Issue 5, October 2008
|International Trade Policy|
Trade policies in today’s “flat world” (Thomas Friedman’s famous analogy to the supposed ‘evening’ effects of globalization) are an issue of utmost concern to developing countries because these policies dictate the terms on which LDCs will be integrated into the global economy. In fact, the development debate is often framed as “trade versus aid,” suggesting that participation in global markets is sufficient for LDCs to begin to climb the development ladder and address poverty among their citizens. In reality, trade is just one more tool for development and is closely related to the other instruments discussed. Theoretically, aid, combined with in-country economic and governance reforms, should create the conditions for LDCs to take advantage of globalization for growth. However, LDCs’ preparations for global competition are only one part of the equation; international trade policy is what they inevitably encounter when they enter the market.
What Kinds of Policies Are In the Marketplace?
International trade policy consists of bilateral and multilateral arrangements between countries and dictates the terms of commerce between them. As Jeff Faux has said, “the precise content of a market’s rules has major consequences for who gets to be rich and who gets to be poor.” Free trade policies open up markets by removing barriers to goods coming in and out of countries. In a free trade scenario, the market itself determines how the global economy functions by promoting the concept of “comparative advantage.” Comparative advantage describes a system by which countries prosper by doing only what they do best, or specifically, what they do most efficiently and profitably using their own distinctive mix of labor, resources, and expertise. What they cannot produce efficiently and competitively for the global marketplace, the market dictates they buy from other countries. Specialization is paramount in an era of globalization; the market does the sorting.
Generally, LDCs have a comparative advantage in labor-intensive, low-skilled activities, such as agriculture and light industry. In a free market, LDCs’ corn, sugar, and cotton is cheaper to grow, to pick, and to pack because of lower land values, and a larger, lower-priced labor pool that will engage in such activities. Easily manufactured goods such as textiles capitalize on the same features of LDC economies. Developed nations, on the other hand, have comparative advantage in producing technology-intensive goods and services. In a free market, they should be abandoning agriculture and light industry because their production costs are much higher for these products than in LDCs. Developed countries have skilled, educated workers concentrated in urban areas where innovation and investment become agglomerated and increase in value. In theory, they should be producing high technology goods and engaging in the delivery of services that capitalize on their expertise, such as banking, accounting, engineering, entertainment, and biotechnology. In sum, free markets allow the world to make purchasing and production decisions (imports and exports) based on competitive pricing and expertise. It is all about efficiency.
Protectionist trade policy distorts the free market sorting effect. Protectionism refers to barriers that are erected, impacting how goods move between countries. These can be in the form of tariffs (taxes on goods imported from other countries that artificially raise the price of those goods in relation to domestically-produced goods of the same kind). They can also be in the form of subsidies (grants paid to domestic producers of a good so that those producers can charge less for the product and artificially make it competitively priced with goods of the same kind produced in other countries). Other protectionist measures include tax breaks for domestic producers, labeling requirements and standards for imported goods, and import quotas. The rationale is to skew the market price of goods for a country’s advantage. The result is that inefficient industries are propped up and their goods protected from competition from abroad, where those goods may be more efficiently and cheaply produced. The natural ecosystem of supply and demand is disrupted, and countries are not limited to doing only what they do best.
Whether protectionism is good or bad depends on where one sits. Economic transitions generally follow a pattern. As a country’s economy becomes more developed (its workforce more educated and its technology more expansive), it loses its comparative advantage in basic labor-intensive agriculture and industry and has two choices: it can invest in moving up the economic ladder to produce technology-intensive goods and services where it has the natural comparative advantage in the global marketplace; or it can invest in protecting the more rudimentary, traditional industries that often comprised the basis of the economy initially. To put it another way, it can invest in the retraining of workers and/or the provision of income support to workers to prepare them to move into more advanced industry and services, or it can enact trade terms and domestic legislation that keep its otherwise endangered industries alive in the global market.
Free market advocates would advise that developed countries start buying their agricultural products and basic manufactured goods from those countries that can produce them more cheaply (imports) and turn their attention to producing the more sophisticated goods and services that the rest of the world needs from them (exports). Yet, transitions such as these are incredibly difficult and often require short-term hardship that most politicians seek to avoid. It is often more expedient to do some of both – protect some non-competitive industries while growing more competitive ones.
