“Developing nations are at a competitive disadvantage when it comes to international trade. Moreover, the benefits accrued from free trade are only enjoyed by developed nations”
Free trade has removed the barriers between countries. The biggest advantage of international trade relates to the advantages accruing from territorial division of labour and international specialization. International trade enables a country to specialize in the production of those commodities in which it enjoys special advantages. All countries are not equally endowed with natural resources and other facilities for the production of goods and services of various kinds
A developing country is a country with a relatively low standard of living, undeveloped industrial base, and moderate to low HDI. This index is a comparative measure of poverty, literacy, education, life expectancy, and other factors for countries worldwide. Developing nations have also been called underdeveloped nations. Most of them are in Africa, Asia, and Latin America. Classical theories of international trade propose that comparative advantage resides in the factor endowments that a country may be fortunate enough to inherit. Some suggests that developing countries are at competitive disadvantage when it comes to international trade. For me, developing countries are not at competitive disadvantage all the time. Some of them may lack in the past, but today I believe that it has improved more and will be able to take over the benefits accrued. In fact, today, developing countries has increased their roles in international trade.
Developing countries in international trade
Developing countries have become major players in global trade. It is not always in a competitive disadvantage. Furthermore, they also get benefits from doing the trade internationally.
Improved Quality of Life
Free trade improves the quality of life for a nation and its citizens. It can import goods that they may not able to produced. Also, importing goods may be cheaper for a developing country than attempting to produce it. Child labor in developing countries has also be the main problem in the lacking of technology. Children are used as a cheap substitute for manufacturing equipment. International trade would allow countries across the border to invest equipment and pay higher wages to adult workers through foreign investment. With higher family incomes, children are able to attend school rather than work. Trade also creates employment opportunities by boosting economic sectors that create stable jobs and usually higher incomes, thus improving livelihoods. For example, manufacturing workers in open economies received pay rates 3 to 9 times greater than those in closed economies, depending on the region. In Chile, a worker in a sector open to trade and investment gains an average €1,100 more per year than a worker in a relatively closed sector.
Encourages innovation
Trade encourages innovation by facilitating exchange of know-how technology and investment in research and development, including through foreign direct investment. Investment and trade have facilitated the deployment of information and communication technology, with mobile cellular coverage reaching 86% of the world’s population in 2008, including 69% of the African population.
Enhances competitiveness
Trade enhances competitiveness by helping developing countries reduce the cost of inputs, acquire finance through investments, increase the value added of their products and move up the global value chain. For example, emerging economies like China, Brazil, India and South Africa are steadily catching up with developed countries thanks to increased trade. The GDP per capita increase of G20 developing countries stands at 115% for the decade 2000-2010.
The rise of south-south trade
Over the past two decades, trade and investment have risen not only between the rich countries of the North and the developing economies of the South, but also among countries in the South, but also among countries in the South, particularly involving Asian nations. For example, China and India increased imports from MENA (Middle East and North Africa region). Bilateral trade between China and India has grown increasingly significant as well, with exports from China to India Jumping from $686 million to $14.5 billion. Developing countries mostly have similar conditions that can be seen as a quite challenging environment. These south-south trade means that both have similar conditions that make the developing countries have a competitive advantage. They could become leading investors there because of the greater experience with the economic and political conditions of the host country, low costs and culture similarity.
Demand conditions
Porter emphasizes the role home demand plays in upgrading competitive advantage. Demand condition is the nature of home-market demand for the industry’s product or service. Most developing countries are well populated. This means that they are more likely to have a higher demand compared to those with less population. A more demanding local market leads to national advantage. Most developing countries such as Indonesia, China, and India are in the top 5 of most populated countries. For example, the large size of the market in Indonesia confers a notable advantage. As one of the world’s 20 largest economies, Indonesia boasts a large pool of potential consumers, as well as a rapidly growing middle class, of great interest to both local businesses and foreign investors. However, much more must be done to improve Indonesia’s competitiveness and therefore fully reap the benefits of international trade. Another example is India. A more demanding local/global market has given India the international advantage.
The developing country is at competitive advantage when it comes to the market in their home country. It will enable them to compete at home against larger developed country MNEs and they know their clients better for sure. They are also benefited because they have facilities and distribution networks that are better adapted to the conditions of the country.
