Free Trade Agreement (FTA) describes a trade bloc region that a number of countries agree to sign together to foster their economic development. These agreements represent a form of unity between two or more countries to reduce or eliminate trade barriers such as tariffs and import quotas to facilitate trade of goods and services with each other. The documents that identifies the definitions and descriptions of services, goods and trademarks such as goods and services manual. Around the world there are different types of FTAs that has been signed by countries to establish economic cooperation’s, this agreements has been signed between developed countries, developing countries or between developing and developed countries. This paper analyses the impact of these FTAs on the economic development of the developing countries.
The Rapid Evidence Assessment (REA) examines the impact of FTAs between the developing and developed countries on the growth of economy in the third world countries. Through the review of literature on FTAs, REA gives particular focus on the impact of the fully or partially implemented agreements. The evidence given in this analysis is examined to ascertain how the developing countries may benefit or incur losses from new FTAs.
In the analysis REA discovered that certain aspects of FTAs have been extensively assessed while others have been largely ignored. The analysis is based on a thorough quality assessment of forty-five FTAs encompassing majority of the Organizations for Economic Cooperation and Development states and thirty-five regions and countries. These agreements facilitate the undertaking of economic activities without the barriers to policies and market entry. Free trade has resulted in numerous benefits to several countries particularly the developing countries. These benefits include free movement of capital and labour, expanded markets, political relations in form of integrations, access to technologies, and improvement in infrastructure.
These are some of the positive impacts of free trade that has contributed a significant role in the economic growth of developing countries. Despite these benefits, some nations object these FTAs claiming that it poses more negatives effects on the economic development of developing countries. Part of the reasons advanced for the objection of free trade include the exploitation of the third world countries through environmental pollution, underperformance of domestic industries and unemployment of domestic workers therefore significantly affecting the nation’s economic growth.
In the nations such as South Korea, Japan, China, other East Asia countries and the majority of the third world countries free trade has been found to workout. Majority of the member states have attained the status of “developed countries” and thus achieve economic development through trade liberalization. The nations establish economic and free trade partnerships that aid the negotiation of trade across borders; this is an important factor that facilitates the transfer of technical services, support, social and environmental issues between member countries. The agreements give clear guidelines that ensure countries conduct trade in a defined environment that stopped them from exploiting natural resources from each other. In this regard the countries are expected to form a mutual understanding between each other and thus realize substantial economic development. For instance appropriate example of a third world nation which has benefited from free trade partnerships is Egypt in sub-Sahara Africa.
FTAs enhance foreign direct investments in countries that are developing by raising the inward revenues to these nations. The high revenues generated by these countries are directed back to the development projects such as improving social amenities and infrastructure to the citizens. Apart from these benefits, foreign direct investments establish more employment opportunities for domestic workers thus assisting developing nations cut the high unemployment rate. This marks one of the significant achievements that have contributed to rise of economic status among the developing nations. For instance, the increased foreign direct investment resulted in the economic development of China. As one of the developing countries China has the biggest reserve of foreign direct investments and therefore, it has attracted several foreign investors because of trade liberalization and reduced market barriers thus resulting in the rise of its gross domestic product. In the process the economy of China has progressively grown putting them at an advantageous position when compared with other developing countries. This indicates the extent to which trade liberalization has generated economic development through trade partnerships that encourages foreign direct investments.
Free trade permits free movement of capital and labour across the regions and countries. The free flow of capital and labour ensures that the member states acquires the necessary factors of production for their businesses that will assist them to advance their output and productivity. Many countries in Europe experienced high levels of unemployment during late 1950s, for instance in Italy there were increased levels of economic problems that brought about shortage of experts and different types of labour. With the inception of free trade agreements, European Economic Community guaranteed that the unemployed workers could get employment opportunities in other European countries such as Germany at no cost. Similarly Germany had experienced shortage of experts in different fields and thus they were able to source them from other countries such as Italy.