The problem is, in order for poor countries to get onto that first rung of the economic ladder (agriculture and light industry), the more advanced economies have to get out of the way and move up the ladder. If not, there is overcrowding on those first rungs, a result that free trade advocates see as a lose-lose proposition for both types of economies. The LDCs can’t compete with protected goods from developed countries, and their economies falter; the developed countries spend tax dollars protecting industries that they should be abandoning in favor of more lucrative sectors. A complicating factor is that developed countries also face competition for their technology-intensive goods from other developed and some middle-income countries, and LDCs face competition from other developing and middle-income countries for their agricultural and manufactured goods. The result is a complex maze of incentives at play in the design of trade policy, and most countries end up advocating for some free trade and some protectionism, depending on the goods and trading partners in question.
Decisions regarding tariffs, subsidies, customs duties, import quotas, and the like are expressed in these trade policies – either between individual countries, regionally, or in international bodies such as the World Trade Organization (WTO).
The World Trade Organization (WTO)
The World Trade Organization (WTO) has its roots in the General Agreement on Tariffs and Trade (GATT), and was officially created in 1995 as an umbrella institution to negotiate and enforce the increasing number of international trade agreements that developed after WWII. Between 1980 and 2005, the world saw an exponential growth in global trade (a four-fold increase), largely facilitated by a move away from protectionism and toward free trade. More nations trading more goods meant an explosion of bilateral and multilateral agreements regarding the terms of this commerce. Jagdish Bhagwati of Columbia University has described these numerous and often conflicting political agreements as the “spaghetti bowl” approach to international trade (in reference to the lack of order in a bowl of spaghetti) – at any given time, nations are now negotiating different arrangements as individual entities, and as members of regional blocs. Geopolitical tensions can be exacerbated; large wealthy nations generally dominate the process. Quid pro quo or tit-for-tat deals are struck in layer upon layer; the sheer complexity and diffusion of the negotiations has disadvantaged poorer nations who were often subjected to what Paul Blustein, in his article “Trade Pacts Run Amok,” has called “the law of the jungle.” The WTO was created to simplify the process, and to theoretically make it more inclusive, by developing a formal, multilateral forum for trade negotiations, along with adjudication capacity in the event that rules were breached.
However, as many experts have pointed out, the WTO does not do what many think it does – it does not and was not designed to develop and oversee trade policy as an authoritative institution analogous to the United Nations. It is merely a forum, a sophisticated marketplace where nations come together to try to reach consensus or to address grievances. It does not have a staff with any real authority to make or influence decisions or dictate outcomes. Rather it provides an aggregating function, providing a place where countries can receive administrative and technical assistance as they continue to barter about bilateral trade agreements and multilateral trade policy. As for its ability to address fundamental imbalances and inequalities in international trade, Frank Alcock has cautioned people to remember that the WTO “doesn’t impose policies upon governments as much as it articulates their preferences in the form of rules to which they commit themselves,” and that the convictions of those governments “rarely extend very far beyond their perceived self-interests.” If anything, the WTO just provides a place for the “law of the jungle” to play out. The way this plays out, however, often favors the elites of the global economy (from developed countries and multinational corporations) who tend to wield the most leverage and be the most seasoned at bartering and advancing their own interests.
Partly in response to this criticism, the WTO, after coming under fire during its 1999 Seattle negotiations for failing to pursue some manner of trade equality for LDCs, launched the Doha Development Round of trade negotiations in 2001 (commonly referred to as the Doha Round).
The Doha Round
The Doha Round is ongoing and consists of different rounds of negotiations by a revolving roster of trade negotiators from different subsets of the WTO’s 153-nation membership. It seeks agreement on key issues of concern to developing nations by 2011; yet, most have long feared it will not live up to this promise. In fact, talks collapsed this summer after seven years of contentious negotiations, dealing a serious blow to the credibility of the WTO and to the aspirations of LDCs who had once thought Doha would facilitate their positive integration into world markets. It is helpful to consider what Doha set out to do, before turning to what has occurred over the last seven years.
