Trade Liberalisation Undermines Development
ZAMBOANGA, Philippines, February 10 (IPS) - Despite lacking both evidence and theory, many economists claim trade liberalisation accelerates development. But only a few economies have gained many jobs from external market access.
Instead, most economies have experienced greater deindustrialisation and food insecurity, besides deepening their vulnerability to recent tariff threats.
Multilateral trade liberalisation
In conventional trade theory, gains from trade liberalisation are mainly one-time increases in output and exports due to static comparative advantage.
Post-World War Two (WWII) US foreign policy transformed multilateral relations and transnational institutions, including international economic governance.
With the growing power of transnational corporations, many multilateral institutions, including the United Nations system, have been reconfigured or marginalised.
The General Agreement on Tariffs and Trade (GATT) was a ‘second-best’ compromise after the US Congress vetoed the creation of the International Trade Organisation, despite widespread international enthusiasm for the 1948 Havana Charter.
Almost half a century later, the World Trade Organisation (WTO) was established in 1995, following the 1994 Marrakesh Declaration concluding the Uruguay Round of GATT negotiations.
Trade mahaguruJagdish Bhagwati argued that multilateral trade has been undermined by plurilateral and bilateral arrangements favouring dominant partners.
With the era of trade liberalisation essentially over since the 2008-09 global financial crisis (GFC), free trade advocacy has received a new lease of life from mythmaking about the ‘pre-Trump’ era.
Uneven, mixed effects
Mainstream trade theory does not entertain the possibility of ‘unequal exchange’, however defined.
Nor does it even incorporate Bhagwati’s notion of ‘immiserising growth’ when productivity gains reduce prices for consumers, rather than increase producers’ earnings.
The three decades of trade liberalisation from the 1980s saw slower, but more volatile growth than the post-WWII quarter-century termed the ‘Golden Age’. More recently, stagnationist tendencies have dominated since the GFC.
With trade liberalisation, many developing countries have experienced greater food insecurity and deindustrialisation, as the manufacturing shares of their national income shrank.
Much import-substituting industrialisation after WWII or independence has since collapsed. Besides resource processing, very few new industries have emerged in Africa.
‘Aid for Trade’ for poorer developing countries implicitly acknowledges trade liberalisation’s adverse effects by mitigating some of them. Why then should they abandon protectionism if they need to be compensated for doing so?
Wealthy nations have also insisted that developing countries end manufacturing tariffs. But as Dani Rodrik has quipped, why rich nations “need to be bribed by poor countries to do what is good for them is an enduring mystery”.
African nations and Caribbean and Pacific small island developing states enjoyed preferential access to European markets, which full multilateral trade liberalisation would eliminate.
Such preferences for Sub-Saharan Africa have pitted African against Asian least developed countries, undermining the collective negotiating strengths of both.
Many countries had expected the current Doha Round to eliminate rich nations’ producer subsidies, tariffs, and non-tariff barriers, but that has not happened.
Cutting farm support in the North could make food agriculture in developing countries more viable, but would also raise food import prices in the interim.
World Bank ‘structural adjustment’ programmes and IMF fiscal discipline requirements have undermined rural infrastructure and productivity, setting back smallholder agriculture in most developing countries.
Setbacks, not gains
Trade liberalisation also reduces tariff revenue. Such losses have hurt developing nations, especially the poorest, for whom tariffs often accounted for up to half of all tax revenue.
Such revenue cuts severely undermined the fiscal means of developing nations, crucial for government spending and investment, including for development and welfare.
Most governments are unable to replace lost tariff revenue with new or higher taxes. Meanwhile, more borrowing to offset lost tariff revenue has worsened indebtedness.
Trade liberalisation advocates are typically vague about how it is supposed to raise exports, incomes, and tax revenue, besides compensating for lost tariff revenue.
Instead, tax burdens typically become more regressive as overall tax revenue declines. Real consumption is supposed to rise as import prices fall with lower tariffs, but could also decline due to increasing consumption taxes.
Less policy space
Trade liberalisation has also reduced available development policy tools, especially those relating to trade, investment, and industrialisation.
The constraints imposed by trade liberalisation and investment agreements have generally limited the scope for and potential of development policy initiatives.
The actual role and impact of trade policy for growth and employment remain moot. But there are no analytical reasons or robust empirical evidence that trade liberalisation per se ensures sustainable development.
World Bank and most other studies acknowledged modest, if not negative, net gains for most developing countries from any realistically achievable outcome.
It is often ignored that realistic expectations of gains from trade liberalisation rely crucially on a strong positive export supply response.
However, such a response is unlikely when internationally competitive, productive and export capacities do not already exist, as in most developing countries, especially the poorest.
Hence, most of the Global South has not been able to overcome the worst consequences of trade liberalisation to achieve sustainable development.
In any case, the WTO Doha Round talks were ended by rich nations in 2015.
With the increasingly blatant self-interested contravention of WTO rules by the US, European and other wealthy nations, developing countries may best enhance their development prospects by reverting to GATT rules.
This would allow them to opt in, as appropriate, rather than resign themselves to the uniform ‘one size fits all’ WTO rules and regulations, regardless of context, circumstances, capacities and capabilities.
IPS UN Bureau
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