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The Importance of Free Trade in International Trade

2017-01-10 | 来源:51due教员组 | 类别:更多范文

英国Dissertation代写论文精选:“The Importance of Free Trade in International Trade”,这篇论文主要介绍了自由贸易在国际贸易中的重要性。文章指出,自由贸易协定的目的是倡导自由贸易,而有效的资本配置能够促进经济的发展,所以自由贸易能够激发市场的活力。

 

Introduction

 

Theoretical Framework

 

The general idea of free trade agreement of growth was developed in advocacy of free trade based on neoclassical trade theory (Solow, 1956) and from recent endogenous growth theory (Romer P. , 1990). The support for free trade is drawn from Ricardian principles of comparative advantage (Viner, 1937). Similar idea is drawn from the notion of perfect competition and the believe of neoclassical economists who argues on the importance of efficient capital allocation due to free trade (Krugman, 1986; Corden W. , 1974).

 

The phenomenon of free trade came under severe scrutiny in the face of Great Depression. Hence, theoretical foundations of ‘optimum tariff' were developed in support of protection (Johnson, 1950; Kaldor, 1940). Johnson (1958, 1971) advocated trade protection in three groups in his classical exposition. They are the economic arguments, non-economic arguments and non-arguments. Economic arguments raise infant industry argument, optimal tariff argument and correction of domestic market distortions, while non-economic arguments emphasize on self-sufficiency for domestic economy. Non-arguments attempt to resolve balance of payment distortions through trade protection. Johnson concluded that ‘optimal tariff' protection is the only valid argument, while in other cases such arguments will only inflict distortions.

 

The neoclassical economists refute the notion of protection as an alternative, as this would result in intra-industry effects. The increased barrier to entry would make domestic traders to engage in monopolistic competition, while small enterprises will be left inefficient. Intra-industry effects are the source to welfare loss (Tybout J. D., 1991). In addition, Bhagwati(1988) and Kruger(1974), raises the theory of directly unproductive and profit (DUP) seeking activities, which will cause waste to national resources. Additionally, the Solow-growth model embodies technology as an endogenous factor (Agion, 1992; Romer P. , 1989), which argue that international trade ensures faster diffusion of technology, that is embodied into the better intermediate goods which results in higher productivity and growth for domestic economy (Grossman, 1991). This will result in learning by doing effect and technological know-how is surpassed. In addition, management is more efficient and all will combine in high growth (Krugman, 1987; Young, 1991; Lucas, 1988) .

 

Objective of the study

 

A high number and standard of studies have been conducted on Export-led growth, trade openness, “manufacturing exports as a new engine of growth”, specifically in the last decade, on different economies, ranging from developed to poor countries, drawing interesting conclusions. The present study seeks to investigate the effects of export, openness on growth in the context of Bangladesh.

 

Firstly, the study will seek for stable effects of policy shifts and implementation, in Bangladesh, which will be determined by stable changes in the determinants. Stationarity conditions, if satisfied, will ensure the stability of economy and productivity, towards a particular goal.

 

Secondly, the study will investigate the current association between growth and trade openness. While it is desired, that the adopted outward-looking trade policies of Bangladesh to result in positive association of productivity to liberalization, trade openness might be effected by other variables and may render different conclusions.

 

Thirdly, the study will examine, if the export led growth hypothesis is still applicable to Bangladesh, as before, while many countries, such as Sri-Lanka, Philippines, Nigeria have seen opposite relationships. Additionally, Hossain and Karunaratna (2004) have argued that “manufacturing exports have become new engine of growth” which is a disciple of the de novo hypothesis. In contrast, Adelman (1984) suggests that, agricultural exports should have dominant effect for a pro-agricultural society as Bangladesh. It is important to see if, ‘manufacturing exports is an engine of growth', or still other factors are dominant as before.

 

Investment is an endogenous factor that should imply the increased import of intermediate goods, as a result of increased export, and more openness, would consequently; render higher productivity (Krugman, 1987; Lucas, 1988; Young, 1991).

 

Relevance and limitations of the study

 

Relevant studies have been conducted in the context of Bangladesh, in last decade and have drawn interesting remarks. However, the major drawback is the timeframe of earlier studies, which did not cover analyses from the last ten years. In the last ten years, econometric methods have changed and improved rigorously. Hence, many studies have been rendered invalid due to absence of proper methodology. The world economy has seen dramatic events in politics, international trade and global economy. The trends in global economy, which were much more rigorous, in the last ten years, have affected Bangladesh magnificently, as Bangladesh emerges as a high power economy in Asia, and have interested researchers, due to high deviations and high rises to productivity. It is necessary to embody recent econometric techniques of Johansen's maximum likelihood cointegration analysis and vector error correction methodology, which will inform on recent associations, among the interested indicators. Hence the state-of-art econometric techniques will provide reliable results that would help the policy makers to observe the relationships and bring sufficient changes, in trade policy to render profit.

