Does Free Trade Lead

to Exploitation of Developing Countries?

Kristi Beattie, Todd Duncan, John Ray, Shashi Shankar

Benefits of Free Trade to Developing Countries

Contrary to popular belief, free trade has a number of benefits for developing nations such as:

Environmental Benefits Labor Benefits Economic Benefits

Environmental Benefits

Free trade has proven to help environmental issues in developing nations, as is evidenced in: Improved environmental regulations Improved technology for industries Negative correlation between foreign

direct investment and S02 emissions.

Environmental Benefits:Improved Regulations

“Income effect” Exports rise and the standard of living

in the host country improves People demand more stringent

environmental regulations

Environmental Benefits:Advanced Technologies

“Technique effect” Domestic plants can learn from

foreign invested plants that often use more advanced technology

Environmental Benefits:Negative Correlation between FDI and S02

Emissions

A study in China indicates that there is actually a negative correlation of .43 between foreign direct investment and SO2 emission in the industrial sector (significance level of 1%).

Estimated SO2 emission in a foreign invested factory is .5 kg per employee, whereas in a domestic factory it is .98 kg.

Environmental Benefits

Earlier assumptions Developed countries move their manufacturing

operations to countries with relatively lenient environmental policies, providing advantage in producing pollution intensive goods.

However, free trade can actually increase the standard of living, leading to increased environmental regulations and advanced technologies.

Labor Benefits

Free trade has helped the labor force in developing nations, as is evidenced in: Improved women’s rights Increased employment opportunities

Labor Benefits:Improved Women’s Rights

Social and cultural boundaries cause women to be majority of unskilled workers.

Free trade provides a large number of low-skill jobs, in turn providing a lot of jobs to women.

Leads to job competition between men and women and decreases the gender wage gap.

Labor Benefits:Increased Employment

Opportunities Some argue free trade causes

individuals to work for unfair pay.

However, developing countries struggle with high unemployment. People are happy to have these jobs. These jobs are better than the alternative. These jobs assist people to attain higher life

satisfaction and ultimately join the middle class.

Economic Benefits

Free trade has helped developing nations grow their economies, as is evidenced by trends in: GDP Shrinking poverty levels Types of exports Investment and trade between developing

nations

Economic Benefits: GDP

5% per year increase in GDP in the 1990s for developing nations that embraced trade.

1% per year decrease in GDP for developing countries that did not lower trade barriers and increase trade.

Economic Benefits: Shrinking Poverty Levels

Concurrent with the increase in globalization in the 1980s and 1990s, the number of people living on $1 per day fell 375 million (a 50% decrease).

Economic Benefits:Types of Exports

20 years ago, raw materials made up 80% of the goods exported from developing nations.

In 2004, manufactured products made up 80% of goods exported from developing nations that embraced trade, while those that did not (in Africa) continued to export primarily raw materials.

Economic Benefits:Investment & Trade Between Developing

Countries In 2004, developing nations invested

$40 billion in other countries. Trade between developing nations has

been increasing. As of 2007: Indian-African trade = $25 billion Chinese-African trade = $55 billion

Economic Benefits

Overall, free trade has led to increased GDP for developing nations. That GDP is reflective of more jobs, more exports, and better wages for those nations.

But there are some cases of exploitation...

Oil in Nigeria

Sweatshops

Shifts to other developing countries

Conclusion

Even though there are a few cases where exploitation did occur, free trade is very beneficial to developing countries. This is seen through improved environmental regulations, an enhanced labor force, and a rising economy.