The worlds poorest countries are at a competitive disadvantage in almost every sector of their economies.

Free trade cannot possibly be in the interests of such nations. Critically discuss this statement using appropriate theories and real world examples to support your arguments.

When government does not discriminate against imports and exports it means that it is adhering to the Free trade policy. Economic arguments against free trade criticize the assumptions or conclusions of economic theories. Socio-political arguments against free trade cite social and political effects that economic arguments do not capture, such as political stability, national security, human rights and environmental protection.

The countries which follow free trade are the ones whose markets are free from governments interventions and influence through quotas or duties on what its citizens can buy from another country, or what they can trade to other countries. Under free trade policy price becomes the sole determinant for resource allocations, depending on the economic resources supply and demand. The main characteristics of free trade are; 1.The goods can be traded without taxes or barriers, 2.There is free movement of labour and capital between the countries involved in the agreement, 3.The markets can be freely accessed Although, under Free trade there are safe and equal playing rules for a competition, however it does not necessarily ensure a fair competition for all the parties involved. The private sectors of various countries who have signed the agreement will compete with other countries private sectors on equal terms. Incase of poorer countries, their weaker private sectors will compete against much stronger companies. Thus, while the parameter may be equal, the players capabilities are not. The government intervention is need in the private sectors, to protect their production. For example, Senegal, opened its market, and lowered the tariff of tomatoes during 1994 to 2001 when it was producing about 73,000 tonnes of tomato concentrate by 1990. In 1996/7, hit by the imports from EU, the production decreased to 20,000. The EUs exports of tomato concentrate to Senegal increased from 62 tonnes in 1994 to 5,348 tonnes in 1996 due to the increased access to Senegals market (an 8625,81% increase). Since then, there has been stagnation in Senegals tomato processing industry with decreasing prices of tomato concentrate and a lack of credit and investment resources available to processors. The EU farmers, on the other hand, have easy access to credit and qualified labour compared to the Senegalese counterparts, and they are able to produce tomatoes more cheaply for the European processing industry. Moreover, in 1997 alone, the EU paid out US$300 million in export subsidies to tomato processors.

Free trade has its advantages and disadvantages. There will be various economical to technological differences in competing industries, that is why countries can take certain policies and measures under the free trade zone but recognizing national sovereign policies regarding competition policies.. In order to seek higher wages the skilled labour will shift to richer countries leaving the cheap labour. Foreign corporations will also compete for commodities with higher financial capital and stronger purchasing power, raising the living standard of the poorer countries society.

1.According to smith absolute advantage theory, countries should specialise in the production of goods for which they have an absolute advantage and trade them for goods produced in other countries. The countries engaging in trade benefit if they trade in goods in which they are specialising in and have an absolute advantage. A country should never get goods at home that it can buy at a lower price from other countries.

Considering the trade between two countries, Ghana and South Korea. Assuming that Ghana and south Korea both have the same amount of recourses that can be used to produce rice and cocoa. Assuming that 200 units of resources are available in each country. If Ghana takes 10 resources to produce one ton of cocoa and 20 resources to produce one ton of rice, it could produce 20 tons of cocoa and no rice, 10 ton of rice and no cocoa, or some combination of rice and cocoa between the two extremes. Similarly, South Korea takes 40 resources to produce one ton of cocoa and 10 resources to produce one ton of rice. south Korea could produce 5 tons of cocoa and no rice , 20 tons of rice and no cocoa or some combination between both extremes