LDCs generally feel they are laboring under a triple whammy from the international community in the realm of trade policy. At the risk of oversimplification, their concerns are as follows: (1) To a significant extent, LDCs are excluded from the markets of wealthy countries by tariffs, subsidies, import quotas, and other measures that prevent their agricultural and basic manufacturing goods from reaching consumers in those wealthy countries in the form of imports; (2) The artificially low prices of goods from protected industries in wealthy countries make exports of those goods to other developed and developing countries and even to LDCs very cheap, crowding out competing products from LDCs, which are often products that they depend on for domestic and export income; (3) The protection of intellectual property in wealthy nations impedes the transfer of technology and innovation to the developing world, especially in the arena of pharmaceuticals.
Tariffs and Import Quotas
Wealthy countries’ tariffs on imported goods are often higher on those originating in developing countries than on those from other wealthy countries. By some estimates, US tariffs on LDCs are three to four times higher than those imposed on developed nations. The poorer the LDC, the more the disparity; US tariffs on the poorest of the LDCs can be ten times higher than those imposed on OECD countries.
For example, it is often more expensive for the American consumer to buy African agricultural goods than to buy European produce, even though the actual cost of the African produce is lower when it leaves the continent. The price is increased by disparate import taxes or tariffs when it enters the US, decreasing its competitiveness in American grocery stores, and thus making it not worth growing or shipping from Africa. Just as importantly, tariffs on African goods tend to be determined on an escalating scale that increases the tariff or tax along with the amount of processing involved in producing the good. This makes raw African cotton cheaper to import than African clothes and discourages the development of garment and textile manufacturing (which is more lucrative than raw cotton) in Africa itself. A similar situation exists between Europe and Africa with respect to cocoa and chocolate. The EU places a 1% tariff on raw African cocoa, but a 30% tariff on processed cocoa in the form of chocolate, discouraging the processing of cocoa (again, where the money is made) in Africa. Escalating tariffs essentially recreate a mercantilistic arrangement similar to that which existed in colonial times – raw materials shipped out of Africa and most processing (the adding of value) done abroad.
That these exorbitant tariffs are collected by wealthy countries from LDCs to whom they, in turn, must give aid is a point not lost on the development community. Steven Radelet from Foreign Policy Magazine has shown that US generosity toward economies destroyed by the Asian Tsunami in the amount of $350 million was dwarfed by the $1.8 billion in duties collected on imports from Indonesia, Sri Lanka, Thailand, and India in 2004.
Many wealthy nations further disadvantage LCDs' agricultural goods by providing subsidies or grants to domestic farmers to keep the price of otherwise expensive and inefficiently produced domestic farm products artificially low. This is a particularly contentious issue between Africa and the United States (with respect to cotton and corn) and between Africa and the EU (with respect to livestock prices). US cotton subsidies are seen as being particularly distorting to world markets and destructive to African farmers, and numerous experts mention them as a symbol of hypocrisy and bad faith dealing in free trade among developed countries.
Joseph Stiglitz estimates that the US spends $3.4 billion to subsidize 25,000 US cotton farmers, resulting in higher production and lower prices. These subsidies generally do not go to the small family farmer, whose image is often used to tug at the heartstrings of the American public (who pay for the subsidies in the form of taxes). Instead, they mostly go to large industrial farms that account for just a small fraction of US Gross Domestic Product. Eliminating cotton production from the US economy would, in this view, not only help the American taxpayer and consumer, but also have little to no impact on the livelihood of most Americans. By contrast, there are 10 million cotton farmers in Sub-Saharan Africa (most of them in LDCs), and US cotton subsidies essentially wipe them out in the global market. African cotton, moreover, is usually grown in small family farms that are not only more efficient and less expensive to run than American agribusiness, but also provide jobs for millions of people, many of them women who can care for their families while building self-sufficiency. Kate Eshelby recently did a comparison of the cotton markets in the US and Burkina Faso, calling cotton a “moral issue.” She has shown that American subsidies to a small group of cotton farmers in the US is more than the entire GDP of Burkina Faso, a country for whom cotton is the primary export and lifeblood. Seen another way, she points out that the US gave Burkina Faso $10 million in aid in 2003, but that the small African country lost $13.7 million in cotton exports attributed to US subsidies.
