Sep 30 2010
Free Trade Debate: to what extent has globalization based on free trade contributed to global economic growth and development?
Today in class, my IB year 2 students undertook a debate on the extent to which free trade has contributed to or hurt the well-being of the world’s people. In preparation for this debate, students were asked to research and bookmark to our class’s Diigo group one article offering evidence in support of their argument.
The debate was framed around a quote from Paul Krugman from chapter 11 of the excellent book, Naked Economics.
“You could say that globalization, driven not by human goodness but by the profit motive, has done far more good for more people than all the foreign aid and soft loans provided by well-intentioned governments and aid agencies.”
- 80% of the toys sold in America are made in China.
- Foreign companies make toys in factories operated and owned by Chinese.
- Working conditions in China are horrible with a minimum wages that is far too low.
- In addition to low wages, standards of worker safety are lower than the United States, leading to exploitation of labor to produce cheap toys for Americans.
- To make matters worse, the prices of a certain toy may vary greatly from rich country to rich country. For example, a doll that sells for $29 in the USA sells for $64 in Holland. How is this fair?
- The cost of labor makes up less than 5% of the price of the toy.
- Free trade only increases the profits of the capitalists, but does not help the workers in the poor countries where products are manufactured.
- Due to free trade, demand for labor in more developed countries decreases since production occurs in other countries where it’s cheaper to produce.
- This means jobs lost in rich countries, so less economic growth, less consumption, lower incomes.
- Growth in some countries comes at the expense of growth in other countries. There are winners and LOSERS in free trade.
- Under free trade as we call it today, subsidies to farmers in Europe make it difficult for African farmers to compete.
- Africa accounts for less of the total trade in the world today than it did in 1990, mostly because of its inability to export produce due to subsidies to farmers in Europe.
- With less access to advanced capital and the lack of government subsidies, African farmers find it difficult to compete on the global produce market.
- Free trade hurts poor countries’ farmers and therefore increases the gap between rich and poor.
- Trade liberalization creates some losers as it increases the gap between those with skills to work in the global market and those who don’t have those skills.
- Trade leads to an increase in inequality and more relative poverty.
- Trade creates severe tensions between big and small firms and workers who succeed and those who lag behind.
- Export growth can exacerbate the exploitation of natural resources. Without environmental protection, trade may make us richer but at the price of future development.
- Africa is establishing Free Trade Areas to improve the flow of goods and services across country. If trade were not beneficial, then why would so many countries be clamoring to enter a free trade area?
- When workers can move freely in a region it can lead to better, more efficient resource allocation. The same is true of capital, goods and services. Larger markets lead to more efficiency and greater opportunities for employment and for business operators.
- Reducing tariffs, quotas and other barriers to trade increases efficiency and allows for more opportunities for all those who live within a free trade areal.
Christopher: Foreign Trade, Not Foreign Aid « John Stossel
- If we help developing countries improve and increase their trade with each other and the rest of the world, it will create jobs, allow entrepreneurs to start companies and therefore reduce unemployment.
- Greater opportunities and less unemployment leads to more social stability, reduction in poverty, and less likelihood that the poor people of the world will become “extremists” or result to violence and terrorism to express their dissatisfaction with the world.
- More trade and international relationships reduces likelihood of conflict between and within poor countries.
- We should expect to see social and political stability arising from increased economic opportunity.
- Free trade WILL increase economic opportunities in poor countries.
- Unlike aid, free trade cannot be “used up”. Aid is a one-off, when it’s gone it’s over, but trade can be self-perpetuating.
- On the other hand, Sarah says, “but it all depends on the kind of aid and how it is used!”
- Aid can be invested responsibly, but often times it is not.
- So maybe there is room for BOTH aid AND trade.
- Lara says, “In extreme circumstances, aid is necessary. In other, trade is better as a long-run means of achieving growth and development”
The exercise of debating the pros and cons of free trade for rich and poor countries was rewarding and provided an interesting and engaging way to introduce Unit 4 of the IB Economics course. The final two units, on International Trade and Economic Development, are closely tied, as one of the main strategies for achieving improvements in people’s standards of living is to improve the unfettered access to resource, good and service markets across national boundaries. We will be revisiting the debate on the effectiveness of trade versus aid at promoting the objectives of economic development repeatedly throughout the rest of the second year of IB economics.
For now, some questions went unresolved in today’s debate, and I will ask my student and any other interested reader to respond to those questions in the comments below.
- Is it possible that free trade has increased not only the relative poverty in the world, but also the number of people living in absolute poverty? In other words, trade makes the rich get richer, but does it make the poor get poorer? Or do the poor just feel poorer due to increased wealth and income of the rich?
- In 1970, the economies of China and Africa were roughly the same size, and the average income of a Chinese person was around the same as an African’s. Today, China’s economy is more than three time’s the size of Africa’s. What has China done differently than Africa to lead to such a huge income gap between the two regions?
- Why should people in Europe, America and other high income regions of the world care about the economic development of the world’s poorest countries? Does improving the lives of Africans require that we in Europe and the rich West make sacrifices in our own standards of living?
- African countries want Europe to stop subsidizing its farmers to make it easier for African farmers to compete. But doing so would mean the loss of an important part of European history and culture. Why would less subsidies to farmers in Europe help Africa, and should Europe listen to Africa on this issue or not?