The free trade agreements facilitated the reduction of unemployment challenges in developing countries as it opened up more employment opportunities where people could freely move from their countries to developed economies where they were guaranteed to get employed. The liberalization of trade in the developing countries helps them lower the rate of unemployment and consequently assist them achieve their economic goals from increased income from abroad. The standard of living among the people living in the developing countries has increased significantly. Many people from the developing countries have been employed following inception of free movement of labour thus raising their economic status. In effect this has facilitated the attainment of economic goals on the reduction of unemployment rates prevalent in developing nations.
The creation of employment opportunities has gone a long way in reducing poverty levels which is one of the significant factors in the attainment of the millennium development goals. Movement of experts and professionals from developed nations to developing countries brings about improved performance of domestic industries that result in high productivity hence add to the economic development of the recipient country. Most of these trade agreements are formed only for economic gains without any political interference. The end result therefore serves to offer mutual benefits to the member states. The free trade partnerships as seen in this literature essentially has decreased the level of unemployed and poverty rates following the implementation of free movement of labour policies. Consequently, the apparent effect is an increased living standards and productivity of citizens in third world nations enhancing their economic goals in the process.
The free trade policies targets to improve agriculture, transport, trade, imports, exports and manufacturing industries. The area covered by FTA includes the agricultural and manufactured products though the provisions used to remove quantitative restrictions and reduce tariffs differ significantly. The entry of several industries in the market improves the infrastructures in partnerships with the recipient government in an attempt to increase market accessibility of its products. By improving and opening up more infrastructures such as social amenities, railways, roads, electricity and communication, these industries facilitated the development of this countries.
The economic growth in the developing countries has resulted in a substantial increase in investments level. The member countries benefits from the revenues generated by the industries and it does not benefit directly through revenues from taxes and tariffs. More investors have channeled their resources into different investment projects in the developing countries due to favorable policies that have lifted barriers on imports and exports across the region. Mainly the developing countries gains from the revenues generated during exports while the imports supply the essential goods and services that are necessary to facilitate their economic development. For instance, the removal by the European Economic Community of the import and export tariffs facilitated the free movement of services and goods among the member states. In effect this has resulted in an increased development of the third world countries through the improved trade that fosters the exports of goods and services without barriers.
The integration among the member countries has increased because of trade liberalization that aid trade inflow to the developing nations with regard to capital and technologies. A strong economic growth has been enhanced in the process and this is shown through the increased gross domestic products for the developing countries in Latin America, Africa and East Asia. A case example is the Latin America middle income level nations which have partnered with developed countries like China leading to the enlargement of their financial system and consequently economic development. The transfer of technology has transformed the manufacturing industries which has attracted many investors to these countries in the process. The use of technology has enhanced the productivity by reducing the cost of production and labour and thus the relative labour productivity has been improved.
As stated in the comparative theory advanced by Ricardo, nations should focus on the production of products that requires reduced cost to advance the economy and productivity by making exports to another nation that is not good in production. The developing nations have been able to attain increased specialization and productivity through acquisition of technologies introduced into their countries from the developed nations as a result of trade liberalization. India is a perfect example of a country that have gained comparative advantage by adopting labour intensive production skills in manufacturing and other services that needs intensive skills such as in software industries. The acquisition of these technologies has facilitated the rise in exports in its production to other Asians nations’ consequently improving gross domestic income and revenues that has largely improved the country’s economic development. High standards of technologies increase investments level in the recipient countries due to more inflow of investors. The increasing levels of investments give rise to a significant decrease in the rate of unemployment. Coupled with the elimination of tariffs and barriers, the increased number of manufacturing industries in the developing countries exports more products to the developed countries.
FTA has facilitated an improved access of economic resources and utilization of the limited resources in the developing countries hence giving rise to their social and economic development. Most of the third world countries struggle with under-utilized and scarce resources. It has become possible to exploit these resources because of free trade that allows investors’ free entry to these countries hence takes part in the mining and the production process. Investors take part in the exploitation of these resources by mobilizing labour and capital that in the process enhance the economic status of the country. With free trade the developing countries get the chance to source resources such as capital from the developed nations to facilitate their economic growth. Trade liberalization has helped countries such as India to develop by obtaining labour, capital and other important resources from the developed nations. The elimination of barriers and restrictions among the member states helps them realize their economic development that would not be realized. As such the free access of economic resources in the developing countries has significantly transformed their economies.