The problem goes beyond cotton in the US. The Center for Global Development reports that in 2005, the EU 15 (OECD European members) spent $179.28 per cow subsidizing European cattle, compared with $16.11 in aid per person in the developing world (the majority of whom live on less than $2 a day). Overall, the American Political Science Association’s Task Force Report on Difference, Inequality, and Developing Societies estimates that agricultural subsidies of rich countries combined totaled $280 billion in 2004, exceeding the GDP of all of Sub-Saharan Africa combined, and six times the foreign aid these countries provided. Subsidies cost the average OECD citizen around $1000/year, and in the US, 87% of all agricultural subsidies go to only 20% of America’s farmers.
In addition to the difficulty that African farmers experience in gaining access to US domestic markets, the US, like many developed nations, also engages in what is known as “dumping.” Dumping means exporting excess subsidized agricultural and/or industrial production at rock-bottom prices; in other words, sending the excess cotton, corn, and livestock products that developed country farmers are paid to grow, to LDCs. While on the surface, goods for low prices would seem to be a good thing for people living in poverty, it also means that domestic producers in LDCs cannot compete with wealthier countries’ products even in their own domestic markets. There is little incentive to grow more food or develop local industries in LDCs if exports from developed countries are cheaper for in-country consumers. LDCs have little leverage in restricting such exports from the OECD and others, yet wealthy countries often enact import quotas on goods coming from LDCs into their own countries.
Intellectual Property/Patent Protection
LDCs are also generally hurt by what are known as TRIPs (trade regime for intellectual property rights), whereby developed countries restrict the export of technology to LDCs in the form of patent protection. This phenomenon is most well-known in the area of pharmaceutical drugs (usually for HIV/AIDS, but also for Malaria) that are prohibitively priced for export to LDCs because drug company patents on the medicines disallow the production or sale of lower-priced generic equivalents. While these patent protections make eminent sense in protecting and recouping the Research and Development (R & D) investments of wealthy country pharmaceutical companies (and thus protecting the incentive to innovate), they are literally lethal to many in LDCs. Additionally, because the market in LDCs for big pharmaceutical drugs is so small (because the drugs are too expensive), there is little incentive for pharmaceutical companies to put that R & D into producing innovations that would address tropical and other diseases known mainly in the developing world. Critics here point to the fact that modern medicine has produced Viagra, but has yet to cure Malaria. There has been movement on this front in recent years with OECD and drug companies donating or subsidizing patented drugs for LDCs. Furthermore, some other developing nations such as India and China have seized the market opportunity in this realm, producing generic drugs (sometimes in violation of TRIPs) for sale in LDCs.
A Flat World?
Generally, the position of LDCs going into Doha is that the playing field is far from flat; in fact, it is leveled against them in an era of globalization. Their experience in the WTO has often been that even when tariffs and subsidies have been declared illegal, new barriers are erected to get around those rulings. For example, legal import quotas often serve the same function as an illegal tariff. The WTO has, in the past, ruled that the majority of US cotton subsidies are illegal, and promises have been made to repeal these and other subsidies by developed nations, but to little avail. The issue becomes complicated as neither the US nor the EU wants to drop protectionist policies first, as this would give their fellow developed nation competitors an edge in the LDC market. The question of protectionism is, as described above, often presented as a moral one. When the full effects of protectionist trade on LDCs are calculated, most agree that their impact is crippling on the societies that are already least able to provide social safety nets for farmers and workers when their businesses are unable to compete in the global marketplace. As Giles Bolton has pointed out, the effect is magnified when these cycles force motivated businessmen and farmers to migrate from the developing to the developed world, accelerating the debilitating brain and talent drain already in progress.
Why This Protectionism?
