell from the period of protectionism in the 1960s to the liberalization of the 1980s as imported goods and services began to outcompete domestic producers, resulting in per capita income growth falling from 3% per year to 1.7% per year.
Free trade is beneficial but only when a country has the industry developed to compete on a global stage. For this reason, the growing trade war between the USA and China is, in my opinion, detrimental as both countries are limiting their export markets, especially as the USA is so reliant on Chinese imports. However, for developing countries, protectionism does have its benefits at least until industry can stand up. From this argument, it follows that a potential solution to the described poverty trap would be for NGOs to provide the capital, infrastructure and education needed to allow developing industries to compete. This is, by all means, true in an idealistic world, however, aid can bring its own problems, even though it does have legitimate solutions.
One large area of concern is that of corruption as aid money is often not transferred to those who need it most preventing the full effect. An argument can also be made that aid creates market distortion by creating an element of overreliance of individuals to aid money, limiting productivity growth within an economy for future development. Also, classical free market economists make an argument that aid limits market forces as it prevents economic efficiency needed for allowing growth. This is especially true with the concept of tied aid as goods and services are purchased as a requirement and exporting industries can charge excess costs, reducing its effectiveness in the long term. Of course, aid can be beneficial, but only when applied correctly and in situations such as national disasters where aid is needed to provide short-term relief on a humanitarian level.
Overall, we see that the idea of globalisation and aid benefitting developing countries is not as clear-cut as traditionally assumed and we must realise that other alternatives can still be possible and we must think of all the possibilities potential effects before arguing for and against policies of trade or aid.