Professional Documents
Culture Documents
Advantages and Disadvantages of Free Trade Agreements in Developing Countries
Advantages and Disadvantages of Free Trade Agreements in Developing Countries
Introduction..............................................................................................................................................2
Conclusions...........................................................................................................................................17
recommendations.................................................................................................................................18
References:............................................................................................................................................18
Bibliographic references:...............................................................................................................18
Van Den Berghe Romero, Edgar, (2002). Free trade agreements: challenges and opportunities ,
Mexico, Ecoe Ediciones,........................................................................................................................19
Planning and programming secretary, SEGEPLAN. (2006). Investigations on the NAFTA Free
Trade Agreement between the United States, Central America and the Dominican Republic.
Guatemala: ASIES..................................................................................................................................19
Normative references:.....................................................................................................................19
Electronic Receipts:.........................................................................................................................19
Others:.................................................................................................................................................20
ANNEXES:..............................................................................................................................................21
1
Introduction
In this sense, a trading partner is known as the country or region that participates
in an exchange of goods or services, in order to obtain mutual satisfaction and
cooperation, said cooperation is commonly supported by Free Trade Agreements
(FTA).
FTAs are agreements between two or more nations to obtain tariff and non-tariff
advantages and thus facilitate free trade between the subscribing nations.
These are a product of globalization and the tendency to liberalize the market in
international matters, due to their ideological and functional nature, FTAs from
the beginning of their existence have been subject to discussion regarding the
advantages and disadvantages that they entail for nations. signatories, that is
why throughout this investigation the main arguments of these positions and how
these arguments are applied and discussed in Guatemala will be addressed.
2
Free Trade Agreement (FTA)
Free Trade Agreements are commercial agreements that are signed between
two countries or between a country and a group or union of countries, with the
aim of increasing their international trade in goods and services and improving
their commercial and financial relations by: reducing the bureaucratic procedures
regarding exports and imports between the signatory countries of the agreement;
the elimination of customs taxes, the gradual annual increase in import quotas for
some products, especially agricultural products, and sometimes, the elimination
of visas for citizens of the countries that signed the trade agreement.1 .
1
Van Den Berghe Romero, Edgar , (2002), Free trade agreements: challenges and opportunities ,
Mexico, Ecoe Ediciones,
2
Super Intendency of Tax Administration, International Agreements and Treaties, Guatemala, 2019,
https://portal.sat.gob.gt/portal/atrabajos-y-tratados-internacionales/ .
3
The theory of the invisible hand is a metaphor that points to the market economy as a tool with the
capacity to achieve maximum social well-being as long as self-interest is sought. This theory was
developed by the economist Adam Smith.
3
Article 52 of the United Nations Charter recognizes and encourages the various
countries to reach agreements.
The author Edgar Van Den Berghe Romero , in his work Free Trade
Agreements: Challenges and Opportunities , maintains that FTAs contain a
series of objectives which can be broadly summarized in5 :
From the previous objectives, it is easy to establish that FTAs increase exports
and such an increase triggers a beneficial effect for the countries involved in the
agreement or treaty because the exporter sells products in which it has an
international competitive advantage over the importer. It benefits you since you
can contain inflation by purchasing an imported product at a lower price than if
you produced it in your own country.
4
United Nations Conference on International Organization, Charter of the United Nations, United States,
1945. Art. 52.
5
Van Den Berghe Romero, Edgar. op.cit ., p. 3.
4
The exporter increases his Gross National Product and his Trade Balance; It
allows the importer to bring new machinery, new products and new technologies
to the country, which in the medium and long term helps will go to its economic
and industrial growth; In addition, exporting allows the producing country to lower
its costs due to the economy of scale due to the greater volume of production
that implies having access to other markets.6
As for the objectives previously described for the same author, these can be
developed in both developed and developing countries and these can even form
interrelationships and mutual benefit.
In the words of Édgar Van Den Berghe Romero, corporations from the most
developed countries export capital to create factories in the less developed ones,
but with a large amount of labor that, due to its very abundance, is cheaper,
creating subsidiary plants that They will export what is produced to the country
that provided the capital or to third nations; With this foreign direct investment,
jobs are created in the underdeveloped country and the cost of living in the
capitalist country is lowered.7 .
However, there are countries that hold a different position that involves believing
that reducing the imports is beneficial for the economy of your country, likewise,
contrary to what was previously said, there are positions that defend that
globalization with the reduction or elimination of tariffs generates a setback in the
industrial sector and, therefore, in the nation's economy, such aspect will be
evaluated later.
6
ibid., p. 4.
