Rhiannon Horsley, member of the Reading Uni People & Planet group writes:
Rhiannon Horsley
World trade is a vastly complex area, and one that cannot be easily summarised. The difficulties faced by poor countries in relation to world trade are equally complex and diverse. However there are some areas that remain a fundamental problem to these nations, not least of which are trade barriers, which come in many different shapes and sizes. They can be tariffs and subsidies, technological or knowledge based, they can prevent countries from trading and in many cases deny them the right to do so.
Most countries, with very few exceptions, are heavily reliant on trade, in poorer countries this reliance is often governed by large multinational corporations (MNCs) that can wield a lot of power and influence. Global institutions such as the World Bank, International Monetary Fund (IMF) and World Trade Organisation (WTO) also levy huge amounts of power regarding the trading of all countries, especially the poorer ones. Subsequently these institutions have a vast amount of power over the fate, direction and regulation regarding international trade that often has a detrimental impact in the developing world.
The system of tariffs and subsidies operated by many countries in the world has, in my view, a detrimental impact upon many poorer countries.
Subsidies
The subsidies paid by rich countries such as those in North America and the European Union to their farmers often has an adverse effect on poor countries. Because of the subsidies they receive goods are often sold at a price below the market value. If these goods are then imported into countries they will often undercut the local producers, flooding the local market in this way will cause the price to drop. The dumping of goods on third world markets is condemned by Oxfam, and it seems that the World Trade Organisation might agree, as a recent ruling made US cotton subsides illegal.
Subsidies also affect producers in the developing world who are hoping to export their goods to the EU or USA. The subsidies paid can result in the product being sold below the market value, and therefore other producers are simply unable to compete. These can often double the impact on poorer economies. Firstly countries are unable to sell their goods to these countries, particularly the EU and the USA, because they cannot compete with the subsidised price. At the same time, if goods are dumped on their markets then they are unable to sell their goods locally, again because of the cheap subsidised imports. Not only does this hurt the farmers but relying on imports could also damage a country’s balance of payments.
Import tariffs
Alternatively they may face a barrier in the form of an import tariff. Again these are designed to protect native industries; when a good is brought into a country or economic area where tariffs are imposed on imports the price rises. As with subsidies this can make the imported good less competitive than the local rival.
The system of tariffs often works against the poorer nations. Many of these nations rely on producing commodity products such as cocoa beans. While the tariff on raw commodity produce is often fairly low, as soon as countries start to process these raw ingredients and therefore add value to them, they face far higher import charges. The benefit of manufacturing these goods could be hugely beneficial because processed products have a higher value. If they were able to manufacture their goods they would be freed from the volatile world of commodity exports, where prices fluctuate wildly.
Cocoa beans are a good example of tariff escalation; raw cocoa beans face a tariff of only 3% when coming in to the UK, where as imported chocolate bars will have to pay a 16% tax. Trade rules, such as these, often prevent developing countries from benefiting from the profit to be made in processing goods, and with the cheaper labour that they can supply surely prevents them from using their comparative advantage.
Technology, knowledge and regulations
However non-tariff barriers to trade have also been identified as preventing trade, and are arguably more important as traditional tariff barriers are beginning to disappear. Technology, knowledge and regulations can also provide barriers to trade.
Technology is often needed when trying to access world markets, whether it is simply the means to transport your goods, or something more sophisticated like hi-tech machinery. Without the relevant technology, ability or knowledge to obtain the technology many countries will remain unable to enter foreign markets.
Market knowledge is also important, and again may provide a barrier to trade. For a country to be a successful exporter there obviously needs to be a market for their goods. Or they may be unaware of the most efficient methods of production, the latest styles in the fashion industry, or many other knowledge based problems. However, regardless of the specific problem, lack of knowledge could be a serious hindrance to any nation, and especially a poorer one which may lack the resources needed to gain the information required. Regulation perhaps stands as one of the biggest barriers that poor countries may face, especially when trying to export to the EU and USA.
The benefits of investment
One common way to overcome these problems is to attract investment from foreign firms, which are famously attracted by the cheap labour, but also the relaxed regulation and tax breaks that they often receive. Investors often bring the technology, the relevant knowledge about consumer desires and regulation, and the finance to start industry that the host country may lack. Developed countries, and more importantly their industries, can bring in their huge resources to conduct research and development that are most needed by developing countries.
Although this has enormous benefits for the country it also has its draw backs. Many countries often gain skill and training from the foreign firms so they are then able to participate at a higher level in the businesses, or set up their own enterprises. However, many have described the scramble to gain the help of foreign investors as a ‘race to the bottom’. This is particularly evident in the Export Processing Zones (EPZs) in many countries, especially those in East Asia. These zones create conditions that are favourable to investors, such as easy access to reliable electricity and water, tax holidays, as well as tax free imports and exports. These incentives and others like it can often be harmful to the local economy. For example foreign investors will often seek a monopoly of the local market, and this is often granted, as it was in Kenya and Zambia in rubber tire manufacture. The protection placed on these goods and the monopoly conditions, result in higher prices due to the reduced competition and increases the likelihood that more money leaves the country and goes directly to the foreign firms’ shareholders.