 

Among the few limitations of the study was the absence of first hand secondary sources. Most data sources for Bangladesh are not available online and are preserved in paper based format. The lack of proper technology and internet, withdraw the authorities of the country, to provide data directly. Therefore, data are collected from World Bank sources, which may not correct for errors, and sometimes fail to provide detailed data series as an intermediary.

 

Structure of the dissertation

 

The second section will contain a brief country profile and approaches to liberalization. The third phase will contain literature review that will discuss literatures in support to export-led growth hypothesis and trade liberalization. This section will bring forth studies that contrast and significance of the study. The fourth and fifth section will contain methodology to estimation and results of analysis. The final section will give conclusion and remarks to the dissertation.

 

Process of trade openness and Export-growth in Bangladesh

 

After independence in 1971, Bangladesh has gone through three phases of policy changes, towards deregulation and openness to trade. The first phase was marked by severe control on exports and imports. The policy implemented in 1972 to 1975, put the country in a socialist framework, with a fixed exchange rate system. Industrial enterprises, banking and trade infrastructure was massively nationalized as an inward-looking, import substitution approach was adopted. Agricultural inputs and outputs were controlled. Empirical literature suggests that this was a good decision for the researched timeframe (Ahmed N. , 2000).

 

The second phase of policy shifting began in 1976 and continued up to 1990. This phase of denationalization, deregulation and trade liberalization lacked a good direction to work out the process. Nationalized trade barriers were reduced, and a ‘free trade' approach was undertaken. Privatization of industries and banking sector was allowed and price controls over nationalized firms were lifted. Abolishment of state trading was initiated.

 

The third phase of policy shift, were introduced in the beginning of 1991 and continued up to 2002 with significant remarks. In the recently developed policies toward export-promotion and trade openness, ‘trade barriers' have been removed as a flexible exchange rate regime is adopted. To encourage further reduction of anti-export bias, export processing zones have been established, to co-operate manufacturing exports. This recent policy shift has moved towards complete privatization of banks, infrastructure and agricultural sector. During this phase, Bangladesh continued to experience rapid liberalization.

 

In order to further opening up the boundaries, Bangladesh has entered into a ‘free trade agreement' among countries in the region. As discussed, to encourage EP trade policies, and free trade, Bangladesh entered into bi-lateral agreements with India, Pakistan, Sri-Lanka, and continues to trade and investment framework agreement with United States. Bangladesh is an active member of SAARC, Developing-8, and Bangkok Agreement. The country is rigorously seeking to import in developing of a regional co-operation among Bangladesh, Bhutan and seven northeastern states of India and Nepal.

 

From the graph presented above, it can be seen that, starting form 1971, imports were increasing at a low rate, with a fall in 1976-77, but moved up after that. The import line took a peak after the third policy implementation in 1991, and continued to rise at a high speed. The export trend was almost at a constant level, until the 1991 policy implementation. Afterwards, the trend peaked, gained a momentum after 2000. However, the export line still falls below the import trend.

 

As reported by the export promotion bureau, in 2005-2006 FY, export earnings have grown by 21.3%, which is due to high demand of, chiefly manufactured goods, led by garments industry and knitwear. During this period, import payments have grown by 9.5%.

 

In contrast to real export, manufacturing exports exhibit of higher exports than imports which are in percentage of merchandise exports. This is indicative of higher productivity.

 

When the country adopts rigorous trade policy towards openness and promoting exports, large scale capital owners and labor unions are in oppose to liberalization. The cause of opposition may lie in the fact that, increased competition, effect the workers, in protected public and private sector, who fail to adjust to the exposed economy, with increased productivity. The politicians tend to protect large scale owners, who severely discourage competition and create bias towards exports (Sattar, 2004).

 

Literature Review

 

Concepts and Empirics on Export-Led Growth Phenomenon

 

Export led growth phenomenon has been central to the trade and development literature for many years. The bulk of researches that has taken place on this issue are therefore, not small in number and range. The focuses of these studies were bi-directional. Some of the studies attempted to find whether expanding export would improve the growth performance. Others tried to find the paths through which the expansion of export will affect the growth performance. Economic theory confirms that export expansion leads to increase the growth performance, as that efficiently allocates productive resources and also with the high volume of productive resources accumulated as a result of higher capital earned through export growth, (Bardhan, 1970; Cheneray, 1966; Basu, 1991; Romer P. , 1989 ; McKinnon, 1964; Grossman, 1991).

 

Export expansion makes the home country to concentrate on comparative advantages and to earn economies of scale. The home country continues to invest on its economies of scale and achieve better efficiency. The increased efficiency creates external competitive pressure on the home country, along with improved internal competition. In the face of more competition, the monopolistic and oligopolostic behavior of the market is eliminated. Efficiency is also created as learning by doing. Knowledge is transferred to other sectors and growth is enhanced. The external competition, aids the small economy to realise and emphasize on removing limitations, through economies of scale, and by reaping the true advantage of globalisation, which is acquired by increasing export.

