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.”
I was very impressed with their well thought out viewpoints, considering we have only just started our Unit 4: International Trade section of the IB course. Below are the summaries of my student’s arguments for and against free trade. Next to their names are links to the articles they found to support their argument.
Anti-trade arguments
Ika:
  • 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.
Koen: The Negative Impact of Free Trade | eHow.com
  • 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.
Sarah: Doha trade deal ‘will hurt Africa’ | Environment | The Guardian
  • 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.
Silvia:
  • 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.
Pro-trade arguments
Duy Anh: allAfrica.com: Africa: Free Trade Area for East, Southern Africa Making Progress
  • 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.
General comments from the class after both sides have presented their arguments
  • 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.

Discussion questions:

  1. 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?
  2. 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?
  3. 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?
  4. 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?

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

11 responses so far

11 Responses to “Free Trade Debate: to what extent has globalization based on free trade contributed to global economic growth and development?”

  1. Patti Brazillon 04 Oct 2010 at 8:56 pm

    Hey Jason and students,

    This was a great post – my students were researching this question at the end of last year and had a hard time finding data that supported the contention that outsourcing reduced jobs in the U.S. Did you all find a good source for that question?

    I hope all is well for you. Take care!

    Patti

  2. Grace Forsython 07 Oct 2010 at 4:46 pm

    1. I do not think that trade makes the poor get poorer as with free trade it lowers the unemployment rate of the country. This ensures that people are getting paid. Although the money they receive in many of these countries is a lot smaller than our minimum wages it is still going towards their wealth and without free trade they would not have these job opportunities. Therefore the poor may feel poorer due to the increase wealth of the rich however they are in fact too benefitting from trade as they are being provided with opportunities to work.

    2. I believe that it was perhaps due to the different political systems of these two countries that the income gap became so much larger. If China has an effective government to guide them with economic choices it very much works to their advantage. Africa is a country that is still witnessing many civil wars within different countries; this is one of the aspects that stops Africa from becoming as effective as China within the trade system. Africa is also a very large continent and so prevents another barrier for themselves to get around, particularly when choosing what goods to trade. Different parts of Africa will have different goods or services that they have comparative advantage in whereas in China it is easier to specify and specialize in a few goods in which they have comparative advantage in than other countries.

    3. The economic development of some of the world’s poorest countries can be vital to people in high income regions of the world. These places may have natural resources that are rare and can only be provided by them, they may also have comparative advantage at creating goods than one of the high income regions which would allow these high income regions to stop creating that particular good and being specializing in something whereby they have less opportunity costs involved. Improving the lives of Africans will not necessarily cause the West to have to make sacrifices to their own living standards; it could in fact work to their advantage. If Africa can make the good for a cheaper price than somewhere else that was producing this good prior to Africa then it helps the West as they have to spend less for the same product, as the same time this would be helping Africans by providing money and jobs for many workers.

    4. Less subsidies to farmers in Europe would help Africa as then Africa would be able to make and sell the goods for cheaper than the Europeans could. The purpose of the subsidy in the first place would be to help farmers that are forced to compete with the low prices the Africans are able to sell their goods at. If Europe listens to this there would be negative and positive consequences. A positive consequence is that some goods may become cheaper due to the imports however domestic firms would suffer and unemployment rates would rise.

  3. Gustavo Proeglhoefon 10 Oct 2010 at 3:49 pm

    This is not an answer to the Discussion Questions….

    I also found this discussion pretty interesting, and I really liked the ideas that are presented for both sides of the argument. Nevertheless, I still agree with the quotation and I believe that trade is really beneficial to any country that is involved with it.

    First and foremost, we must not forget that countries have freedom to choose if they want to trade or not. Therefore, if the poorer countries want to trade and to allow multinational corporations to exploit their labor, it is probably because they are having more benefits than losses.

    In my opinion, the biggest problem with anti-corporations and anti-trade movements is that the people fail to observe that, in most cases, the workers would be in much worse situations if they did not have the jobs that are provided by the corporations. Poverty is extremely relative, and it completely depends on the people surrounding you, and on your life experiences. Consequently, even though people are submitted to horrible working conditions, we still have to ask them if they would rather do what they are doing, or not be able to sustain their families.

    After all, I am certainly not saying that I am happy with the bad conditions that are imposed to workers; however, I think that the causes for this situation depend on a huge range of factors, and have little to do with the multinational corporations that are just making use of the lower prices of labor that are supplied by the country.

  4. Sakkti Elangovanon 11 Oct 2010 at 4:18 am

    1. Free trade does increase relative poverty and income inequality in a country because the benefits of free trade don’t normally reach the poor. The benefits are all enjoyed by the rich. Most poor countries don’t enjoy the benefits of free trade because Europe and America are still subsidizing their own goods even though they have asked many developing countries to open up for trade. Free trade does not necessarily mean fair trade and so, many workers do not earn fair wages. The money goes to the chief executive officers of the large multi-national corporations instead. Hence, the poor will not be able to have access to basic necessities like proper shelter, healthcare and food because they cannot afford it.