Once a multinational is established in a country it may be able to exert a lot of pressure over the government. The threat of closing down its operations, and the subsequent threat of job losses and the damage it would do to the countries economy could mean that the multinational can make demands on the government that they have to meet. The benefit of tax holidays seems uncertain, in that tax holidays reward multinationals for doing what they would probably have done anyway, a firm will only invest in an area that would have been profitable anyway, especially when a company is looking open a factory in a country to penetrate protected markets. Tax holidays probably only draw in those in export orientated, labour intensive industries.
The big men in suits
Global trade institutions also play a key role in the fortunes of developing countries; the most famous are the International Monetary Fund (IMF), the World Trade Organisation (WTO) and the World Bank Group.
The WTO arguably has the greatest impact upon poor countries in terms of trade, as it is the only global institution dealing with the rules of trade between nations, and it deals with all international agreements on trade. Unfortunately, the WTO is far from a democratic institution. Negotiations in the WTO are generally done by consensus. In principle that’s even more democratic than majority rule because no decision is made until every one agrees. Where agreement is impossible, the WTO runs on a one member, one vote system, which is more democratic than most other international institutions.
However this explanation of the WTO seems optimistic at best. Poor countries often have very little choice but to accept the WTO agreements, or lack the resources to discover what the new agreements really mean for them. At one major meeting the EU sent over 500 negotiators, whereas Haiti could not afford to send a single one. At the last round of WTO talks it was calculated that Africa would be $2.6 billion worse off, while the rich nations stood to gain $141.8 billion. It seems unlikely, despite what the World Trade Organisation claims, that countries would willingly or knowingly agree to make themselves worse off.
The IMF and World Bank also play a role in the state of a poor nation’s ability to trade, and has received criticism for many of its policies. They favour countries that have liberal markets, and give more financial aid if a country makes an effort to liberalise its economy. Liberalisation can often have dire consequences, especially if it is forced through too quickly. Opening up markets could create an influx of cheaper foreign goods, which will undermine the local producers and economy. Faced with cheap, often subsidised products local producers may be unable to compete and will go out of business. The IMF also imposes structural adjustment policies (SAPs) upon countries, often when they are struggling to pay their international debt, in a hope to balance the books. This practice also undermines the WTO belief that countries should be able to erect tariffs it protect themselves against cheap imports, but IMF and World Bank rulings often prevent them from doing so.
The IMF and World Bank are both run on a one dollar, one vote principle. While the United States, Great Britain, Germany, France and Japan hold about forty percent of the votes the world’s fifty poorest countries have only three percent of the vote, and the USA alone has the power to veto any agreement.
Mozambique provides us with a good example of a harmful World Bank policy. Mozambique was forced to privatise her cashew nut industry, the country’s second largest import. It was then suggested that Mozambique export raw cashew nuts, to be processed in India rather than processing them themselves as they had been doing, despite earning an extra $130 per tonne for processed cashews. The World Bank insisted that this policy be implemented and also said they should reduce the export tax. Although Mozambique did not want to do this their hands were tied because they relied on World Bank approval for their annual $50 million aid package. Without the cashew nut deal, there would have been no aid. Fourteen factories closed and an estimated 77% of workers lost their jobs. But despite the governments reservations the World Bank insisted that these changes take place.
Conclusion
There are many areas of the current world trade system that hinder poor nations. The restrictions imposed on them by the IMF, the World Bank and WTO, the unfair system of subsidies and tariffs, and their lack of knowledge, expertise and technology as well as many others. While all pose great barriers to trade I think one of the most restrictive on developing nations is subsides and tariffs. Not only do these stop producers from being competitive in foreign markets, but the also encourage cheap imports which are hugely damaging to local economies.
It seems absurd that our age would be based around the principle of free trade when only the rich can benefit. The power levied by the rich countries often leaves the poor nations unable to fight back; rich countries provide them with vast sums of aid upon which they are reliant, and the rich have control of the institutions that implement trade rules. Trade is widely regarded as key for development, yet countries are being denied the ability to trade on an equal footing with developed countries, and this is mostly due to the subsidies and tariffs used by rich nations.
Bibliography
Pressure Works (2006), Christian Aid The Facts About Trade
Gills, Perkins, Roemer, Snodgrass (1996) The Economics of Development Fourth Edition, W.W Norton & Company
Joseph Hanlon (1997), Can Mozambique Make the World Bank Pay for Its Mistakes?
John Wilson and Keith Makaus (2000), Quantifying the Impact of Technical Barriers to Trade
Jeffrey Sachs (2005) The End of Poverty: How We Can Make it Happen in Our Lifetime Penguin
Oxfam (2004), Stop the Dumping
WTO (2003), 10 Common Misunderstanding About the WTO
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