Why would developed countries, who give an enormous amount of aid to LDCs, be so obstructive in their trade policies toward the promotion of self-sufficiency in impoverished countries? The reasons once again resemble a cycle: LDCs don’t have much consumption power so they don’t have much clout in the international trading system; consequently, their interests don’t rank highly on the agendas of wealthier nations. This lack of influence results in a disadvantaged or marginalized position in the marketplace, which only reinforces their lack of consumption power or poverty. One might question, however, if LDCs do not represent a significant portion of global trade to start with, why would developed countries see them as a threat and go to the trouble of erecting protectionist barriers against them?
The answers to this range from political pressure at home (American farm and pharmaceutical lobbyists) to what Stephen Chan has called the power of precedent-setting. If the OECD and others were to drop their barriers against the LDCs, they would also be under pressure to drop them against developing nations who might one day represent a threat to the status quo. Essentially, in the “law of the jungle,” the LDCs get caught up in competition between wealthy nations and the BRICs, and among wealthy nations themselves. No one wants to surrender any advantage in a quickly changing marketplace because one never knows which country could use a concession as a way to improve its own position. In this view the LDCs are simply caught in the net as developed and developing nations that have a greater stake in the global marketplace protect their legitimate interests.
Will Doha Help?
Most experts are guarded in their optimism about the Doha Round making any significant improvement in the bargaining position of the LDCs. First of all, its agenda is incredibly broad, in terms of both actual negotiated outcomes and psychological aspirations. As Louise Blouin McBain summarized in an article for World Policy Review, this round is charged with no less than creating a clearly articulated, socially just, set of multilateral rules to govern global trade. It seeks to bring the magic of markets to the world’s most impoverished and low-capacity economies, instill solidarity and goodwill between developed and developing nations alike, and “restore the dignity” of the LDCs. It attempts to address the fundamental and historic issues of power, capacity, incentives, and inequality that have existed since trade began thousands of years ago. The sheer complexity of the task makes the prospect of success on any of the distinct items of the agenda unlikely.
Second, most experts believe that in addition to its unrealistic objectives, the timing of the negotiations has become extraordinarily challenging to the past few years. With a possible global recession looming, most countries are loathe to make concessions; even if they wanted to make concessions, they would likely be hamstrung by the anxiety of their constituents. As EU Globalization expert Zaki Laidi has said, “the benefits of free trade are rarely immediate and visible, whereas their costs are viscerally and instantly felt.” Powerful lobbies already exist to promote protectionism in developed countries. Such protectionists are likely to find increasing support among the everyday Americans, Europeans, and Japanese who fear a retracting global economy, and among politicians eager to please special interest groups in election years. The passage of the 2008 US Farm Bill, with most protectionist measures intact and $289 billion in new farm spending (including $20 billion in new subsidies for farmers), is evidence of this.
Third, even if the negotiating environment were better, the majority of experts see the Doha process as flawed. Over the years, the membership of the WTO has expanded dramatically, with blocs forming among different countries, preventing both consensus and a one country, one vote system on major initiatives. As Zaki Laidi has written, trade negotiations today, as in the past, follow geopolitical dynamics. The WTO is now made up of three main blocs – the OECD community led by the US and EU; the G-20 group of developing countries led by Brazil and India; and the G-90 made up primarily of LDCs. The G-20 are often in competition with and in opposition to the G-90 and the OECD. The OECD often fights amongst itself, as does the G-90. Many groups are often against the US, whom they distrust because of the side deals American negotiators have been known to make with strategic allies. The US is also often seen as negotiating in bad faith, reneging on WTO deals, and making agreements in opposition to WTO policies, such as is the case with agricultural subsidies. Moreover, unlike many WTO member nations, responsibility for trade policy in the US is split between Congress and the Executive Branch, and the two branches often differ and amend each other’s commitments.
The process behind Doha is seen as cumbersome, political, and inordinately slow. It is also perceived as being somewhat unfair, despite the one country, one vote rule. Who sits at the table at various times is an issue of great consternation. Not every country is included in all rounds of Doha, and there is the sense among the G-90 that they are being excluded from the most important discussions (most agree with this, pointing to the phenomenon of “Green Room” sessions where only the most powerful players are present). Recent rounds have seen LDCs walk out of negotiations when they felt their representation was inadequate or was confounded with G-20 or Chinese interests. Moreover, as Stiglitz and Collier have both noted, when LDCs are included, the technical nature and breadth of the negotiations is a burden on them and they are disadvantaged as compared to more seasoned and expert negotiators who also enjoy more generous travel budgets and connections. As in any business transaction or negotiation, much takes place behind the scenes, and frequently, LDCs are unable to be there.
