Rahul (Year 12)
Editor’s note: Year 12 student Rahul, now in Year 13, wrote this essay on free trade – little did he know how relevant it would be at the time of publication in May 2025, with Trump’s tariffs and global trade arguably at a crossroads! CPD
The impact of free trade on developing countries depends on many factors, such as the terms and conditions of the trade agreements, the level of development and diversification of the economies, the quality of institutions and governance, and the complementary policies and measures that are adopted to support affected groups and sectors. Therefore, there is no definitive answer to whether free trade benefits or harms developing countries, as it may vary from case to case and over time.
The benefits of free trade are numerous; smaller economies have access to larger markets due to countries being able to sell their goods and services without encountering heavy tariffs. This increases the demand for their product, increasing sales, allowing them to expand sooner, which would increase their gross domestic product (GDP) – a measure of economic growth. As GDP increases, it can help these developing countries to become larger. Furthermore, businesses will seek to establish operations in countries with favourable trade policies, which would result in a large inflow of the factors of production, creating jobs, and further helping the economy. The open access to other countries markets allows easier access to newer technologies, practices, and new knowledge from international firms operating in that country, which can spill over into local firms, improving their productivity and innovation capabilities.
There are also consumer benefits, due to the larger options available to customers, it forces companies to reduce their prices to remain competitive, as well as offering them greater variety. As a result, this provides customers with greater purchasing power, allowing them to be able to afford more goods and services. Free trade forces countries’ institutions to adapt to meet more stringent requirements necessary for international trade, due to new regulatory frameworks, which can lead to improvements in governance and legal systems, and more transparency in the governance on the country.
In addition to the wide range of benefits to free trade for developing economies, there are also a fair number of disadvantages, one of which is dumping. Dumping is when a country or company export a product below the cost of production or the market value in the producer’s domestic market. The main problem with dumping is that it can undercut local industries that cannot compete with the artificially low prices, potentially leading to job losses and business closures. This would make it harder for developing countries to experience more growth, making it harder for the country to become economically better off.
In addition to that, free trade can reduce the tariff revenues and policy space of developing countries in a few ways. Tariffs are often a significant source of government revenue for many developing countries. Due to the lack of tariffs, these countries can experience a large decrease in revenue, which can greatly limit their ability to fund public services and development projects. To combat the loss of tariff revenue, developing countries might feel forced to increase the number or rate of tax, such as VAT or income tax, which leads to less money for the people, making them worse off. These policies could also lead to economic dependence on developed nations, limiting developing nations’ long-term growth and development.
Due to this increased globalisation, developing countries may be more exposed to external economic shocks, due to the reliance on a narrow range of export commodities or markets. These fluctuations in global demand and prices can lead to economic instability, affecting income and employment. In addition, free trade would lead to a decrease in jobs in the sectors that developing countries cannot compete in, and an increase in jobs in the sectors for goods they are exporting, which exacerbates income inequality as some workers benefit from higher-paying jobs whilst others are forced into lower paying jobs.
Overall, free trade can be a powerful engine for economic growth, which can be seen in East Asia, and Latin America, with South Korea, Taiwan, and Chile. This allows these countries, which previously would not be able to participate in global trade outside specific sectors, to experience rapid growth, and improve their economy to that similar to that of a developed country.
The GSAL Journal 