    2. China has been more successful than the continent of Africa because of its effective economic policies including opening to the global economy and large multinational corporations. China has been an attractive destination for so many corporations because of its extremely cheap labor and large labor force. With its large population, China managed to experience strong industrial output over the past years. Most importantly, the implementation of policies that would open up the economy to the world made China into a strong trading partner with a large amount of countries including many developed countries like the United States, Germany, England and Australia. It is an ideal trading partner as it is rich in natural resources like iron and coal.

    3. Europeans and Americans need to care about the economic development of the world’s poorest countries because in general the increase total welfare and total output of the global economy would benefit all economies, including the rich nations. Rich nations have to care about these poorer countries because they are the ones that America and Europe have to look to for natural resources, labor and land. Look at how many Africans there are in France, Belgium and Holland, for instance. Poor countries have a lot to offer for the rich nations and this is why Europe and America have to help these poor countries to develop in the economic aspect.

    4. By removing the subsidies from farmers in Europe, the goods that were produced from Africa will be less expensive compared to the non-subsidized European goods. Therefore the African goods will look more attractive to the European population because they are cheaper. If Europe does decide to remove the subsidies, it will most probably experience negative consequences as the domestic farmers would not be able to compete with the foreign farmers whose goods are being produced at a much lower costs and are sold at a much lower price. Hence the domestic farmers will become unemployed because they are not earning any profit.

  5. Marina Antoniazzion 11 Oct 2010 at 7:14 pm

    1. In my opinion, I do believe that the relative poverty is increasing due to an efficiency in trade between developed nations. However, I believe that the poor people are not getting poorer, but simply have the illusion due to the increasing wealth of rich countries. When in fact, I believe that the absolute poverty might even have increased to the the increase in labour. Developed nations have increased their mass productions due to the increase of population in the world, and so the unemplyment rate for cheap labour has gone down consequently.

    2. It is important to note that china has been consistent with leadership rulers including Mao Zedong which deeply encouraged the pursue of economic growth and transformation. As opposed to Africa, china has taken some very fundamental policies towards their economic growth success. Chinas government was able bravely invest in its people, education, and health which increase the quantity and quality of the productive population that was motivated for increasing effective demand. Through these initiatives, Chinas now commands 15% of the world trade. However, it is important for Chinas economy to keep the economic and social policies in place in order to strive, and to keep their economic growth from declining.

    3. Economic growth in rich continents like Europe and America highly depend upon the poor countries. A lot of the labour that contributes to those countries’ mass productions is dependent upon the population of those poor countries. It is vital that rich countries act against their own well-being and improve the lives of the poor people in order to ensure them a better developmental process. Since rich nations are very dependent on poor countries, it is our call to improve their lives so that countries like America and Europe will gain an even better production system and mass production, which all goes towards the economic growth.

    4. Less subsidies to farmers in europe would simplt benefit the workers in Africa. This is due to the fact that it subsidies were to be completely eliminated from european farmers, the costs of Africa would be much less and so the demand for Africas production would be highly demanded as opposed to the European. Africa has very cheap labour, and thus very cheap costs of production. In my opinion, Europe should dismiss the important european history but instead give the opportunity to poor countries to develop and to start their own economies. Therefore, I do believe that European farmers should be minimally subsidized, if not at all, in order to give a boost to the developing economies.

  6. Patrick Schlumpfon 13 Oct 2010 at 2:47 am

    1) As we can see throughout the idea of capitalism, trade made rich people get even richer by increasing the access to scare and valuable resources. Even though many people think trade destroys markets and make people lose their jobs, this exchange of goods and services overseas was key to the success of many nations throughout history. I believe the poor just feel poorer compared to the parabolic growth of wealth from the upper class, since the difference between the incomes is every time greater. However, it must also be taken into consideration the fact that multinationals bring jobs to people in poorer countries, and so, more jobs are created. So, poor people look poorer compared to the rich, but are richer compared to themselves before the settlement of multinationals in their countries.

    2) I believe that the first reason why China was able to grow three times more compared to Africa was due to the enormous cheap labor force the country has. This certainly attracts many multinationals aiming to maximize profits, since one of the major costs of a firm is resource costs (wages). The second reason is that China has its Communist roots, and therefore, the idea of income distribution was most probably taken into consideration. This increases people’s purchasing power over time, and therefore, more individuals heat up the economy. Lastly, given the fact that China is a country, and Africa a continent, it is much easier to rule one large country compared to one large continent with several opposing views.

