Open The Border For Trade

By: Bikal Dhungel 

Two group of people who oppose opening up their national borders are right and left wing extremists preaching things like national sovereignty and fear of loosing national identity. What is a national identity and if it is important for our daily survival is a separate topic of discussion but opening up the border in this case means nothing other than free trade, not essentially free movement of people but of free trade.

Why free trade is important is, there is strong evidence that nations with most free trade are also the ones with highest income and high level of welfare and oppositely, countries with more protectionist trade policies are the ones with low level of income. Why free trade is a good thing is, when you have a business, your market will be large. When you have a large market, you have an incentive to be an entrepreneur. Being entrepreneur helps you to increase your income and probably you will also create jobs for others. When employment level rises, the tax collection of a country rises and it can invest in education or infrastructures which will increase the literacy rate and this again creates more educative people who might then come up with a bright idea to become an entrepreneur and this again helps the country as a whole. This will go on and on.

So the question goes why are countries reluctant to open up their borders for free trade ? This issue is much deeper than we can imagine. Normally, in developing countries, the few elites who own the local businesses are the ones who have much political influence. They know very well that, if you open the border and let foreign businesses who can produce goods efficiently come to compete with them, they will be out of business. So, they will do anything to exercise their power to stop competitors to enter the market. Who looses here are the consumers. Consumers are paying higher prices for inefficient goods. Why should they buy goods with higher prices from somebody who seems to be from their own country instead of buying cheaply from a foreigner ? With protectionism, few elites of a country profits whereas the large majority will suffer. These elites or lets say business owners talk about national sovereignty, or bring issues like cross border crimes or the disappearance of local businesses and the average citizen believes them. In most cases, these businessmen also own media companies which gives them even more power to control public opinion.

Imagine, for a small country with a population of 30 million which has a neighbouring country with1 billion people. When a single product, just a single product from this small country become successful and it can sell this to a tiny fraction of people , lets say 1% of the big country's population, which means 10 million in our calculation, the small country can create job for 1 million people if one person is is able to cover ten customers. 1 million new jobs creation is not a joke. It can transform the country overnight. So, free trade is good for two reasons: 1) it gives more incentive for potential entrepreneurs, 2) it will be cheap for home customers.

Then there are limitations. Of course you have to let the local businesses grow, but there should be a limit of time. If you subsidize inefficient local business for a long time which fails to achieve economies of scale, it is only the waste of tax payers money. On the other hand, as most of left wing extremists points, big multi-nationals with eat up small businesses. This is only partly true. Multi-nationals also create jobs locally. Evidence shows that multi-national companies have better working conditions and payments than local businesses provide because these days they have a huge pressure from international society and informed consumers will punish them by not buying their products if they fail to stick on work ethics. Moreover, this is also the opportunity for technology transfer. When a multi-national company invests in your country, it will have a spill-over effect regarding technology. The know-how can be then used later. A big business also creates another spill-over of jobs for example if a big tea producer opens a branch in a country, it needs resources, in this case tea leaves, which will then be supplied from another firm located there. So, this lead to the creation of another firm. It is true that, free trade should have conditions. In terms of negative externalities like in environmental pollution, an agreement should be done prior to free trade agreement. Other issues like consumers rights, transparency etc should also be considered.

Currently the European Union is discussing a Free Trade agreement with the US called TTIP which remains highly controversial because of its lack of transparency and because of the fear of loosing consumers rights. Environmental issues are also neglected. This has caused a huge uproar in many countries within the European Union but also in the US.

Free Trade in other parts on the other hand has worked very well. For example NAFTA ( North American Free Trade Agreement ) between the US, Canada and Mexico. It has created millions of jobs and raised Mexico to be an upper-middle income country today. The European Union itself is the largest free trade zone in the world. Before the EU was created, when goods crossed the national border, it used to be taxed coupled with other transaction costs and until it comes to the hands of consumers, the price became higher. After the EU enacted free movement of goods, capital and humans, trade has increased, goods have become cheaper and there is no hassle in the border, there are no borders anymore. Moreover, every country specialized in goods which it can produce efficiently or in economical language, where it has comparative advantage and imported goods which other country is efficient. By this way, both parties were better off. And, as a result of this, a huge market was created. Germany, the largest exporter in Europe exports 60% of its goods to other European countries today.

On the other hand, trade is also Peace. When countries trade with each other, they are less likely to fight with each other. When Germany exports high amount of goods to France, a stable, economically powerful and peaceful France is also in the interest of Germany. So, in case if France is in financial difficulty, Germany has incentive to help it. Potential of any conflict in Europe is roughly null but in developing countries, it is unfortunately high. So, trade might help them in many aspects. Concluding everything, trade is good for prosperity, good for peace and good for the well being of the whole world if everybody plays with the rule.