trade

july'08

Africa, with 14% of the population of the planet, has only a tiny 2.6% share of world trade consisting mainly of petrol, timber, coffee, cocoa, cotton products, diamonds, gold and other commodities. However, even this 2.6% of world trade generates ten times the amount received by the continent in aid. Therefore expanding trade is vital for Africa where an 1% increase in the share of world trade would generate an extra $90bn (£45bn) which could help transform economies and provide extra spending for vital progress in health, education and water.

Using export figures for 2004 the total value of goods traded in the world was $9,200bn(£4,600bn). Of this total the EU and the US together accounted for 55%. The world's top ten exporters were Germany, US, China, Japan, France, Netherlands, Italy, UK, Canada and Belgium. Africa accounted for $232bn or 2.6% of exports in 2004 with sub-Saharan Africa accounting for $151bn or 1.6%. The top exporters from sub-Saharan Africa were South Africa, Nigeria, Angola, Cote d'Ivoire and Equatorial Guinea. Incredibly, tiny Singapore with a population of 4m people accounted for more exports in 2004 than the entire 48 countries comprising sub-Saharan Africa with 700m people.

International trade is an emotive issue which seems to provoke endless debate amongst governments, multilateral organisations and development agencies with bandwagons often being mounted and rational thinking sidelined. Below then just1WORLD attempts to clear the air and tries to analyse whether international trade adds to or subtracts from development throughout the world and whether or not it is in the interest of nations to play the trade card by subsidising domestic production and imposing trade barriers on imports.

Let us start with, as they say, a known, known. Over the past 55 years, as trade regulations have gradually been reduced, international trade has flourished.

Between 1950 and 2005 world trade multiplied by a factor of 19 whilst world output rose 8 fold. In that period trading in goods and services helped bring ever rising living standards to people living in North America, Western Europe and East Asia where the bulk of trade takes place. Conversely those countries which shunned trade and contact with the outside world failed to even keep up with their neighbours. South and North Korea both started from the same base in 1950 but today the outward looking South Koreans enjoy per capita incomes 20 times greater than their cousins living in the hermit kingdom in the north where emergency food aid often has to be delivered. Similarly, incomes in export-oriented West Germany were also many times greater than in the inward-looking Communist state of East Germany when the Berlin Wall came down in 1989.

Singapore is another excellent example of a nation which has embraced international trade in order to promote economic advancement. With no natural resources, in the 1960's the government of prime minister Lee Kuan Yew (1959-90) encouraged international companies to come and set up in Singapore. At the same time his government set about providing the educational system and investment climate needed to attract foreign enterprises. And so far has Singapore come in the last 45 years that it is now not only a successful trading nation but one of the wealthiest countries in the world with Gross National Income (GNI) per capita rising from $400(£200) in 1959 to $27,500(£13,750) in 2005.

China, too, has played a strong hand in international trade in the last 20 years with exports growing by a factor of 30 helping the country to generate economic growth of 9%+ per annum over that period lifting an estimated 270m people out of poverty.

Embracing international trade then offers countries the chance to grow their economies rapidly which leads to higher incomes which through taxation means more money to invest in healthcare, new schools, modern technology, greater food choices, clean water and improved sanitation. And, in recent times, no other international process has done more to generate prosperity for hundreds of millions of people throughout the globe.

International trade then is a vital tool in advancing economic prosperity and many developing countries are keen to expand export opportunities. However, even with the reduction in trade rules and regulations which have taken place over the last 55 years, there are still too many restrictions still in place today. The reason for this that governments feel it necessary to appease internal pressure groups in order to protect domestic industries, particularly agriculture, from international competition. As a result, in developing countries where the bulk of the population still work on the land, these measures severely dent the opportunity for people there to trade their way out of poverty. It is estimated that developing countries could benefit by as much as $200bn(£100bn) annually if rich countries removed all trade barriers.

There are three main ways in which rich countries play the trade card.

TARIFFS are taxes placed on imports which have the dual purpose of raising revenue for a country whilst at the same time protecting its domestic industries. By so doing tariffs lead to a situation where it is cheaper to produce goods in the home country even though the same goods are cheaper in another because these import taxes make them more expensive.