Factor Endowments
There are two factor endowments, which are basic factors and advanced factors. Developing countries have varieties of basic factors or fixed factors such as natural resources, location, climate, etc. For a country to develop a competitive advantage, it has to be able to develop advanced resources (skilled labor, research facilities, technology, etc). For example, Indonesia is one of many developing countries. It is rich in natural resources, but somehow it had not use those greatly in the past. Indonesia’s relative poor technological development is confirmed by several ‘input measures’. However, studies show that Indonesia achieved high economic growth, large declines in poverty, widespread delivery of basic education, coupled with rapid industrialization and structural change (Rock 1999:169). Moreover, Indonesia succeeded in acquiring and adopting new industrial technology within a short time period. In the other hand, skilled labors are still an issue in several developing countries such as Thailand, Cambodia, India, etc. Most of them have a shortage in skilled work force. For example, according to the World Bank, Thailand will face the biggest shortage of skilled labor in the Asean region, while an academic has proposed the implementation of area-based education in order to give students the right skills for the job market. The survey, which was conducted between 2006 and 2009, shows that only 38.8 per cent of workers suitable for the job they are doing. Kiatanan Ruankew, deputy director general of Dhurakij Pundit University’s research department, explained that the Thai education system failed to provide the right skills to people, resulting in the creation of a workforce that does not match the jobs available. (“Thailand Faces,” 2016). Thus, government investments in basic and higher education, by improving the general skill and knowledge level of the population and by stimulating advanced research at higher education institutions, can upgrade a nation’s advanced factors. However, in India, low-skilled labor does not seem to be an issue. The early evidence following economic liberalization suggests that India’s emerging international competitive advantage – and the corresponding opportunities for multinational corporations – lies not in natural resource industries or low-skill, labor-intensive manufacturing, but in skill-intensive tradable services, as exemplified by software (Kapur & Ramamurti, 2001). I believe that labor matters are different in each country and developing countries are able to achieve those competitive advantages if they are able to adjust and manage their labor or workforce to specialize in what they are good at, hence create a great competitive advantage. Also, local disadvantages in factors of production force innovation. Adverse conditions such as labor shortages or scarce raw materials force firms to develop new methods, and this innovation often leads to a national comparative advantage.
Disadvantages
Despite all those advantages of the international trade to the developing countries, the other side of the picture cannot be ignored. Developing countries have experienced some disadvantages accrued from the international trade in the past.
Exploitation of the endowments
International trade may exhaust a country’s natural resources like coal and oil, which are irreplaceable. These goods are exported for the sake of profit. But the country suffers in the long run when their source is dried up completely. Developing nations with small economies are often heavily dependent on their trading partners in developed nations. It is not uncommon to find that developed nations will attempt to exploit these relationships. They do so by using their economic power to influence political decisions that are not directly related to their trade activities.
Blow to Infant Industry
An infant industry is a new industry that is just starting to develop. As developed countries enter developing countries, it will risk the new domestic industries. Developed nations are stronger in advertising and branding (Lall, 1983). They also have much advanced technology (Barlett & Ghoshai, 2000; Dawar & Frost, 1999; Wells, 1983). Host governments mostly favor the establishment of developed country MNEs, because they usually bring more advanced technology to the country (Stopford & Strange, 1992). Furthermore, customers often prefer products from developed countries firms.
Late movers
According to the Harvard business review, the size of the market is less important than the character of the home demand. It means that a nation can achieve competitive advantage when the domestic buyers are the world’s most sophisticated and demanding buyers for the product or service. Local buyers can help a nation’s companies gain advantage if their needs anticipate or even shape those of other nations – if their needs proved ongoing “early-warning indicators” of global market trends. Somehow, in reality, these “early – warning indicators” mostly came from developed nations. For example, Sweden’s long-standing concern for handicapped people has spawned an increasingly competitive industry focused on special needs. Denmark’s environmentalism has led to success for companies in water-pollution control equipment and windmills.
Conclusion
In conclusion, developing countries are not always in competitive disadvantage in international trade. The international trade has benefited developing countries in several sectors. It improved the quality of life, encourages innovation, and enhances competitiveness. It also has competitive advantage in the south-south trade because of its similar culture and challenging conditions. Developing countries also are well populated, making them at competitive advantage because of the bigger demand compared to developed nations. Also, developing countries would be at competitive advantage if they know how to organize and manage their advanced endowments, especially labor and workforce. It is because, in the past, most developing countries are at competitive disadvantage because they are rich in natural endowments but are unable to developed the advanced endowment and thus became exploited. Despite all of the advantages, international trade also gave several disadvantages to the developing countries emerging in it. It gives a risk of the countries to be exploited and also it blows infant industry in home country. Developing countries are also at competitive disadvantage because of they being late movers.