 

The theoitical literature also argues that, export expansion increases the investment and capital accumulation in a country. The two-gap model explains , that growing export reduces the constraints that prevail in foreign exchange. Such reduction of constraints lead to better accumulation of productive resources, capital goods and intermediate goods (McKinnon, 1964; Bacha, 1984; Cheneray, 1966). Export expansion also increases investement opportunity of a country. Modern economists suggest that, savings by domestic and banking system, government savings and foreign exchange savings cannot only induce investment. Investment opportunities determine investment rather than savings. The growth of export will provide investment opportunities to home country, (Sandrum, 1994).

 

Theories suggest that, the relationship of export and economic growth is bi-directional. Economic growth may also increase export for a country. The effect of better learning and technological development, give rise to output. The growth of output ensures that domestic demand is met and export will expand. However, this technological process development or learning process development is not directly related to the export promoting policies (Jung, 1985). As the home country realizes economies of scale, expansion of export takes place. Investemnt (Grossman, 1991). Therefore, the bi-directional theory suggests that, GDP is a function of investment, that enhances export performance, and export increases investment opportunity, that is directed to GDP growth.

 

In the designing process of development Economics, entailed was dominant export passimistic theories, rather than export promoting views. After the end of world war II, import substitution strategies were to be followed by many countries. However, the initial phase of implementing import substitution strategies seemed ideal during that period, but the results of taking attempts to implement the import substitution strategies were not favorable for all economies. Economists found that, that export passimistic views were not justified for many economies that have reached a certain level of development, and industrialization. On the other hand, the import substitution trade policies laid undesirable effcts on balance of payment. As a result, the growing economies did not accept import substitution strategies, rather accept export promoting views (Adelman, 1984).

 

The growth led export is also suggested by theories. According to Bhagwati (1988), growth led export hypothesis is dominant when supply and demand is induced by growth. In such cases, anti-trade bias is turned down.The possibility of bi-directional causality prevails in many major theoritical literture (Grossman, 1991; Bhagwati J. , 1988).

 

On the other hand, Irma Adelman (1984) argues that, export-led growth is not the only open development strategy for a least developed country. The open development strategy that ensures the allocation of agriculturally driven resources may prove superior than the strategy for allocation of capital for investment resources. An alternative to the import substituion strategy, for a closed development approach, maybe an ADLI ( agricultural-demand-led-industrialization) strategy. It is important to identify the phase of closed development ideology, which is dominant after the era of Pro-agricultural strategy is over. Another theoritical literature similarly argued that, ADLI as a balanced-gowth-approach, can only be a mean, to attain the goal for developing countries need for higher growth, and the need for growing industrialization by expanding the demand for domestically produecd consumer goods and intermediate goods. The linkage effect to agriculture with industrialization is also examined (Singer, 1979). Singer (1979) defines this target as Lime target and ADLI is the solution. However, Irma Adelman(1984), also puts out the constraints to ADLI strategy as it requires the improvement of infrastructure in Agriculture which is difficult to attain in South Asian Sub-continent. The physical capital needs to be perfectly infrustructred for ADLI yield expected results. Therefore, ADLI strategy is a solution to allow time to the developing countries to bring abouth changes structurally, in 1980s to 1990s. This strategy cannot wire out the importance of export-promoting strategies as an alternative for import substituion strategies at all (Adelman, 1984).

 

Alongside the theoritical literatures on export-led growth hypothesis, the number empirical literature from the first of its kind by Maizels(1963) is many. Jung and Marsall(1985) scanned 11 empirical studies that were carried out from 1967 to 1982 timeframe, and all of the studies found supportive relationships to export and growth. Greenaway and Sapsford(1994), reviewed 14 empirical studies that were conducted on the export-led growth hypothesis, and 12 empirical studies vividly shown relationships between export and growth. One of a major study conducted by Giles and Williams (2000), which conducted 150 cross country analysis from 1963 to 1999. Out of the 57 countries that were analysed , only 4 countries failed to show significant relationships between export and growth, and only 10 out of the 102 time series analysis didn't show significant relationships between export and growth.

 

It has interested the empirical literature to examine export-led growth hypothesis prior and after the oil shock in 1973-74 timeframe. Among the studies,that took place prior to the oil shock, Michalopoulos and Jay (1973) conducted a study in a 1960-73 timeframe, by estimating export and gowth into a poduction function, signifcant relationships were found. Tyler (1981) conducted study on a group of middle income countries, putting export and growth into similar production function framework, and found similar relationships.Therefore, export orientation into the framework is supposed to effect growth therough economies of scale, allcation of productive resources and utilization of capital, optimally. The study of Feder (1983) found similar results. Balassa (1983) were dubious about the relationship afther oil shock, as in the face of economic recession 1974-75 that took place after the quadrupling of oil price in 1973-74, may have effected the relationship because of the orientation of external shock in the production function. The study he conducted had taken th period of 1973-79, after the shcok, on 43 developing countries, who were directly affected by subsequent recession. The result did show export affecting growth positively and the numerical magnitude of the effect did grow compared to early results. The changes in intercountry growth rate before and after the oil shock is rather a result of different trade policies introduced.

 

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