There is no better example here than in the sugar industry. Western Europe is the most expensive place on earth to grow sugar yet farmers in the European Union (EU) are the largest producers of sugar in the world with 40% of the market. Sugar can be produced in 2 ways - from sugar cane which grows easily in the tropics and from sugar beet which is grown in temperate climates like Northern Europe.

In Mozambique, one of the poorest countries in the world, sugar cane grows abundantly and not surprisingly the country has some of the lowest production costs in the world. All should be set fair then for Mozambique to sell large quantities of its sugar to European countries where sugar is used profusely in the food industry. However, there is only one problem, a tariff barrier of 160% has to be overcome. It will surprise no one then to learn that not much sugar from Mozambique is sold in EU countries. Instead there is sugar on offer from the 300,000 domestic sugar producers - at three times the world price.

On average tariffs on agricultural products in the EU are today around 22% whereas on manufactured goods they have dropped from an average of 40% to around 4%. In manufactured goods the EU member countries set tariff barriers against each other but those set against the developing world are 4 times greater. And in another show of solidarity against poor countries, tariff escalation means that rich countries maintain higher tariffs on imports of processed commodities than on raw materials thus depriving poor countries of revenue and preventing them from adding value to their exports e.g. it is easier for poor countries to sell cocoa beans to Europe rather than chocolate.

NON TARIFF MEASURES include safeguards, anti-dumping measures etc. but mainly take the form of quotas. Quotas are a quantitative restriction on the amount of goods of any one kind that are allowed to be imported. Here a ‘portcullis’ will descend as soon as the numbers imported are reached. In January 2005 a major breakthrough occurred in this field when the Multifibre Arrangement (MFA) on quota limits on textiles from the developing world was abolished allowing open access everywhere. However, such was the increased volume of cheap imports, particularly from China, that domestic producers in EU countries immediately complained and regrettably, even after 10 years to prepare for the abolition of textile quotas, the EU sought to appease their clothes manufacturers by re-introducing limits. This, however, in turn provoked EU retailers to complain that they would be penalised for orders which had not yet been delivered whilst, at the same time, customers would be faced with higher prices. And so a compromise was agreed with China agreeing to limit exports.

Other areas that still need to be tackled in regard to quotas include Japan being allowed to reserve 93% of its rice market for domestic farmers whilst rice farmers in poor countries like Haiti lose their livelihoods through cheap subsidised imports as the World Bank pushes them to open up their markets.

SUBSIDIES- 2 kinds - PRODUCER AND EXPORT.

PRODUCER SUBSIDIES come in the shape of support prices which subvert the workings of the international trading system. There is no better example of this than the EU Common Agricultural Policy (CAP). Established in 1962, this keeps food prices in Europe high above world levels and operates throughout the EU to boost farming productivity, guarantee food supplies and ensure a 'fair' standard of living for farmers. For example it is estimated that every cow in the EU is subsidised to the extent of $2(£1) per day - the same amount as almost half the world's population lives on. As a result those heavily subsidised cows go on producing record amounts of milk.

One of the most contemptible examples of producer subsidies being used to appease a domestic pressure group was in the US in 2002 when President George Bush caved in to the 25,000 cotton farmers there and granted them support totalling $3bn(£1.5bn) per annum in order to compete in price with cotton farmers in Burkina Faso, the country second from bottom in the 2007 UNDP Human Development Index, where cotton grows naturally. This action by the most powerful economy in the world is surely one of the most pernicious and contemptible pieces of protectionism ever passed on Capitol Hill and the US government should hold its head in shame. In Burkina Faso cotton represents over 50% of the country's exports and 2 million people depend on it for their livelihood. A pound of cotton can be produced in Burkina Faso for $0.21(£0.10) compared to $0.74(£0.37) in the US but now thanks to American generosity living standards for cotton farmers in Burkina Faso have plummeted. Thankfully, however, in a case brought by Brazil, the WTO has recently accepted that US support for cotton violates global trade rules and this subsidy will eventually have to be unwound.

EXPORT SUBSIDIES are the final guarantee that farmers in rich countries do not make a loss even when they overproduce. In the case of surplus milk production this is made into dried milk powder and dumped on the world market forcing prices down and throwing thousands of poor farmers in countries like the Dominican Republic out of business and into the cities.