Besides the positive impacts brought about by the FTAs on the economic development of the third world nations, free trade on the other hand has generated substantial negative impacts. Many analyst argue that free trade pose significant threats to the economy by exploiting domestic companies, increasing the level of unemployment, lowering the standard of living among the resident people and increasing pollution.
Free trade according to many analysts argues that it has become a platform where the developed economies exploit the domestic industries and consequently it has negatively affected their economic development. Several multinational companies for instance Nike is known to exploit the developing nations by employing cheap labour and taking advantage of the abolished barriers to maximize their profits.
An increased influx of imports into a country has been reported as result of free trade hence it gives rise to increased supply of goods in the market. This increase result in lowered prices of goods and services triggering the domestic industries and companies to reduce their prices, consequently it may lead to reduced or lost share of the market. Hence, industries in the developing countries become less competitive. It is viewed that this will negatively affect the domestic firms by decreasing their economic growth.
To protect its local industries the developing countries levy taxes on imports and initiate policies that limit imports which result in fluctuations of prices in the market. The rising steel import from Asia to UK led to reduced prices of motor vehicles and hence the car manufacturers and sellers recorded significant losses.
By imposing taxes on imports, a country will reduce the amount of imports into the country’s market that in turn will raise the supply and the prices of goods by the domestic industries. But with the adoption of free trade among the member states on the other hand the amount of imports will increase due to market liberalization. This increase will result in lowering of prices of goods in the market hence raising the demand for the imported products and lowers the demand for the domestic goods therefore negatively affecting the growth and development of the domestic industries.
FTAs have been blamed as the major cause of unemployment in the host developing countries. Because of free trade there is a free movement of labour and entrepreneurs within the member countries without any limit. Free transfer of skilled labour within these countries occurs to facilitate the performance of industries and companies. This free movement will lower employment opportunities of the domestic workers in the developing countries thus increasing the rate of unemployment. The dependency ratio in these countries will increase and thus limit them from achieving developmental goals such as the reduction of unemployment rates.
Apart from causing unemployment in the domestic developing countries due to free movement of labour, similarly the absence of barriers and tariffs in the market result in the establishment of many industries in the host countries that affects the performance of local industries. This brings about increased competition leading to loss of some domestic industries that may shift its operations to other countries hence create employment gap. For instance, because of free trade there was increased unemployment rate in Philippines from 1991 to 2001 with fifty three firms being closed down leading to loss of jobs of about eighty thousand employees and twenty nine other industries downsized their human resource leading to loss of jobs of about four thousand employees. Also, free trade in the United States has resulted in the shifting of industries to third world nations where custom duties and taxes could limit other companies from entry and hence enjoy a stable market. This development has resulted in massive loss of jobs in the United States.
The implementation of free trade policies has been viewed as a form of imperialism and colonialism in disguise that contribute to the exploitation of the developing countries. The policies tend to favor the developed countries owing to their capital potential. Majority of the developed countries aim to establish industries in the developing nations because they easily carry out its operation by exploiting their resources. By establishing these industries the developed countries dominate and control the economy of the host country and end up regulating most of the development projects, revenues and resources. For instance, during the nineteenth century, free trade policies allowed the European countries like Britain to acquire natural resources from the third world countries mainly in Africa which created huge gap in development between the countries.
From this analysis, it is apparent that free trade has contributed significantly to the economic development of the majority of developing countries. Though free trade has been attributed to several negative impacts on the economy of the developing countries, it can be seen from the literature that the positive impacts surpasses and overrides the resultant negative effects. Therefore, FTAs has caused significant development projects in the third world countries that has triggered their economic growth and become an important element in the realization of the millennium development goals.