20 Combination that Ghana can produce in units ( blue ) Combination south Korea can produce in units (orange) cocoa 5

10 rice

20

Clearly, Ghana has an absolute advantage in producing cocoa and south Korea has an absolute advantage in producing rice. Considering a situation where neither of the countries are trading both countries would use half of their recourses to produce rice and the other half to produce cocoa. Each country must also consume what it produces. Ghana would be able to produce 10 tons of rice and 5 tons of cocoa, where south Korea would produce 10 tons of rice and 2.5 tons of cocoa. Without trade the combination of both the countries production will be 12.5 tons of cocoa( 10 tons in Ghana plus 2.5 tons in south Korea) and 15 tons of rice ( 5 tons in Ghana and 10 tons in south Korea). If each country were to specialize in producing goods for which it had an absolute advantage and then trade with the other for the good it lacks, Ghana could produce 20 tons of cocoa and south Korea could produce 20 tons of rice. Thus, specializing, the production of both goods could be increased. Production of cocoa would increase from 12.5 to 20 tons and production of rice would increase from 15 tons to 20 tons. The increase in production that would result from specialisation is therefore 7.5 tons of cocoa and 5 tons of rice. If Ghana decides to export 6 tons of cocoa to south Korea and import 6 tons of rice in return, its final consumption after trade would be 14 tons of cocoa and 6 tons of rice. This is 4 tons more of cocoa than it would have consumed before specialisation and trade and 1 ton more of rice. Same for south Koreas final consumption after trade would be 6 tons of cocoa and 14 tons of rice .this is 3.5 tons more of cocoa that it could have consumed before specialisation and trade and 4 tons more rice. As a result of specialisation and trade, output of both cocoa and rice would increase and consumers in both nations would be able to consume more. Hence

forth we can see that trade is a positive-sum of game; it produces net gains for all involved.

Resources required to produce 1ton of cocoa and rice Cocoa 10 40 Rice 20 10

Ghana South Korea

Production and Consumption without Trade Ghana South Korea Total production Cocoa 10.0 2.5 12.5 Rice 5.0 10.0 15.0

Production with specialisation Ghana South Korea Total production Cocoa 20 0 20 Rice 0 20 20

consumption after Ghana trades 6 tons of cocoa for 6 tons of south Korean rice Cocoa 14 6 Rice 6 14

Ghana South Korea

Increase in consumption as a result of specialization and trade Ghana South Korea Cocoa 4.0 3.5 Rice 1.0 4.0

2.New trade theory gives two main points: a) it increase the Varity of goods available to consumers b) decrease the average cost of those goods through economies of scale. The theory suggests that even when the countries do not differ in resource endowments or technologies, they will benefit from trade. Trade allow a nation to specialise in the production of certain product, achieving economies of scale and lowering the cost of production, while buying the products from other nations that specialise in those products

that the home nation does not produce. This mechanism increases the average cost of those products and their price, freeing recourses to produce other goods. The theory also suggests that a nation may dominate in the export of a good simply because it has one or more firms among the first to produce that good. Because they are able to attain economies of scale, the first movers in the industries may get a lock on the world market that discourages subsequent entry.
For example An African mining company in Lagos Nigeria is the only mine where this particular diamond is found. The African mining company ships this diamond to diamond jewelry companies all over the world. Other countries would not have this diamond if the Nigerian mining company did not mine and ship it to them.
(2010, 10). An Example of Absolute Advantage. StudyMode.com. Retrieved 10, 2010, from http://www.studymode.com/essays/An-Example-Of-Absolute-Advantage-448104.htm

For example, in the commercial aircraft industry, the fact that Boeing and airbus are already in the industry and enjoy the benefit of economies of scale discourages new entrants and reinforces the dominance of America and Europe in the trade of midsized and large aircrafts. This dominance is further reinforced because global demand may not be sufficient to profitably support another producer of midsized and large jet aircrafts in the industry. So although Japanese firms might be able to compete in the market , they have decided not to enter the industry but to partner themselves as major subcontractor for Boeing on the 777 and 787 programs.

Nokia was the leading manufacturer of mobile devices in the world. Headquartered in Finland, its 132000 employees 3.Poters Diamonds Classical theory of international trade says that comparative advantage resides in the factor endowments that a country may be privileged enough to inherit. Factor endowments include land, natural resources, labour, and the size of the local population. Michael Porter argued that a nation can create new advanced factor endowments :1.skilled labour, 2. strong technology and knowledge base, 3.government support, and culture. Porter used a diamond shaped diagram which signifies the national playing field that countries establish for their industries.

