Free-Trade Policy and Local Industries [Archives:1998/25/Business & Economy]
The free-trade policy universally represented in current times by the World Trade Organization agreements which advocate vehemently the lifting of trade barriers between all countries, is based on the theory that all countries can ultimately benefit from their respective comparative advantages in world trade.
The free-trade policy is not a new theory in economics. Efforts were made in 17th and 18th century Europe to liberalize their economies from the interference and control of governments, nobles and the church in order to achieve sustainable economic growth.
The free-trade policy not only calls for promoting international trade, but also for lifting all kinds of protection on infant local industries in the developing countries, whether in the form of tariff or subsidy protection, which causes serious damage to those infant industries.
In the Republic of Yemen the few import-dependant light industries that were established in the 1970s and 1980s – primarily producing fruit juice, pasteurized milk, biscuits and cigarettes – have in recent years been badly hit by the smuggling of cheaper imports and by the open-door policy which is gradually being introduced. This has led to visible profit loss and thousands of job redundancies.
The free-trade theory hypothetically suggests that imports of high quality goods should stimulate local producers to face the competition by inventing or adopting better production methods to improve the final product and minimize costs, and thus eventually improve and up-grade local products.
In reality, this country’s manufacturing facilities involve costly imported technology and cannot be modified by local expertise due to the absence of essential technology. This means that local industries are unable to face foreign competition, in the short term, at least until they can develop their own quality control and local expertise.
Therefore, free trade in reality is only beneficial to countries with dynamic and flexible economies and skilled labor which can adopt production lines and administrative and technological strategies to become more cost effective with improved quality.
A given industry can only become dynamic, thriving and can truly be called a national industry if it becomes part of an integrated economy and society in a country which possesses the potential to exploit all of its human and natural resources. To help achieve this, there must be political stability, security, general liberties, equal opportunities, an independant judicial and justice system and a vigorous education system. The whole economy must be oriented to serve that goal.
Unfortunately, much of the efforts and resources in the Third World, as it is in the Republic of Yemen, are dissipated in finding that pre-conditional harmony and organization. Local industries thus, in a free-trade situation, lack the ingredients for self-viability unless they are given state protection and unless smuggling is eliminated.
Permanent and overall protection of infant industries is not suggested. Instead a partial tariff protection should be given to the locally added value inputs of the product such as labor or local raw materials. This is hoped to act as a strong incentive for local industries to use more local inputs, within a competitive local market.
The protection should only be limited to added values while imported inputs should remain free of protection with a view of encouraging industries to seek more protection through using local raw materials or labor intensive industries.