Liberal Trade Theory has lost validity

Kuthula Matshazi

Perspectives on International Trade

If we are to use liberal trade theory, which is derived from neoclassical economics, it leads us to believe that free trade results in gains for all nations, then the theory of free trade has lost its validity because evidence shows us that although it does produce gains, on the whole many countries and people have been losers. Not only has these losses been experienced in the developing countries but they have been felt in the developed countries.
Birdsall et. al (2005) have shown that poverty in developing countries has perpetuated and in some cases even further deepened within the framework of free trade. One source of the poverty has been the structural adjustment and aid programmes that are provided by the developed countries and multilateral institutions such as the World Bank and the International Monetary Fund. By liberalizing the economies of developing countries, the developing countries believed that they would unlock value in their mainly primary products based economies and be able to trade their primary commodities on the lucrative markets of developed countries, especially in agricultural products, for instance, which is generally the main economic activity of developing countries. However, that has not been the case as the developing countries have, instead, in many instances come up against protectionist practices by the developed countries as well as huge agricultural subsidies which renders them unable to compete profitably (Birdsall, et. al, 2005).
Vietnam has demonstrated that it is possible for a country that is outside of the World Trade Organisation’s free trade framework to record gains. It has achieved this feat because its absence from participating in liberalized trade has actually enabled it to pursue only those policies that it deemed relevant to its needs (Birdsall et. al 2005). Rodrik calls the act of a country pursuing its own agenda to implemnt those policies that are going to be gainful to them policy space.
Biven (2007) on the other hand views the current free trade environment bringing about inequality in the United States. He argues that contrary to general economic belief that integration leads to economic gains for all, the integration of the US economy with countries from the developing world has created negative results such as inequalities in many instances (Biven, 2007). One area is in those jobs that can be offshored. The people employed in these tradable jobs (Blinder, 2006) that can compete with similar jobs in low labour cost countries are going to face job losses, job dislocation or a reduction in wages. Blinder (2006) cites a study by Forrester Research showing that by 2015 the US will be losing about 300 000 jobs per year and that a McKinsey study shows that the country stands to lose a further 11 percent of all national jobs to offshoring (Blinder, 2006: 120). Blinder does not see this as necessarily a catastrophe as he believes that there will be some natural adjustments within the labour market and the economy generally since the transition from the first industrial revolution, to the second and finally third did not similarly bring about a catastrophe. Using Krugman’s computable general equilibrium, Biven (2007) sees the establishment and spread of professional industries at the expense of labour intensive industries and the rise of inequality, yet the model was undertaken to prove the benign impact of trade flows on US wages (Biven 2007: 6).
On the other hand, Bhagwati (2007) feels that the free trade theory is still very valid but the uproar we hear and read in the newspapers is misplaced. He sees a trend whereby opponents of free trade rally around a particular character when they claim to have come up with evidence that can refute the successes of free trade. He believes that he made a lasting case for free trade by suggesting that if market failure occurred and was corrected by a suitable policy then the case of free trade would be restored. While this is a plausible theory, Bhagwati does not tell us how we can still believe in free trade when it has failed to account for the various negative outcomes outlined by scholars such as Biven (2007), Birdsall et. al (2005) and Blinder (2006). For instance, inequalities still persist, the Agreement on Trade-Related Aspects of Intellectual Property Rights continues to deny affordable AIDS drugs to sufferers in developing countries (Birdsall et. al (2005). Bhagwati (2007) also argues that as countries become similar in endowments, they could both profit hugely from trade in similar products. Granted, in few cases that could be the case but this claim has not been proven as a general and sustaining rule. If that were the case, countries such as Mexico would have prospered in its trade with the US. I think Bhagwati should also take into consideration that it is not only free trade per se that can bring about gains. Rather, trade is influenced by some other factors such as country endowment, disposable incomes, regional location, political considerations as well as political economy.
In conclusion, free trade can be generally good for the increase in trade volumes but that does not mean that the gains are automatically shared with the poor people or even the country hence the need for other policies to enhance its effectiveness.