According to the Organisation for Economic Co-operation and Development (OECD), in 2006, government support for farmers was $268bn (£134bn), down slightly from 2005 and well down from $350bn in 2003. This financial help ranged from 1% of farm receipts in New Zealand, 11% in the US, 32% in the EU, 53% in Japan to more than 60% in Iceland, South Korea, Norway and Switzerland. Total OECD support in 2006 respresented 27% of farm receipts, a slight fall from 29% in 2005, due mainly to rising world food prices. All in all crop and livestock prices were on average 21% higher in OECD countries than world market prices.

Although farm support is well down from 2003 levels it still undermines fundamentally the efforts of farmers in developing countries to earn a living and represents a $730 million per day tax on poor countries.

At the same time agricultural support in rich countries adds an extra £15 to the weekly shopping basket of a family of four in the EU, increases taxation, provides no guarantee of food quality and produces surpluses which are regularly dumped on world markets putting farmers in poor countries out of business. Furthermore, 70% of support for farmers goes to the largest 25% of the farms and to cap it all the whole system is so bureaucratic that EU auditors recently discovered that only 40% of farm support actually reached its destination.

SOME POSITIVE DEVELOPMENTS

In recent years some tentative progress has been made by the richest countries in opening up their markets to the poorest nations:-

the US African Growth and Opportunities Act (AGOA) signed in October 2000 offers tariff and quota free access to the US for a range of African goods. This has seen exports from some African countries to the US grow quite rapidly.

the EU through the Lome Convention offers some of the same to a list of poor countries. Here in an 'Everything But Arms' policy all imports other than 2 agricultural commodities are allowed in free of all tariffs and non tariffs from these mainly African, Caribbean and Pacific (ACP) countries. And a date of 2009 has also been set for the free import of the presently restricted commodities of rice and sugar.

in an attempt to placate criticism the EU has agreed to a cut in support for sugar by 36% over the next three years. At the same, although payments to all farmers will remain constant, production payments will decrease and farmers will be encouraged to concentrate on quality; grow less popular crops; look after the countryside e.g. maintaining hedgerows, leaving strips at the sides of fields uncultivated for wildlife; diversify into tourism, country crafts. This should go some way to address the problem of over-production.

the North American Free Trade Area (NAFTA) which comprises Canada, US and Mexico was expected to result in a mass of jobs being exported over the Rio Grande to Mexico. The Mexican economy has boomed since NAFTA was set up in 1994 but the US has also created 10m new jobs in that period.

numerous bilateral trade agreements have been signed and encouraged by countries like US, Morocco, New Zealand, Singapore and Chile.

All of the above agreements certainly help to increase export opportunities but in a world context they represent only a trickle in the river of trade. And so it is important that the present round of trade talks under the auspices of the World Trade Organisation (WTO) reach a successful conclusion.

In 2001 the WTO launched the Doha Development Round of trade talks with a target date for completion of December 2005. And according to EU Trade Commissioner Peter Mandelson 'the goal is incredibly simple and compelling... to make our multilateral trading system work at long last in the interests of the world's poor.' A successful conclusion to this WTO round would have had profound implications in efforts to make poverty history for it would have allowed developing countries, particularly the more advanced, to use their comparative advantage to best effect and thereby give millions of people the opportunity to trade their way to a better life.

However, after months of wrangling the only substantive agreement reached by the 148 members of the WTO before the December, 2005 deadline passed was to agree to phase out all export subsidies - by 2013. The talks were then extended but domestic political interests - particularly concerning France and its refusal to allow any reduction in CAP spending until 2013 and the larger developing nations like India and Brazil refusing to reduce their high tariff rates on imports - continue to override international considerations.

A constructive outcome will require all the main players to come back to the negotiating table and be willing to give up ground in vital areas so that a breakthrough can be made. However it seems that no important player in the talks is willing to make the first important move and the Doha Development Round which promised much at the outset is set to drift into oblivion.