Extreme views exist on either end of the political spectrum in regard to Doha. Some believe that LDCs have been tricked into participating in a process that cannot possibly meet their needs, that they come to the table with little to bargain with, and that the system is somewhat rigged against them. On the other extreme end are people who believe that aid agencies have co-opted LDCs to be spoilers at Doha out of a fear of losing their place in the development industry if trade should in fact succeed in promoting economic growth among their client states.
Doha talks broke down in late July 2008 upon the failure of emerging economies such as China and India to reach compromises with the United States and others over protection for farmers in developing countries. The US and other OECD nations generally stood firm in their opposition to new counter-subsidies that developing nations sought to introduce to protect their own agricultural sectors from competition from developed nations. This opposition was not surprising, but what was interesting to many was the new power exhibited by India and China in standing up to the US and others on this issue. The fact that they were willing to walk away from the talks, rather than accept developed world trade terms, suggests that they believe they can do better elsewhere, in regional and bilateral agreements, perhaps spelling the demise of multilateral trade negotiations in general. Many experts see the rise of the BRICs and their divergence from OECD and LDC interests as the primary challenge facing the WTO going forward. In the talks, the losers were ultimately the LDCs, who walked away with little to show for seven years of negotiations.
Since Doha was launched in 2001, The Economist reports that over 100 bilateral and regional deals have been successfully negotiated, lowering protectionist barriers on some WTO members and not on others. These agreements will stand, despite the collapse of talks on multilateral issues. While lucrative for some blocs, such as those in Southeast Asia (the Asian Free Trade Agreement or AFTA), these deals actually undermine the fundamental principle of the WTO, which is that concessions offered to one member must also be offered to all members; the deals also unevenly address the concerns LDCs brought to Doha. However, a joint study conducted by the Inter-American Bank, the World Bank, and the London School of Economics shows that all may not be lost. They found that over time, preferential cuts in tariffs reached bilaterally or regionally often spread to previously excluded members. Citing the “juggernaut effect,” The Economist reports that many experts see free trade as a snowball effect – small dents in protectionism achieved through preferential trade agreements have macro and micro economic effects that ultimately gain momentum and lead to the eradication of trade barriers more generally.
Is It Even Free Trade that LDCs Seek?
How do these bilateral and regional preferential trade deals impact LDCs? An interesting point made by many experts is that if the WTO really exists to promote free trade, then this is not where the LDCs should be looking for relief from their predicament. They believe LDCs don’t need free trade or the abolition of protectionism as much as they need what Collier has called “selectively-free trade,” Stiglitz calls “asymmetrical” protectionism, and Peter Hardstaff calls “trade justice.” In this view, what they really need is protection from the BRICs in developed country markets. The success of China and India looms large, and many believe this is as much a problem for LDCs as are OECD tariffs and subsidies. What LDCs really need is to be able to grow their domestic industries to produce exactly what China and India are already producing for wealthy and developing nations alike, and to export the produce that Brazil is already exporting. They need barriers dropped by developed nations against them, but erected against these emerging economies, so that they can catch up. As Carolyn O’Hara of Foreign Policy has pointed out, they also need to erect these same barriers themselves to protect their nascent domestic industries from cheap rice, textiles, and electronics from China and from generic drugs and computer software from India – all while not unduly burdening their own impoverished populations whose lives could be improved by access to these very imports. Getting this done while advocating for free trade is difficult. Getting this done in the WTO may be impossible.
