Embedded in the concept of free trade is the assumption of internal factor mobility. Internal factor mobility assumes that factors of production within an economy are mobile. This implies that resources can be shifted from one form to another in line with the world market trends. However, in effect such resource movements are in most cases impossible. Specifically when applied to developing countries, which are mostly agrarian economies. For instance, an agrarian developing economy aiming to specialize itself in agricultural goods might have invested its resources in infrastructural developments.
To build road or canals, they cannot pick up the road and place it elsewhere. Therefore, these resources become sunk costs and such resources cannot be relocated. It also requires regulatory efforts on part of developing nations, and could consume many years before diversification of economy actually takes place.
Even when developing countries consume efforts to manufacture labor intensive goods, to break the dependency on agricultural exports, they face resistance from developed countries. Developed countries put barriers in form of tariffs and quotas on such goods coming in from developing countries. Mostly this comes as a protectionist measure to safeguard national goods against the cheaper goods being produced in labor intensive countries. “The United Nations estimated in 2001 that such trade restrictions cost the LDCs at least $100 billion annually-2% of their GNP”. M. Dunn and J. Mutti defend this strategy of developed countries: “If apparel manufacturers must pay wages that are ten times as high as in India or China, not surprisingly those firms feel that they are at an unreasonable competitive disadvantage. They are likely to argue for tariffs that offset these cost differences, thus putting them on a level playing field in competing with imports.” However, the postulates of free trade such as factor endowment and comparative advantage encourage countries to pursue this strategy. When the same is necessary to protect economies of developing countries the developed countries neglect their concerns. Therefore, the entire concept of free trade dies by such steps prevalent in the contemporary economy.
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