(Siddiqui, 2015), since 1950s leads to engine of economic growth and overall development of the country especially developing countries which accounts for one third of world trade, due to highly protected and higher trade barriers. The result of trade liberalization gains comparative advantage under the patronage of World Trade
Organization (WTO), the backbone of international trading system, which had been established after eight rounds of multilateral trade liberalization agreements (Uruguay
Round accomplished in 1994). The countries should focus on what they do their best by capitalizing resources – land, labor, human capital and physical capital they possess. …show more content…
Therefore, French should produce and export wine because wine has comparative advantage. However, Ricardo’s model has limitations that countries don’t fully specialize in commodities in which they have comparative advantages and developing countries are still poor although specialization in export of commodities.
The weaknesses of classical trade theories led to development of Heckscher (1919)-Ohlin
(1933) Theory (factor endowments theory) depending on sources of comparative advantage for the production of different products between countries. Every country emphasizes different factors of production including land, labor, capital and entrepreneurship in order to make differences in production of goods (Grimwade, 2000).
For instance, since China possesses low paid labors, China can take advantage of producing labor-intensive goods over trading countries. Therefore, differences in factor endowments – not productivity determine patterns of trade. Nonetheless, Subasat (2003) argues that according to Olin, relative factor price and relative factor endowments are directly related i.e. demand is less significant than supply. However, if there is customers’ demand, capital-abundant countries take advantage in terms of exporting …show more content…
However, after 2nd
World War, GATT was eager to form new bodies called International Trade Organization
(ITO), World Bank and International Monetary Fund (IMF) for the purpose of immediate tariff reduction (Das, 1998). On January 1995, successor of GATT, World Trade
Organization was established for the purpose of promoting free flow of trade in manufactured commodities as well as in service, agricultural and capital sectors to reduce subsidies as there was high distortion in trading agricultural products. WTO’s agreements are still controlled by GATT without changing basic principles. Nevertheless, some countries like Japan, EU and US don’t like liberalization in agriculture although OECD stated that free trade created US$200 billion annually due to high productivity. For example, since 25% of Japanese populations are working in agricultural industry, the employees were unemployed if multinational Organizations enter into agricultural industry with the help of technology. Therefore, it is important to protect local farmers by negotiations under Uruguay Round.
Commercial polices between countries, counterparts to the monetary field of IMF