Economic Development: Theory and Policy Applications

By Fidelis Ezeala-Harrison | Go to book overview

14
Role of Free Trade and Regional Integrationism

The focus of this chapter is on the onset of the so-called free-trade areas and regional trading blocs in the order of world trade among nations. As countries realized their economies' dependence on trade, they also realized that trade brought with it certain dangers that go with opening their economies up to the influence of the rest of the world.

The virtues of free and unrestricted trade were so highly promoted in the world that it found its way into the economic development planning and policymaking of every country that saw itself as a free-market-based economy. Nations based their trade policies on the driving force provided by the comparative advantage paradigm, namely, that each country's welfare would be greatest when each country specializes in the production and export of products in which it has comparative advantage over others, while importing from its partners those products whose comparative advantage are lower abroad.

Over the decades, however, countries gradually came to realize that totally uncontrolled international trade had certain problems associated with it, problems such as dumping, unequal factor prices, varieties of product qualities and standards across countries, health and environmental concerns, and the like. Therefore, most countries instituted various forms of trade restrictionist measures, on the one hand, to regulate and correct for these problems, and on the other hand, to protect their domestic economies from foreign competition. At the same time, certain world bodies and international institutions began to be formed to address the problems that are bound to arise with greater world trade. Further, countries began to realize the need to form free-trade alliances with their neighbors so as to take full advantage of their proximities to each other, by forming regional trading blocs (or free-trade areas).

As the developed countries vigorously embarked on trade protectionism, LDCs began to be increasingly frustrated as they realized that such attitudes severely threatened their capabilities of achieving growth and development through trade. The protectionist actions of the DCs simply set the clock back for world trade; it led to poor terms of trade for trading partners (especially LDCS), and resulted in slow growth of industrial specialization and exports for partners.

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