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Opinion
– Despite lacking both evidence and theory, many economists claim that trade liberalization accelerates development. But only a few economies have gained many jobs thanks to access to external markets.
Jomo Kwame Sundaram
Instead, most economies have experienced greater deindustrialization and food insecurity, as well as deepening their vulnerability to recent tariff threats.
Multilateral trade liberalization
In conventional trade theory, the benefits of trade liberalization are primarily one time increases in production and exports due to static comparative advantage.
Post-World War II American 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 marginalized.
The General Agreement on Tariffs and Trade (GATT) was a “second best” compromise after the US Congress vetoed the creation of the International Trade Organization, despite widespread international enthusiasm for the 1948 Havana Charter.
Almost half a century later, in 1995, the World Trade Organization (WTO) was created, following the 1994 Marrakesh Declaration that put an end to the Uruguay Round of GATT negotiations.
Trade mahaguru Jagdish Bhagwati argued that multilateral trade has been undermined by plurilateral and bilateral agreements that favor dominant partners.
Now that the era of trade liberalization has virtually ended since the 2008-2009 global financial crisis, the case for free trade has received a new boost thanks to the creation of myths about the “pre-Trump” era.
Uneven and mixed effects
Mainstream trade theory does not contemplate the possibility of “unequal exchange,” however defined.
It does not even incorporate Bhagwati’s notion of “impoverishing growth” when productivity increases reduce prices for consumers, rather than increasing producers’ profits.
The three decades of trade liberalization starting in the 1980s saw slower, but more volatile, growth than the quarter-century after World War II called the “Golden Age.” More recently, stagnationist tendencies have dominated since the global financial crisis.
With trade liberalization, many developing countries have experienced increased food insecurity and deindustrialization, as the manufacturing share of their national income has declined.
Since then, much of the import substitution industrialization after World War II or independence has collapsed. Apart from resource processing, very few new industries have emerged in Africa.
“Aid for Trade” for the poorest developing countries implicitly recognizes the adverse effects of trade liberalization by mitigating some of them. Why then should they abandon protectionism if they need to be compensated for doing so?
Rich nations have also insisted that developing countries end manufacturing tariffs. But, as Dani Rodrik quipped, why rich nations “need to be bribed by poor countries to do their bidding is an enduring mystery.”
African nations and small island developing states in the Caribbean and Pacific enjoyed preferential access to European markets, which full multilateral trade liberalization would eliminate.
These preferences for sub-Saharan Africa have pitted Africans against less developed Asian countries, undermining the collective bargaining strengths of both.
Many countries hoped that the current Doha Round would eliminate rich nations’ producer subsidies, tariffs and non-tariff barriers, but that has not happened.
Cutting support for agriculture in the North could make food farming in developing countries more viable, but in the meantime it would also raise the prices of food imports.
The World Bank’s “structural adjustment” programs and the IMF’s fiscal discipline requirements have undermined rural infrastructure and productivity, setting back small-scale agriculture in most developing countries.
Setbacks, not gains
Trade liberalization also reduces tariff revenues. These losses have hurt developing countries, especially the poorest, for whom tariffs often accounted for up to half of all tax revenue.
These revenue cuts severely undermined the fiscal means of developing countries, crucial for government spending and investment, including development and well-being.
Most governments cannot replace lost tariff revenue with new or higher taxes. Meanwhile, increased borrowing to make up for lost tariff revenue has worsened debt.
Advocates of trade liberalization are often vague about how it is supposed to increase exports, revenues and tax revenues, as well as compensate for lost tariff revenue.
Instead, tax burdens tend to become more regressive as overall tax revenues decline. Actual consumption is assumed to rise as import prices fall with lower tariffs, but could also decline due to rising consumption taxes.
Less political space
Trade liberalization has also reduced the development policy instruments available, especially those related to trade, investment and industrialization.
Restrictions imposed by trade liberalization and investment agreements have generally limited the scope and potential of development policy initiatives.
The real role and impact of trade policy for growth and jobs remains debatable. But there are no analytical reasons or solid empirical evidence that trade liberalization per se guarantees sustainable development.
The World Bank and most other studies recognized 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 liberalization depend fundamentally on a strong positive response from export supply.
However, this response is unlikely when competitive, productive and export capabilities no longer exist at the international level, as is the case in most developing countries, especially the poorest ones.
Therefore, most of the Global South has not been able to overcome the worst consequences of trade liberalization to achieve sustainable development.
In any case, rich nations ended the WTO Doha Round talks in 2015.
In the face of increasingly flagrant selfish contravention of WTO rules by the United States, Europe and other rich nations, the best way for developing countries to improve their development prospects is by returning to GATT rules.
This would allow them to make choices, as appropriate, rather than resigning themselves to the WTO’s uniform, “one size fits all” rules and regulations, regardless of context, circumstances and possibilities.
IPS UN Office
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