The US African Growth and Opportunity Act is a mechanism that exists to provide select trade preferences to certain African nations. Greg Mills has written that bilateral trade between the US and these nations increased 140% since 2001, and that $44.2 billion of a total of $59.2 billion in US-African trade was conducted under AGOA. Some experts note, however, that a portion of this trade follows mercantilistic patterns, and a significant portion of it is in oil, which does not tend to confer general development benefits on poor countries. AGOA is typically seen as the trade equivalent to the aid innovation Millennium Challenge Accounts – both are promising and utilize lessons learned in the past, but it is too soon to tell if they will create sustainable growth, or if the US will even continue to fund them in the future. The European equivalent of AGOA is the Everything But Arms initiative that is similarly well-intentioned in its free trade concessions to LDCs, but imperfect in its implementation.
Many experts have noted that the problem with many of these bilateral, selective free trade arrangements is that they are often offered primarily to those countries least able to take good advantage of them. There are those who believe it makes sense to dispense trade benefits, like aid, to those countries that can make the most use of them to stimulate their own growth and that of their neighbors. Several experts note that one-third of Africa’s people, and a full half of all African economic activity, is contained in just four countries: South Africa (not an LDC), the Democratic Republic of Congo, Nigeria, and Kenya. In this view, bilateral preferential trade agreements, not Doha per se, may have the most potential in promoting African development by starting with the largest nations.
In addition, many believe that LDCs, while erecting some protections against more developed nations’ goods, need to set up preferential deals and remove barriers among themselves. Many development experts decry the abysmal state of economic (and security) cooperation among Sub-Saharan African nations. With a significant portion of the continent land-locked, relations with neighbors, unburdened by multiple layers of customs duties, are key. Goods need to be able to move freely on jointly-maintained transportation links between African countries so that LDCs can begin to meet each others’ needs, as well as transport products to ports. The growing success of such regional cooperation in Southeast Asia and Europe is often cited as a case in point. On the other hand, some believe this is not as relevant for LDCs in Africa, noting that the success of the European Union and ASEAN is built on the diversity of the economies involved, linking the weaker with the stronger. Collier and others believe that more regional cooperation where only poor nations exist only creates a poor region and is a distraction when connections with the developing and developed world are the ticket to prosperity.
The Free Trade Gospel Reconsidered?
Consider these statistics. According to the World Bank Commission on Growth and Development, cited by the OECD Secretary-General in a recent article, globalization has, over the last 60 years, brought “three billion people the fruits of growth.” The OECD further calculates that reducing “trade transaction costs” (increasing free trade) by 1% would generate “welfare gains” of $43 billion dollars, of which a “65% share would go to developing countries.” The 2003 Copenhagen Consensus estimated the world economy would gain $254 billion (in 1995 dollars) if all protectionism were abolished. Expert Moises Naim’s review of economists’ predictions of potential Doha gains shows that even the “most pessimistic projections” of returns on trade liberalization would yield between “$50 billion and several hundred billion” in increased revenues. The World Bank estimates that as many as 32 million people could be brought out of extreme poverty and a further 64 million out of $2/day poverty by 2015 if Doha’s objectives are met.
Most of the decrease in global poverty over the past three decades has been due to the economic rise of China and, to a lesser extent, India, both of whose growth has been predicated on an increased share of global trade. Moreover, most experts believe that free trade reduces conflict between nations (a theory known as the supply-chain theory of peace promotion where countries that share in the process of extracting and transforming a raw material into a marketable good via commercial agreements rarely go to war with each other). As we have seen, the expenses of war and the benefits of peace can both be calculated in terms of economic growth. When Doha was launched, the US was quick to emphasize the potential anti-terror effects of free trade as well.
Yet, many believe that, in the words of Joseph Stiglitz, author of the famous article “Globalism’s Discontents,” trade liberalization is “far more complicated than people realize.” Like capitalism in general, it inherently confers benefits unequally, depending on a variety of internal and external factors. Nations come to trade negotiations with their own interests firmly in view and tend to pursue agreements on free and preferential trade in line with those interests. Those that are benefiting from the system generally seek to consolidate their gains – their own domestic constituencies demand that they do so. Thus, trade charity is perhaps an oxymoron; many believe Doha was doomed from the beginning for this very reason.
