Free Trade and Specialisation

Free Trade and Specialisation

1. Pros

   • Economic Efficiency
     • Free trade policies can allow countries to focus on their own comparative advantage. This saves time and effort as well as resources on less efficient tasks
   • Economies of scale
   • Enhances dynamic efficency
     • Innovate products and processes
       • R&D investment
   • Leap frogging of developing countries
     • Able to adopt methods and techniques that are already created
       • Able to import technology and etc. which could improve their efficiency
   • Encourages TNCs to move there and invest
     • Encourages FDI
   • Uses the surplus of raw materials
     • Heckscher-Ohlin Theory
   • Saves resources from duplication
     • Avoids wasteful duplications when you can just import
     • Take advantage of lower opportunity cost
     • Allocative Efficiency
   • Source of foreign currency for developing countries
     • Able to buy expensive capital in case their own currency drops
   • Injection of demand in circular flow
     • Positive export multiplier effects
       • Increased employment
   • Falling prices for consumers
     • Increase real incomes

2. Cons

   • Race to the bottom
     • Developing countries are fighting to secure contracts with TNCs
       • They have no bargaining power so they reduce their prices
         • Leads to worker exploitation
           • e.g. sweatshops
           • Environmental degradation
   • Over-specialisation
     • Changes in the market
     • Political changes
     • Natural disasters
     • e.g. agriculture is reliant on seasons
   • Structural unemployment
     • Changes in the economy can mean workers don't have sufficient skills to adapt
     • Hysterisis
   • Transport costs
     • 15 largest container ships produce more emissions than all the cars combined annually
   • Rising inequality
     • Uneven gains from trade
     • Pushing wages down due to competition
       • Existing comparative advantage may be unreliable
         • Forced to specialise in them
           • Stuck in low value added production
             • Dutch Disease
               • Neglection/Inability to access manufacturing or higher value added
   • Removal of protectionism increases dumping
     • Collude to reduce prices below rivals to push them out the market
     • Difficult to prove - could be reducing cost
     • Predatory or just dumping excess stock
   • Reliance on important sectors is risky
     • Vulnerable to external shocks - food shortage