Firm strategy, structure, and rivalry

f Factor endowments

Demand conditions

Related and supporting industries

Img. 2 Poters diamonds

The four elements that lead to a national comparative advantage are:1. the availability of skills and resources, 2. information that firms use to make a decision, which opportunities to pursue with those resources and skills, 3. the goals of individuals in companies, 4. the pressure on companies to innovate and invest.

1. Factor endowments: A country creates its own important factors such as skilled resources and technological base. The stock of factors at a given time is less important than the extent that they are upgraded and positioned. Local disadvantages in factors of production force innovation. Adverse conditions such as labour shortages or scarce raw materials force firms to develop new methods, and this innovation often leads to a national comparative advantage.

eg. Japan, lacks arable land and mineral deposits and through investment has built a substantial endowment of advanced factors. Porter noted that Japans large pool of engineers (reflecting a much higher number of engineering graduates per capita than almost any nation other nation) has been vital to japans success in many manufacturing industries. 2. Demand conditions: When local markets for a particular product is larger than foreign markets, it devote more attention to that product than to foreign firms, leading to a competitive advantage when the local firms begin exporting the product. A more demanding local market leads to national advantage. A strong, trend-setting local market helps local firms anticipate global trends.

e.g. Wireless telephone equipment industry, where sophisticated and demanding local customers in Scandinavia helped push Nokia of Finland and Ericsson of Sweden to invest in cellular phone technology long before demand for cellular phones took off in other developed nations. 3. Related and supporting industries: Under stiff competition, local firms enjoy more cost effective and innovative inputs. This effect is strengthened when the suppliers themselves are strong global competitors. like Sweden strength in fabricated steel products(e.g. ball bearings and cutting tools) has drawn on strengths in Swedens specialty steel industry. Firm strategy, structure, and rivalry: Local conditions affect firms strategy. For example, German companies tend to be hierarchical. Italian companies tend to be smaller and are run more like extended families. Such strategy and structure helps to determine in which types of industries a nation's firms will excel. In Porter's model, low rivalry made an industry attractive. While at a single point in time a firm prefers less rivalry, over the long run more local rivalry is better since it puts anxiety on firms to innovate and improve. In fact, high local rivalry results in less global rivalry. Local rivalry forces firms to move beyond basic advantages that the Home country may enjoy, such as low factor costs.

The effect of one point depends on the others. For example, factor disadvantages will not lead firms to innovate unless there is sufficient rivalry. The diamond also is a self-reinforcing system. For example, a high level of rivalry often leads to the formation of unique specialized factors.

Conclusion
Competition under free trade is unfair and unhealthy. With the removal of trade barriers, structural unemployment may occur in the short term as skilled labour moves to greener pastures or the labour is not well equipped with technology and knowledge. This can impact upon large numbers of workers, their families and local economies. Often it can be difficult for these workers to find employment in growth industries and government assistance is necessary. The less developed countries face difficulties to compete with economically advanced countries. Unfavourable Balance of payments that cannot be solved by free trade policy are generally faced by the less developed countries. Increased domestic economic instability from international trade cycles, as economies become dependent on global markets. Under free trade, gains of trade are unequally distributed depending upon the level of development of different countries. Developing or new industries may find it difficult to become established in a competitive environment. It is difficult to develop economies of scale in the face of competition from large foreign TNCs. National security may be compromised as
a country becomes too dependent upon a vital good from one of its trading partners. This dependence would put a country at a political disadvantage.

The price for a free trade is more expensive than the benefit it brings. Free trade agreements defiantly gives market access to developed or rich countries which will allow poor country to attract investments and improve their growth prospects and to expand their own corporate sector, but this is only possible when particular industry has competitive advantage in the poor country. As discussed in the new trade theory, if there would have been free trade between India and Japan, India would have been exploited for its labour and capital and Suzuki India would have not become what it is today .Hence forth whenever these companies come in an agreement of free trade, left alone to compete without governments protection, will not develop and die out in the long run.

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4. Thailand's Free Trade Agreements with Asian Countries. 2013. Thailand's Free Trade
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