In addition, Nancy Birdsall of the Center for Global Development has written that a country’s “poverty profile” matters a great deal; details are extraordinarily important with respect to free trade. Few generalizations can be made regarding the diverse range of LDC economies and their ability to take advantage of any kind of trade deal, free or otherwise. She also notes that OECD countries, China, and India all grew their economies under measures of protectionism until their capacity for export-driven trade was developed. It has also been noted by numerous experts that neither China’s nor India’s subsequent export-driven growth has been via totally free markets. Both economies have employed state-sponsored or state-protected market strategies to some degree; both are determined to continue to do so today, as the breakdown of Doha suggests.
Birdsall and others uses the example of Mexico as an example of the limits of free trade as a magic bullet for development. If free trade were sufficient for growth, Mexico should be a prosperous country. Located on a 2000-mile border with the world’s biggest market, to which it enjoys good access by virtue of the North American Free Trade Agreement (NAFTA), it should be thriving. But it is not, as a result of a myriad of other factors that prevent it from being able to capitalize on its advantageous trade position. Many would say that the prosperity of the European Union proves the adage that free markets ensure growth. However, as Birdsall points out, the EU is much more than a free trade pact, requiring significant economic policy and governance reforms as a condition of membership. It is also made up of economies that enjoyed other types of development assistance at critical times (aid in the form of the Marshall Plan, military security in the form of US and NATO treaties). Trade liberalization has been but one tool in the tool box for the EU; thus its members have been able to steer clear of the many traps that prevent LDCs from benefiting from development assistance.
In sum, the debate over the power of markets, particularly free markets, to produce growth remains fierce. Many believe they represent a false promise to many LDCs, and the WTO is often seen as a place where wealthy countries offer up concessions on some trade terms but not on others, striking deals that are, in the end, worth very little to the G-90, and serve only to perpetuate their marginalization and exploitation by the global marketplace. Others see no alternative to trade-driven growth, and generally feel that LDCs benefit from any attempt to introduce transparency and improve inclusivity in the processes of trade negotiations. Whether they can benefit as much or more from bilateral and regional preferential trade as from multilateral free trade is a question not likely to be resolved any time soon.
The Food Crisis
The free trade debate is only expected to intensify as food prices continue to rise worldwide. The cause of these price spikes is a complicated combination of factors, including the increased consumption of meat in BRICs and middle-income countries that requires more animal feed, the growing use of food products to make biofuels for energy consumers, and persistent distribution problems in the worldwide food market. Experts point out that at least some of these factors are the result of free markets (supply and demand), while others are the result of protectionism (lack of incentives to bring more growers from LDCs into the market, and dysfunctional distribution networks exacerbated by agriculture supports in developed nations).
Tragically, the food crisis that is gripping many LDCs is an illustration of the very dynamics that exist at the table in the Doha round, and at the same time it is making the development needs of LDCs much more urgent. High food prices benefit farmers in the US and other developed nations; many believe this should create a climate where wealthy countries are more willing to compromise on agricultural subsidies. Others believe it only makes protectionism in OECD agricultural sectors more likely. Nevertheless, many fear that before any progress can be made, LDCs may slip off the radar of the market completely. Global trade’s potential to lift new millions out of poverty may mean little if, as the World Bank projects, a sustained 20% rise in food prices puts 100 million people who had escaped poverty over the last decade back into the trap.
A Footnote on Fair Trade Versus Free Trade
Whereas free trade refers to voluntary trading without barriers from third parties or governments, fair trade usually incorporates a measure of aid for countries that produce raw materials such as coffee beans – a subsidy is added to the price of the beans that is transferred to growers in LDCs out of a sense of philanthropy for industries impacted by fluctuating commodities prices. Fair trade coffee is more expensive than free trade coffee because of this subsidy, and, in the short-term, this subsidy benefits the grower, usually in a poor country.
Interestingly, fair trade can actually be harmful to LDCs in the long term because it acts like a traditional agricultural subsidy: it encourages the production of one kind of crop, usually one that would otherwise not be terribly profitable, and discourages export diversification. Collier writes of the farmers, “they get charity as long as they stay producing the crops that have locked them into poverty” in the first place. These types of policies vary by product and by company, but this is an important caveat to consider if you are seeking trade justice in your fair trade dollar.