“Unfair international trade”- Have developing countries had a fair share of the gains from trade?

The issues of trade and the gains thereof are of immense significance to economists, sociologists, political scientists and non-academic alike.  Trade directly and profoundly impacts on peoples’ welfare.  As such, many proponents in favour of international trade wholesale and blindly ascribe to free trade as they see the gains from trade and the benefits there from as the saviour of participation countries.  Many of them do this without critically analyzing the disbenefits of trade on the receiving economy.  But, why is it the case; and is it fair to say that developing countries have not had a fair share of the gains from trade as their developed counterparts?

            In relation to the vexed issue of unfair gains from trade; many political pundits from developing countries including the distinguished Mr. Buddan lecturer from the department of Government at the University of the West Indies, Mona Campus, Jamaica, argue that the very nature of the establishment of the World Trade Organization (WTO) is to rubber stamp the policies and programmes of developed economies.  Mr. Buddan in his article published in the Sunday Gleaner dated 18 September posits that the WTO/Cancun meeting that was abrupted ended is because of the developing countries converging on a point of principle.  Further, he posits that the meeting was to advance the will of the developed world economies.  The issue of unfairness cannot be established on the premise of the absolute trade figures as are published by the organization on trade (WTO) nor on a single abrupt ending of a meeting because of peoples’ perception of unfairness or mistreatment.  To many developing countries the issue of unfairness seems justifiable; their positions take the form of the non-economists and so make for a topical decision as view from the position of economists.

            Notwithstanding Mr. Buddan’s thoroughly argued perspective, one of my past and distinguished lecturers Dr. Orville Taylor has technically concurred with Buddan that there is “unfair international trade.”  This article will unearth provide a different side to this debate.

            The developing countries are innately at a disadvantage by their very nature of high inefficiency, low levels of technologies, high dependence on primary product and a corruption system.  Are the benefits of trade equally beneficial to all participating countries?  The Ricardian Model provides the answer to this question.  Since developing economies continue to import skills, technical capabilities by way of comparative advantage, the gains from trade will only transform the economic and social well being of their citizenry.  Comparative advantage speaks to whether in producing good(s) the opportunity cost of producing the good(s) is lower in that country than it cost in other countries.  Further, trade between two or more economies can benefit all the participants if each country exports the goods in which it has a comparative advantage.  Hence, given that trade takes place within the context of comparative advantage, why was there an abrupt end to the WTO/Cancun meeting?  Answer – Politics verses Economics.

            What is trade?  Trade denotes the voluntary agreement between countries to buy and-or sell goods to each other. So, what are the gains from trade?  Gains from trade speak to the increased consumption derived outside of the normal capacity of the country’s resources. Continuing, for the purpose of this essay, developing countries are seen as constituting inadequate physical infrastructure; poor social security systems; high level of unemployment and corruption; low use of technology, high dependence on primary products; imperfect markets and information coupled with poor work attitude of the populous.

            Ricardo’s Theory of Comparative Advantage predicts that all those who participate in international trade as specialists in their area of greater factor productivity will benefit from their involvement.  Further, countries that lack some natural resource or other capacity can benefit by exchanging goods or services that they can produce ‘efficiently’ for those they cannot.  This concept was also upheld and endorsed by Heckscher and Ohlin in their trade model.  Trade enhances the GDP of developing countries.  In that, because they (developing countries) are able to import needed technical capabilities, capital, raw materials and tangible products that they would have being unable to produce either through geographical limitation or because of the state of their economies; this therefore becomes an advantage (or gain) from international trade.  Now, given that, no developing country is endowed with all the prerequisites natural resources and capital to transform their economies and by extension provide a high standard of life for their citizenry, then why there is an issue of fairness being debate on their part.

            Therefore, what is the argument of fairness of gains from trade being purported by developing countries about?  Many political pundits in seeking to argue their case of unfair gains from trade flatly use the absolute trade figures as quoted in the World Trade Organization’s statistics.  They would say that in 1980 the figures for exports for the world stood at approximately 2.l trillion, and of this the developed countries had 1.3 trillion with the developing world exporting some 978 million.  In 1990, the world export figure stood at some 3.4 trillion with the developed world having 2.5 trillion of the total and the developing economies having approximately 899 million of the total.  In 2000, the world exports rose to some 6.3 trillion and of that, the developing world shared only 2.1 trillion.  Those arguments highlight total ignorance of economic principles by political pundits and so they should be encouraged to continue practicing the craft of their calling and expertise; and allow the economists to do what they are best at – by explaining complex economic phenomena and theorizing.  From this argument we can deduce that the increase of world exportation must be equally shared among all participants without the reason to proportionality of contribution.  With this application we can postulate that no worker should be remunerated more than the other employee irrespective of qualification and–or contribution to output.  As such, socialism’s doctrine of equality has more merit than meritocracy within capitalism.  Hence, despite each individual’s value to production and his/her contribution thereto, all men must be given equal pay for all work performed.