7
loc.cit.
5
Background to the creation of FTAs
FTAs would not have been possible just 27 years ago, however historical events
allow their existence and expansion today. In the historical review carried out by
the author Francisco Giraldo Isaza, the following events stand out:
8
Definition. From, What is GATT?, 2019, availability and access: https://definicion.de/gatt/ , accessed
1.7.2019.
6
4. In 1971 there was a crisis in the international monetary system and the
exchange system was no longer based on the dollar and mutual flexible
exchange rates.
5. The economic recession of the early 1970s and global inflation questioned
the Keynesian model based on the welfare state and administration;
however, thanks to Keynes's thinking in the previous period, there was
strong growth in the worldwide economy.
6. As a result of the international monetary crisis of 1971 and the Keynesian
model, the first series of world conferences were created in Davos,
Switzerland, where the richest countries met annually to decide the fate of
the world economy.
7. Subsequently, transnational companies were transformed into large
transnational consortiums, through alliances, acquisitions and mergers.
8. As the main change, we can mention current globalization, beginning with
the dissemination of new information and communication technologies in
the 1980s, particularly automation and robotics, biotechnology, etc. The
Internet and new information and transportation technologies have been
reducing space-time distances between countries, reducing costs and
interconnecting different markets, thus facilitating the internationalization
of the economy.
9. Finally, one of the determining events in the evolution of the international
economy is the collapse of socialism, materialized with the fall of the Berlin
Wall in 1989, putting an end to the cold war of the second half of the 20th
century.
10. The collapse of the communist world was a factor of utmost importance
for the new capitalist order, advances in communication and transportation
technologies, the industrialization of countries, the increase in the gap
between developed and developing countries, new dynamics of exchange
and new ways of seeing the efficiency of the economy mean that since
then the principles and values of the market begin to govern as we know
them today.
7
It is then concluded that modern economic globalization, the process of economic
opening and integration, the formation of blocks or regions of economic power
underlie and make possible the existence of FTAs today. .9
The first FTA was the Franco-British Free Trade Treaty of 1891, introducing the
most favored nation clause.10
FTAs can be distinguished and identified from three classifications that allow us
to understand the number of parties in it and the nature of the agreed obligations,
this classification is:
9
Rozas Gutiérrez, S., Corredor Velandia, C., Lombana Coy, J., Silva Guerra, H., Castellanos Ramírez,
A., González Ortíz, J., & Ortiz Velásquez, M. (2013). International business: fundamentals and strategies
(Vol. 2 edition, revised increase). Barranquilla, Col: Universidad del Norte.
10
The most-favored-nation clause provides for the automatic extension of any better treatment that will be
or has already been granted to one party to the same extent that it will be granted to all other parties in an
international trade agreement.
8
Advantages of free trade agreements for developing countries
In the theoretical foundations of FTAs, it can be found that they induce greater
efficiency, industrial growth, increased employment and income, reduced poverty
and, in general, improved quality of life for the populations of the countries.
signatory countries.
The theoretical purpose of FTAs is none other than to deepen the division of
labor between different countries so that they can take advantage of their relative
market advantages, eliminating tariffs to be able to produce more with existing
resources.
Which, focused on the object of the research, provides a context where the
elimination of tariffs in FTAs encourages competition, expands markets, deepens
the international division of labor and increases the productivity of a nation, the
latter associated with specialization. and the differences in production costs in
different countries11 .
11
Esquivel, V. (2007). THE EFFECTS GENERATED BY THE FREE TRADE AGREEMENT ON THE
ELIMINATION OF TARIFFS IN GUATEMALA. Guatemala: 2007. Guatemala: San Carlos University of
Guatemala
9
their relative advantages and competition forces greater efficiency, innovation
and adoption of technologies for the development and prosperity of nations.12 .
In the point, “The Advantages of free trade agreements for developing countries”
theoretical points of free trade agreements were developed that develop how
they lead countries to greater efficiency, productivity, growth and well-being,
however the Theory sometimes does not describe what really happens,
especially when the FTA occurs between developed and developing countries,
then experience shows that sometimes trade is certainly not free or fair.
12
Giraldo, F. (2006). Background and possible advantages and disadvantages of the Free Trade
Agreement - FTA for a country like Colombia. Colombia: Pedagogical and Technological University of
Colombia
10
In this order of ideas, sometimes trade integration or economic agreement is not
synonymous with "freedom in trade", "competition" or elimination of tariff or other
obstacles.
Since sometimes in the FTA itself there are imperfections or failures that limit full
competition and therefore freedom.
