Readers Question: Why doesn’t WTO make into law that all manufactured goods should either be assembled or made in the continent where its been sold? There is so many reason why this should be put in place in our globalised world
I don’t agree. The benefits of a globalised world are that we can benefit from goods and services produced in many different continents.
If Japan is relatively better at producing cars, it makes sense for Latin American, Asian and African countries to import cars and concentrate on producing goods where they have a comparative advantage.
Would it help Africa to insist they only bought cars manufactured in Africa?
No, it wouldn’t help because, at the moment, they don’t have a developed car industry. It would take a long time, and cost a lot of money in investment to start producing cars. African nations can’t afford to devote a high percentage of GDP to developing a car industry, when they would gain more benefit from investing these scarce resources into education, infrastructure and health care.
If you made a law that only African cars could be sold in Africa, you would probably see a large fall in the quantity of cars bought and so many Africans who could have bought an imported car are now no longer able to drive a car. This would have an adverse effect on African economies.
Would it help the UK to be unable to import clothes from Asia?
If the UK had to produce its own clothes, it would have to restart its own textile industries. These labour intensive industries would take workers away from relatively more productive industries in the service sector. Because of higher labour costs in the UK, it would also lead to more expensive clothes, and lower discretionary income for consumers. Because we would spend more on domestically produced clothes, other UK industries would suffer from the decline in spending.
If Asian countries like Pakistan, India, China are unable to export clothes to the West, these textile industries would effectively close down. This is because many Asian clothing factories are specifically built for export markets. If factories closed down it would lead to unemployment, falling wages and lower GDP.
Economies of scale
Another problem with discouraging international trade is that we would see lower economies of scale. If each country / continent had to produce its own aircraft, we would need more smaller firms. Therefore, we would get higher average costs and less efficiency. Global production enables significant gains from economies of scale – leading to lower prices.
Are there any arguments to encourage manufacturing in developing economies?
If we take a less extreme view, we could say there are good reasons to consider policies which help promote manufacturing industries in developing economies. For example, many African countries have a comparative advantage in primary products. But, this can limit long-term development. There is the infant industry argument which makes a good case for allowing developing countries some tariff protection to encourage diversification. But, this is different to a complete ban on importing goods from other continents.
Also, it should be remembered the WTO doesn’t have the authority to implement such a law. It is set up to help resolve trade disputes not to implement law prohibiting trade.