This should not be allowed to happen as trade, as we have seen, is vital in challenging and defeating poverty. A new deadline should be set and if there is no progress by a certain date, say December 2008, then in order to break the deadlock, just1WORLD offers this constructive solution - ALL rich countries would agree not to impose any new trade restrictions and to freeze those already in place. Then, starting in 2009, all rich countries would agree to reduce all subsidies/ tariffs/ non-tariffs but only by 10% p.a. This would have a double beneficial effect - it would give producers in rich countries time to adjust and it would mean that all trade support by rich countries would be eliminated by 2019 ensuring that there would be no more need for any more rounds of world trade talks.

This may be a rational way forward but you can just imagine the furore - US farmers would scream about losing their traditional livelihoods, President Sarkozy would become apoplectic with rage at the thought of rich French farmers becoming less rich with the beginning of the end of the CAP and the Japanese government would protest that Chinese rice imports would overwhelm domestic producers. However, the important outcome would be that world trade in general and developing countries in particular would be given a tremendous boost. At the same time in rich countries taxpayers would benefit from the elimination of subsidies, consumers would have more money to spend thanks to cheaper food and EU auditors might finally get to grips with the EU accounts.

In the coming months then hopefully common sense will prevail and there will be a positive conclusion to the Doha Round on trade which will help lift hundreds of millions of people out of poverty in the more progressive developing countries. However, even the most positive of outcomes is unlikely to help the least developed countries mainly to be found in sub-Saharan Africa for the following reasons:-

in most of sub-Saharan Africa over 70% of the people living there are subsistence farmers working with basic tools on tiny plots consisting of barren soil. Agricultural production in Africa has stagnated in the last 20 years

countries in most of Africa have neither the expertise nor the capital to take immediate advantage of more open trade opportunities.

most poor countries depend on primary commodities.

the costs of transport by air and sea, bad roads and railways, poor communications, customs delays, refrigeration for meat products and insurance all add to the cost of sending imports abroad.

minimum standards, health legislation and quality controls will all have to be met before consumers in rich countries make their choices.

many poor countries are net importers of food and will probably come off worse as the removal of export subsidies will increase the price of food on world markets. Tariff reductions will also hit them as they pay none at present and their removal will only help their competitors.

The poorest countries then, most of which are in Africa, will initially suffer and governments there will need outside help both with finance and expertise in order to be able to start to take advantage of a more open trading environment. Thankfully rich countries are already aware of this and more of their overseas aid budgets are being directed towards helping poor countries increase crop yields and improve infrastructure.

But we as consumers can also help farmers in the developing world by buying fairly traded goods.

Fairtrade is an independent consumer organisation set up by a group of charities some 15 years ago in order to offer fair terms of trade to farmers and workers in the developing world. In return for meeting certain standards in production Fairtrade currently pays more than 500,000 farmers in poor countries above market prices for their produce thus enabling them to improve quality and to provide for all the needs of their families. Fairtrade currently operates in 18 countries buying from more than 500,000 farmers throughout the developing world. The Fairtrade mark appears on over 1,500 different products including tea, coffee, bananas, sugar, fruit juice, chocolate, roses, nuts, rice, yoghurts, wines, beer and footballs many of which are available in most supermarkets. Although Fairtrade products cost that little bit extra more and more consumers seem willing to pay this premium as turnover is increasing at 20% per annum. Sales in 2005 in the UK - the world's largest market carrying the fair trade mark - were over $340m (£170m). see www.fairtrade.org.uk

According to Tony Blair's Commission for Africa Report 'trade barriers are politically antiquated, economically illiterate, environmentally destructive and ethically indefensible.'

1. trade restrictions then should be lifted bringing an end to the scandalous waste, overproduction, inefficiency, bureaucracy, corruption and expense they bring just to placate pampered pressure groups like farmers that governments for the most part are too frightened to stand up to.

2. they should be lifted because they hinder farmers and their families in the developing world in their fight against poverty, rampant disease and lack of education.

3. they should be lifted to encourage these same farmers, exasperated by low prices and a lack of trading opportunities, from potentially moving into growing proscribed crops like coca and heroin

and

4. they should be lifted because poverty makes people desperate and spawns the conditions for conflict and terrorism which all too often end with carnage and major refugee problems which the whole world has to deal with.

just1world@just1world.org
© 2001, 2002 Just 1 World - All rights reserved - Legal
Site Designed by IWS
Hosted on the IWSNET network