            Which based on the figures, the developed economies at any period maintained not less than 65 percent of the world export trade?  This appears on the surface to be inequitable as the developed world’s population is only 20 percent of the total human population.  This argument is emotional. One needs to understand why politicians of developing economies use the reasoning of unfairness as it relate to the gains from trade to foster their position.  Answer – they are politicians not economists.  In response to the non-economists arguments, why is it or not fair?  Fairness is a subjective concept and so its measurement as seen through the lens of the developing economies explains their position.  As such, politicians and other human rights agents because of their market will claim unfair as their weapon on which to hide inefficiencies, mismanagement and indecisiveness.  But does unfairness comes in the form of inequitableness?  Answer – your thoughts are as good as mine.

            Is international trade beneficial to all? Within the context of international trade, because all trade relations are carried out through voluntary involvement, one would assume that no sensible people would venture into an arrangement without being able to receive benefits from the association.   Therefore, the argument here cannot be in relation to benefits but the extent of benefits from trade relations with other economies. 

            The position taken by many people as it relates to trade is simply that you should export more than you import.  But, let us critically examine that position.  When a country exports its products and its account is credited with foreign exchange from the buyer country, this money is of absolutely no benefit to the receiving country.  As money cannot be consumed and so does not increase ones welfare, it is consumption that increases peoples’ well being.  Therefore based on the arguments forwarded by Paul R Krugman et al (2000) in their book ‘International Economics, Theory and Policy’, gains from trade arise from external consumption.  So, does export constitutes an increase in consumption and by extension an improvement of peoples’ welfare?

            The issues of benefits from trade arise because of imports.  As the people of the receiving country will have available to them a wide cross-section of products and–or services for consumption.  Because ones economic welfare is increased from consumption, the peoples of developing economies will benefit from trade relations with the developed world.  As without such relations, the developing world would still be in a primitive state.  Given their inadequacies and poor social and physical infrastructures, without trade, the developing world could not transform their economies to possible emerging economies and-or developed status. 

            Without international trade relations, Jamaica for example would not have being able to manufacture electricity, telephones, road network, hospital facilities, machines for factories, automobiles, some raw materials for building and foodstuff so as to satisfy the demand of its populace .  Therefore without trade, the developing economies would disintegrate into mere subsistence markets and anarchy as those countries are not endowed with needed capital and human resources to generate production.  Look at the example Singaporean economy.  That country does not have at its disposal crude oil, natural gases, bauxite, bananas, and citruses but was able to transform it economic landscape from that of developing to an emerging economy by international trade through the background of prudent economic and political management.

            By opening the economy to international trading relation with the outside world and more so developed countries, developing economies see the incentive of reduced inefficiencies that is translated into the lowering of prices for the consumer.  Those price reductions will see the consumer, consuming more products and-or service.  This is through importation.  Hence, importation in and of itself is not evilous.  What about the argument of the destruction of the infant industries due to importation?  Answer – a country should only trade in goods to which it has comparative advantage and not venture into the production of inefficient commodities.  Further, the closure of production in inefficient industries will result in unemployment but note that employment would have result in the efficient industries.  Continuing, many developing economies have continued in the production of inefficient commodities like sugar which are at the low end of earnings and continue to support such industries through subsidies.  Although they are cognizant that such industries are highly inefficient and costly to maintain, they have hanged steady to them because of political administrative reasons and as so they use this support their position of unfairness.

            Are there any negatives to importation?  The answer lies in the simple question, is there any disadvantage from the consumption of foods and medicine?  A country is similar to that of an individual which implies that an economy is only able to not to owe another if it is able to spend less than or equal to that it receives.  A country’s revenue is received through either taxation or exportation and its expenses through government expenditure and importation.  Simply put, revenues are obtained through exportation and expenses from importation.  As such, when a country imports more than it exports this if continue will reduce future consumption.  Continuing, if importation is substitute for domestic production while exportation falls and-or remain constant, the imported economy will see massive unemployment followed by structural changes within the economy.  Hence, the evil of importation lies in mismanagement and the substitution of importation for exportation of domestic production.

            On the other hand, export of goods and-or services becomes beneficial, when we are able to use the foreign currency received to purchase goods we want from other countries.  But until we purchase those goods, our gains from trade are non-existent. Therefore, it is imports which represent our gains from trade.  So, if this is the case, why send anything at all to the outside world?    Our money in the hand of foreigners has absolutely no use unless they are able to purchase our goods or properties with it.  Thus, we must continue to export to pay for our imports.  Exports therefore are the price we pay for our imports, if we do not want to “sell off the farm”.

            The peoples of the developing world have come to enjoy an infinitesimal welfare arising from international trade relations.  Without the opening of the economies of many developing countries, the welfare of their population would not have been increased beyond a century ago.  In that, many of the very products that developing countries produce rest to a large extent of the importation of raw materials, technologies and other components from the outside world.  The very capital that is a must in the production process is often times provided by multi-national organizations that are located in the developed economies.