    3) I think that high-income countries should care about the development of the world’s poorest countries, because these are the countries in which cheap labor can be found. In addition, many resources that have been depleted by humans in other countries may be present in these poor countries. In this case, poorer countries do most probably have the comparative advantage of producing that good. Therefore, since countries should produce the good that has the lowest opportunity cost, nations should care about these poor countries. I believe that rich people around the world do not have to make sacrifices in order to improve the Africans lives, since over time, as multinationals start to settle down, the African standards will start to improve as it happened to China.

    4. Less subsidies on European farmers would mean that countries that are exporting goods make a greater export revenue. Also, since subsidies make domestic production cheaper, the per unit price of domestic goods will also be cheaper. This makes foreign competitors many times give on exporting that good, as less will be bought at their higher price. If Europe removes their subsidies, the African goods would become more attractive to consumers, and thus, more African good will be bought. I think Europe should listen to this issue only if the opportunity cost of the production of this good is lower in Africa than it is in Europe. In other words, only if Africa has the comparative advantage in the production of this good.

  7. Nicolo' Fanellion 19 Oct 2010 at 12:18 am

    The argument for and against trade has always been discussed by many, although people may not have considered the reasons why both countries involved in this transaction, the seller and the buyer, actually continue trading if this were not beneficial for them. First of all, it is voluntary, and both parties trade as they both take advantage from it. In fact, this is the basis of free market economies, which work best when people work towards the best of their interest: thus in trade both parties benefit in some way or another. For the seller, for example eastern Asian countries, they are willing to trade, as this offers them employment possibilities which they did not have before trade: after all, the exploited workers, even if working in terrible conditions, would even be worse off is they did not have the jobs in exports industries they have thanks to free trade. And the buyer, possibly developed nations, benefit from trade, as they have access to cheap primary products which they might not have in their country. Moreover, cheap labor makes it very attractive for these nations to buy from Asia and other countries where labor is very cheap. Thus, free trade happens because both sides in this transaction are willing to carry it out, and thus getting benefit from such things, otherwise it would not happen.

    Complementing to what other people had said about question 2, China also has manipulated their currency a lot to make their goods look more attractive, and thus is desirable for multinational corporations, who are driven by the desire of maximizing their profits, to trade with them.

  8. Michelleon 21 Oct 2010 at 9:07 pm

    Discussion questions:

    1. 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?

    The number of people living in absolute poverty has increased because the rich are getting less and less children, often none at all, and the poor are getting more and more children. The poor-population is growing at an exponential rate, but the poor are getting richer. The rich are just getting richer faster than the poor are.

    2. 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?

    China has opened up to trade, focused on their advantages, particularly their huge labour force and started specializing in production. In addition, they have a stable government, whereas most African nations are led by corrupt governments and are still fighting civil wars.

    3. 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?

    Yes, Europeans and Americans owe it to the Africans, because they restrict their industrial development by setting environmental laws, which is good for nature and such but limits Africa's chances to develop the way the Americans and Europeans did. Also, the 'western' world has exploited many African nations and people, by colonizing, causing war, discriminating and wiping out entire ethnicities, which is still the ground for many existing conflicts today. Often, when a country develops, which leads to more job opportunities and education, poverty lessens and with that many problems, such as crime and violence, dissolve.

    4. 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?

    Less (or rather none at all) subsidies to European farmers would help African farmers because without the domestic subsidies in Europe, their products will become more expensive. The African agricultural products now have a chance to compete in the European market and will be more attractive because the domestic products increased in price. A greater demand for their products is good for African farmers because it will provide them with more revenue and may allow them to grow and expand their business, employ more people and increase the overall welfare of the nation (the given African nation). And yes, Europe should listen, because by eliminating the subsidies and making it harder for European farmers to compete with foreign agricultural firms, it may allow them to specialize in another field and produce something they have the comparative advantage in, creating more efficiency and in exchange having cheaper agricultural products and less government revenue is spent on subsidies which now may be used to fix negative externalities.

  9. Polijneon 22 Oct 2010 at 4:49 am

    1.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?

    Trade can lead to an increase in inequality within a country resulting in more of a relative poverty as the benefit of trade doesn’t reach the poor people in developing counties. Although, free trade gives more money to workers it creates a gap between the rich and poor as demand for labor in more developed countries increases. Even though, they say that free trade helps workers, it is not certain whether they get a fair wage for their hard work. However, it provides them with jobs and opportunities to make more money not necessarily the fair amount.

    2.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?

    There are several reasons how china has become three times the size of Africa, because of its efficiency and through the different political systems. If the country has a stable government is it able to work more productively and is able to stabilize the countries income. Through the use of trade, resources and good economic efficiency China was able to increase their economic growth. Overall, china was able to employ more workers as labor is cheap and population is large, therefore over the years it has become a strong and wealth economy.

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