In economic theory, free trade – that is, trade unimpeded by government regulations and protection of domestic industries – improves the allocation of resources and therefore world economic growth. The theory of comparative advantage explains why this is the case. However, the theory of comparative advantage is based on very restrictive assumptions about the way the world works, and in particular it ignores economic power relations. Yet, it has been an important back-up to the neoliberal position that growth will be highest when governments remove themselves from the allocation of resources and allow markets to work.
The modern push for increasing globalization, free trade agreements, free trade blocks and the increasing integration of international financial markets are evidence of the success of this argument. The Washington consensus – which argues for free trade, deregulation of industries, and privatization of State’ assets – also derives from this neoliberal position on economic development.
Often, developing countries have had to follow the Washington consensus to receive loans from the International Monetary Fund and World Bank. It has been argued that this does not help to end poverty and encourage growth in developing economies but rather stacks trade in the favor of the rich countries. Ironically, the very countries arguing for free trade in developing economies earned their incredible wealth because they protected their industries. Thus, free-trade agreements are said to lock developing countries into producing agricultural goods and other low value-added goods because they can’t protect and develop nascent industries.
Because of the economic power of rich countries, free trade agreements often still allow these rich countries to protect their own agricultural industries and thus push down the price of the goods produced in developing economies. Thus, the counterargument to the theory of comparative advantage is that free trade is really rigged trade in the favor of rich countries and will therefore not alleviate poverty and will have no impact on the incredible income inequality in the world.
International Agreements
Consider the limitations imposed by multilateral agreements on developing nations. For example, the Trade-Related Intellectual Property Rights or TRIPS agreement Article 27.3(b) allows multinational companies to patent their agriculture products. Under TRIPS, intellectual property protections disproportionately benefit a few dominant firms like Syngenta, BASF, Corteva, and Bayer, which control about 65% of genetically modified or GM seed patents and sales, limiting access for developing countries’ farmers and reinforcing dependency on high-cost imports including seeds, and fertilizers. If a farmer uses seeds of any of these companies and keeps a small quantity of produce as seeds for the next season, the company can sue the poor farmer. The 1995 Agreement on Agriculture is another example in which developed countries can protect their agriculture industries through mass subsidies while developing countries can only subsidies for a maximum of 10%.
To further read about monopoly or oligopoly in global agriculture industry read our premium article “Oligopoly in the Global Industries”
Consider externalities, like uncalculated health and environment effects of TRIPS agreement. Form health perspective, GM seeds can cause allergies or resistance to antibiotics in the long-term and increase healthcare cost. Environmentally, GM seeds can negatively affect biodiversity, gene flow to non-GM crops, and herbicide-resistant weeds while positive externalities include lower use of pesticide and higher yield.
Our argument on trade broadly emphasizes goods trade (agriculture vs. manufacturing), while TRIPS specifically addresses intellectual property in trade. However, this doesn’t detract from the reflection that TRIPS is a cornerstone of modern free trade frameworks and amplifies the same asymmetries. Implementation costs for TRIPS (building legal systems for IP enforcement) have been estimated in billions for developing countries, further straining resources without proportional benefits, aligning with the view on how such policies fail to promote growth or end poverty.
Regional agreements are also not without limitations. These agreements impose strict rules on intellectual property rights. For instance, they allow extending licensing for manufacturing general-purpose medicines only in the case of emergencies and prevent parallel imports. The agreements also prevent transferring technology and knowledge and even senior executives to access the market. These agreements engage in controversial terms that World Trade Organization leaves to countries to decide such as environmental policy, anti-trust laws and capital and labor movement. Countries that are in financial hardships cannot get any relief from regional agreements.
Multinational Companies
Multinational firms also protect themselves and exploit labor in the developing countries. Globalization and outsourcing allows firms to reduce dependency on labor and resources in a specific location. Suppliers’ like China and India compete to win production contracts of multinational firms. Multinational firms take advantage of this competition by using their production units and weak national regulations.
Value chain can be broadly segmented into three phases: pre-production (design), production, and post-production (marketing and branding). Value addition and profits are in the pre-production and post-production stages. Multinational firms earn significant economic rents from these two stages due to intellectual monopoly. Apple Corporation outsource production in China where producers only earn 1/10th of the final price of products while Apple keeps the rest for designing, marketing, and distribution.
Likewise, coffee bean producers typically earn 5-10% of the retail price (~21-23% cultivation share in German chains, but net farmer income is low at ~0.41 euros/kg), compared to higher margins for roasters like Starbucks through branding and marketing; competition squeezes producer margins.
Cocoa growers receive about 6-6.6% of the final chocolate bar value, while companies like Mars or Nestlé capture the bulk via processing and branding, exacerbated by producer competition. Due to significant competition between producers, their margins are low. This exploitation increase the supply of labor force whereas, corporations earns higher rents from their knowledge, oligopoly/monopoly, or their market power. This increases the bargaining power of capital against labor which is the cause of lower wages in both first and second world countries.
Counterarguments
IMF or other agreement restrictions not always cause slavery. It is argued that such restrictions do appear as negative reinforcers but they are important for long-term sustainability. In 1991, India was in extreme crisis due to negative balance-of-payments of 9.4% but following IMF reforms, it achieved 6% annual growth on average. Chile is another example which exited from IMF program in 1990s. Recent IMF program of Chile were just precautionary without any drawings.
Counter of Counterargument
A counterargument to this is that internal factors also matter. Corrupt countries often create policies that favor politicians and wealthy individuals, waste resources, and exacerbate inequality. In such regimes, kickbacks are a priority over education, infrastructure, and healthcare. Many countries have vast reserves of natural resources that can take them far away. The Democratic Republic of Congo has vast reserves of copper, cobalt, diamond, and gold, Nigeria and Venezuela have vast reserves of oil, and Pakistan has rare earth minerals. Still, people of these countries barely make a living (like Congo), and some are under a high debt burden (Pakistan).
A Labyrinth
IMF and TRIPS are traps, and with internal corruption, a deadly combination can emerge. Those who know how to manage internal resistance can get out of IMF programs, but they still have to deal with TRIPS. So these international institutions and agreements are labyrinths.