            Many political pundits and sociologists argue that economists have not recognized the extent of the damage of importation on the domestic markets.  The gains from trade are both topical and controversial.  In that, the gains from trade relations must be seen based on whether we speak of the consumers, the politicians or businessmen.

            Because many merchants and-or producers in the developing world have been hiding under the umbrella of protectionism for a long time, they are still seeking various protective mechanisms to evade being efficient.  Over the years, these inefficiencies have been passed onto the consumers in the form of higher prices therefore allowing the traders to make a higher profit-margin.  With international trade, competition increases, market imperfection falls, thereby taking with it a new set of rules that now must be addressed by consumers and producer alike.  Within the developing economies, many inefficient producers stoutly argue against competition saying it epitomizes unfairness. As such, they seek governments’ assistance in protecting them against those firms that are dumping commodities in the local market and against unscrupulous multi-national corporations. 

            In the past, the legislators of many developing countries have imposed tariffs and other protective methods, enabling their domestic industries to build comparative edge to trade with other economies.  It appears that over all those years, when infant industries were being offered protectionism, they have not come of age to fend on their own.  Political scientists are arguing that with the removal of trade barriers, many businesses will close resulting in countless job losses and this will translate into much social ills.  Over one million business fail per day in the United States and this does not strengthen arguments for wholesale protectionism.  As businesses fail, other rise, so opportunities arise for economic activities within the same environment. 

            The reasons advanced a century ago for the introduction and businesspersons or political scientists can no longer forward maintenance of protectionism.  At one point, protectionism was seen as allowing manufacturers the financial space to innovate and to develop competitive muscle; nowadays, tariffs are seen as obstructing innovation and competitiveness.  Now, many people rejoice at the bargains that consumers can steal by undercutting local labour through outsourcing goods from overseas, no matter if produced in near slave conditions.  It is clear that protectionism encourages laziness in domestic industries, while exposure to international competition encourages replacement of obsolete plant and so greater productivity.  Tariffs increase the production costs to the consumers, compounding their uncompetitiveness and flowing through to higher prices throughout the economy.

            Because of the very nature of the survival style of politics in the developing economies, often times many decisions of profound economic implications are taken with a grain of salt.  Why would a government in power in a developing country, given the nature of survival politics, take a particular economic decision that may topple it tenure in office?  Many critical economic decisions have not been taken in developing countries while the peoples within these geographical territories suffer the fatal consequences.  The fatal consequences may range from higher prices, more taxation, further corruption, balance of payments problems, budgetary woes and inadequate social and physical infrastructure.

            For the most part, it seems that workers in poor countries have more to gain and less to lose from their involvement in trade relations with rich countries.  If poor countries lower their barriers to trade and investment, the theory goes; rich foreigner will want to expend some of their capital in those regions.  If this inflow of resources arrives in the forms of loans or portfolio investment, it will supplement domestic savings and loosen the financial constraints on additional investment by local companies.  This is why workers in FDI-receiving countries should be in an even better situation to profit from integration than workers in FDI-sending countries.  So, why are developing countries not been able to transform their economic landscape?  The answer lies in the political administration and the system of survival style politics being practiced by such economies.

            Data examine as published by the United Nations Conference on Trade and Development suggested that inequalities between industrial and developing nations are on the rise.  Since 1965, the proportion of world income of the richest economies has increased from 69 percent to 84 percent in 1990.  Whereas, while in 1965 the richest economies that made up 20 percent of the world human population earned 31 times the incomes of the poorest 20 percent and in 1990 they earned 60 times that.  Do the figures really constitute unfairness?  In my opinion, inequality does not constitute unfairness.  If I am paid a salary of 10 times that of another worker because I have sacrificed to acquire a university education while my colleague who did not, does that constitute unfairness?  If so, on whose path?  This is undoubtedly a clear example of inequality.

            Inequalities have also increased within countries.  Does that constitute unfairness?  If this, according to non-economists, represents unfairness, then why are we not demonstrating for more equality in pay and other benefits?  In my opinion, much of the inequalities that have arisen over the years are due to the developing countries political mismanagement, poor work attitude, unprecedented financial mismanagement of the country’s resources, the imperfections in the market forms and the inability of their leadership to chart a path of growth and development for the people wherein.

            Some proponents of unfairness in the share of the world’s wealth argue that the 1999 Human Development Report clearly indicated that the world inequalities have been rising for nearly two centuries.  The distance between developed and developing economies was about 3 to 1 in 1820, 11 to one in 1913, 35 to 1 in 1973 and 72 to 1 in 1992.  Once again inequality does not constitute unfairness.  The question should be, what are the developed countries practicing that developing economies not?

Paul Andrew Bourne

Tutor

Department of Sociology, Psychology and Social Work

University of the West Indies

Mona Campus

Kingston 7