Bilateral trade agreements can also create political and economic ties between the parties, which in turn provide more stability" (Rodrguez). However, it provides loopholes wherein powerful nations can exploit the agreements to the disadvantage of the developing countries.
One of the opposition to the free trade, such as the bilateral trade agreements is the "infant industry argument" (Mankiw). It is based on the belief that the industries of the developing nations might not be well equipped to compete against the giants of the more powerful nations. This then will lead to the death of the local industry. Bilateral trade agreements simply kill the local industries who have not exhibited economies of scale. In economics terms, the failure to achieve economies of scale on the part of the local industries, because they are relatively new will result to a less efficient production compared to those who are old in the industry and this will be manifested in the relatively high prices of the former (Robert S. Pindyck).
This argument is validated by the study of Rodriguez. According to him trade agreements between nations with large economic level discrepancy can actually hurt the weakest party (Rodrguez). ...Show more