First, the market is not free if real freedom is only held by the developed country;
second, in the vast majority of cases there is no correspondence between the
signatory nations. When these situations persist (just to mention the most
important ones) compliance with the FTA theory described above is unlikely.
The failure to comply with the theory in relation to FTAs between developed
countries and developing countries occurs not due to an error in the theory itself,
but mainly due to the failure to comply with its fundamental assumptions, “Perfect
competition” and “equality of conditions and opportunities.” ”. In order to
exemplify the above, the FTA is brought up, a study carried out in Colombia in
relation to the impacts of an FTA with the US, among the disadvantages are 13 :
a) Not all goods and services are subject to free exchange, but only those
agreed upon in negotiations or that meet certain criteria or common
standards of production, quality control, design and quotas, all generally
imposed by the developed country, in this case the EU.
b) Another of the main obstacles in this FTA is the existence of monopolies
or large transnational consortia, closing the entry of Colombian merchants
to the US market.
c) The sanitary and phytosanitary measures imposed by the US restrict free
access to the market.
d) Agricultural subsidies that allow US farmers export at a price well below its
production costs, which constitutes an advantage in favor of this
developed country and against the national farmers since it prevents them
13
ibid., p. 24.
11
from taking advantage of the free trade opportunities, indicated in the
theory.
As a theoretical and synthesized conclusion, the author Edgar Van Den Berghe
R. provides the following disadvantages15 :
- Trade openness generates greater integration of the country into the world
economy, which can result in reducing the volatility of its growth.
- The market to which developing countries are subject in an FTA is a
market with greater purchasing power than that of these countries.
- Not all sectors of the economy benefit in the same way from free trade
agreements. There are undoubtedly more sensitive products that are
protected with certain trade defense mechanisms, despite the existence of
the FTA.
- There may be some social upheaval due to the worsening of poverty and
exploitation of farmers or microentrepreneurs.
14
Coordination of NGOs and Cooperatives, (2003). The Free Trade Agreement between the United
States of America and Central America and its impact on the peasant economy. Guatemala:
CONGCOOP
15
bid., p. 185.
12
Advantages and disadvantages of free trade agreements for
developing countries and Guatemala.
In Guatemala since the mid-1980s, the foreign trade policy has set three
objectives: 1) increase foreign trade; 2) diversify exported merchandise; 3) and,
diversify the destination of said exports. The purpose of these objectives is to
take advantage of the opportunities that globalization presents for the country.
In 1991, Guatemala joined the General Agreement on Trade and Tariffs –GATT-,
and in 1995 it joined the World Trade Organization –WTO-.16 .
These involve different branches, from strictly economic and financial factors to
geographical, demographic and cultural factors.
16
MINECO. (2017). Promotion and Investment Guatemala. Guatemala. Ministry of Economy Retrieved
from https://www.mineco.gob.gt/sites/default/files/Integracion%20y%20comercio%20exterior/
ied_pagina_web_10_02_17.pdf
17
ibid., p. 12.
13
To begin to evaluate the general context of these FTAs, it must be noted that
derived from certain studies, the Bank of Guatemala has established that the US.
USA It is the country's main trading partner.
For this reason and because it is a Free Trade Agreement agreed between a
developed country and several developing ones, the effects it has had on
Guatemala will be analyzed.
It must be taken into account that the FTA with the USA. USA It has been the
economic event of Central America in recent years. Discussions regarding this
treaty began since President George W. At the beginning of 2002, Bush
mentioned in a speech at the OAS in Washington DC, his country's willingness to
negotiate an FTA with Central America.18
Foreign trade figures as of October 2018 detail that exports totaled US$3,271.7
million, which represents 36.4%, while imports amounted to US$6,256.8 million,
or 38.1%.20
18
Planning and programming secretary, SEGEPLAN. (2006). Investigations on the NAFTA Free Trade
Agreement between the United States, Central America and the Dominican Republic. Guatemala: ASIES
19
Urías Gamaro. (January 14, 2019). FTA with USA USA: Most Guatemalan products enter the US
market duty-free. Guatemala. Prensa Libre Retrieved from https://www.prensalibre.com/economia/tlc-con-
ee-uu-mayoria-de-productos-guatemaltecos-entra-libre-de-impuestos-al-mercado-americana/
20
L oc.cit.
14
The Guatemalan American Chamber of Commerce maintains that foreign
investments have not had the estimated influx in Guatemala, because it is not yet
a competitive country, this derived among many factors from the lack of legal
certainty.
The sectors with the greatest investment in Guatemala and growth are clothing,
textiles and services or call centers, which have made better use of the FTA to
benefit their businesses and contribute to the economy.
It should be mentioned that these are the disadvantages observed from the point
of view of the business or industrial sector; however, there are effects of free
trade agreements that are transferred to the peasant economy:
Mainly, the fact that the United States is Guatemala's largest partner means that
a relationship of dependency exists (since Guatemala is a developing country
and the United States is not).
In the first four months of 2016, Guatemala suffered a drop in exports compared
to the first four months of 2015 of 9.1%. Such a percentage of reduction in the
trade balance shows that, years later, the country still could not compete or
increase its production to the same level as the United States21 .
A main goal of the treaties on the side of the least developed countries is the
improvement in infrastructure and production capacities to improve the country's
conditions and become the most competitive player in world trade. However,
Guatemala has not achieved this, and therefore is not in fair competition, this
being one of the main reasons why the trade balance continues to increasingly
favor the United States.
21
L oc.cit.
15
This is briefly evaluating only some of the effects of this treaty, however the
disadvantages in relation to the advantages may be even greater when
evaluating all the treaties to which Guatemala is a party.
In general, the following can be noted as some of the disadvantages that the
country faces when being part of a free trade agreement22 :
22
Jacob Sexton. (July 2018). ADVANTAGES AND DISADVANTAGES OF FTA BETWEEN THE US AND
LATIN AMERICAN COUNTRIES.. Ecuador. Línea de fuego Digital Magazine Retrieved from
https://lalineadefuego.info/2018/07/05/ventajas-y-desventajas-de-tlc-entre-los-ee-uu-y-paises-
latinoamericanos-por-jacob-sexton /
16
Conclusions
2. Although FTAs offer many commercial opportunities and benefits for the
economy, development does not come only with the market, so that
development can be achieved and the FTA can be truly evaluated, a
functional cultural, social and political environment is required, this prior or
During the application of the FTA it must be observed by the nation's
authorities.
3. In Guatemala, the DR-CAFTA FTA has had an increase in trade and has
generated great profits for the nation; however, it is stagnant due to issues
unrelated to the treaty that have to do with infrastructure, legal security,
poverty reduction, among others.
recommendations
1. The State must ensure that adequate conditions exist so that trade can
develop naturally and reciprocally.
17
2. In a liberal economic model from which FTAs emerge, State
intervention should be little or none; however, this does not reveal to
the State its responsibility to provide legal certainty through its
agencies. In such a way, it is recommended that the agencies in
charge of issuing sentences or to resolve economic conflicts follow a
jurisprudential line that cannot be changed by high-powered authorities
or by discretionary criteria that unfoundedly favor a single party to the
negotiation.
3. It is necessary to take into account small producers and the effects that
FTAs have on the lives of these people, which is why it is
recommended that the FTA discussions be highly publicized and that
all social groups that these treaties may harm be present. or benefit
directly.
References:
Bibliographic references:
Van Den Berghe Romero, Edgar, (2002). Free trade agreements: challenges and
opportunities , Mexico, Ecoe Ediciones,
Rozas Gutiérrez, S., Corredor Velandia, C., Lombana Coy, J., Silva Guerra, H.,
Castellanos Ramírez, A., González Ortíz, J., & Ortiz Velásquez, M. (2013). International
18
business: fundamentals and strategies (Vol. 2 edition, revised increase). Barranquilla,
Col: Universidad del Norte.
Giraldo, F. (2006). Background and possible advantages and disadvantages of the Free
Trade Agreement - FTA for a country like Colombia. Colombia: Pedagogical and
Technological University of Colombia
Coordination of NGOs and Cooperatives, (2003). The Free Trade Agreement between
the United States of America and Central America and its impact on the peasant
economy. Guatemala: CONGCOOP
Normative references:
Electronic Receipts:
19
Jacob Sexton. (July 2018). ADVANTAGES AND DISADVANTAGES OF FTA
BETWEEN THE US AND LATIN AMERICAN COUNTRIES. Ecuador. Línea de fuego
Digital Magazine Retrieved from https://lalineadefuego.info/2018/07/05/ventajas-y-
desventajas-de-tlc-entre-los-ee-uu-y-paises-latinoamericanos-por-jacob-sexton /
Urías Gamaro. (January 14, 2019). FTA with USA USA: Most Guatemalan products
enter the US market duty-free. Guatemala. Prensa Libre Retrieved from
https://www.prensalibre.com/economia/tlc-con-ee-uu-mayoria-de-productos-
guatemaltecos-entra-libre-de-impuestos-al-mercado-americana/
Others:
20
ANNEXES:
21