Social Justice and Global Trade

Joseph Stiglitz discusses trade liberalization and asks how to reform the global trading system to "enhance the chances that trade and globalization come closer to living up to their potential for enhancing the welfare of everyone.":

Social Justice and Global Trade, FEER, March 2006, By Joseph Stiglitz:  The history of recent trade meetings—from Seattle to Doha to Cancun to Hong Kong—shows that something is wrong with the global trading system. Behind the discontent are some facts and theories.

The facts: Current economic arrangements disadvantage the poor. Tariff levels by the advanced industrial countries against the developing countries are four times higher than against the developed countries. The last round of trade negotiations, the Uruguay Round, actually left the poorest countries worse off. While the developing countries were forced to open up their markets and eliminate subsidies, the advanced developed countries continued to subsidize agriculture and kept trade barriers against those products which are central to the economies of the developing world.

Indeed, the tariff structures are designed to make it more difficult for developing countries to move up the value added chain... As tariffs have come down, America has increasingly resorted to the use of non-tariff barriers as the new forms of protectionism. Trade agreements do not eliminate protectionist sentiments or the willingness of governments to attempt to protect producer and worker interests.

The theories: Trade liberalization leads to economic growth, benefiting all. This is the prevalent mantra. Political leaders champion liberalization. Those who oppose it are cast as behind the times, trying to roll back history. Yet the fact that so many seem to have been hurt so much by globalization seems to belie their claims. ...the details of the trade agreements—make a great deal of difference.

That Mexico has done so poorly under NAFTA has not helped the case for liberalization. If there ever was a free trade agreement that should have promoted growth, that was it, for it opened up for Mexico the largest market of the world. But growth in the decade since has been slower than in the decades before 1980, and the poorest in the country, the corn farmers, have been particularly hurt by subsidized American corn.

The fact of the matter is that the economics of trade liberalization are far more complicated than political leaders have portrayed them. There are some circumstances in which trade liberalization brings enormous benefits—when there are good risk markets, when there is full employment, when an economy is mature. But none of these conditions are satisfied in developing countries. With full employment, a worker who loses his job to new imports quickly finds another; and the movement from low-productivity protected sectors to high-productivity export sectors leads to growth and increased wages. But if there is high unemployment, a worker who loses his job may remain unemployed. A move from a low-productivity, protected sector to the unemployment pool does not increase growth, but it does increase poverty. Liberalization can expose countries to enormous risks...

Perhaps most importantly, successful development means going stagnant traditional sectors with low productivity to more modern sectors with faster increases in productivity. But without protection, developing countries cannot compete in the modern sector. They are condemned to remain in the low growth part of the global economy. South Korea understood this. Thirty-five years ago, those who advocated free trade essentially told South Korea to stick with rice farming. But South Korea knew that even if it were successful in improving productivity in rice farming, it would be a poor country. It had to industrialize.

What are we to make of the oft-quoted studies that show that countries that have liberalized more have grown faster? Put aside the numerous statistical problems that plague almost all such “cross country” studies. Most of the studies that claim that liberalization leads to growth do no such thing. ... Studies that focus directly on liberalization—that is, what happens when countries take away trade barriers—present a less convincing picture that liberalization is good for growth.

But we know which countries around the world have grown the fastest: they are the countries of East Asia, and their growth was based on export-driven trade. They did not pursue policies of unfettered liberalization. Indeed, they actively intervened in markets to encourage exports, and only took away trade barriers as their exports grew...

The point is that no country approaches liberalization as an abstract concept... Every country wants to know: For a country with its unemployment rate, with its characteristics, with its financial markets, will liberalization lead to faster growth?

If the economics are nuanced, the politics are simple. Trade negotiations provide a field day for special interests. ... Exporters want others’ markets opened up; those threatened by competition do not. Trade negotiators pay little attention to principles... They pay attention to campaign contributions and votes.

In the most recent trade talks, for example, enormous attention has been focused on developed countries’ protection of their agricultural sectors—protections that exist because of the power of vested agricultural interests there. Such protectionism has become emblematic of the hypocrisy of the West ... Some 25,000 rich American cotton farmers, reliant on government subsidies for cotton, divide among themselves some $3 billion to $4 billion a year, leading to higher production and lower prices. The damage that these subsidies wreak on some 10 million cotton farmers eking out a subsistence living in sub-Saharan Africa is enormous. Yet the U.S. seems willing to put the interests of 25,000 American cotton farmers above that of the global trading system and the well-being of millions in the developing world. If those in the developing world respond with anger, it is understandable.

The anger is increased by the United States’s almost cynical attitude in “marketing” its offers. For instance, at the Hong Kong meeting, U.S. trade officials reportedly offered to eliminate import restrictions on cotton but refused to do anything about subsidies. The cotton subsidies actually allow the United States to export cotton. When a country can export a particular commodity, it does little good to allow imports of that commodity. The U.S., to great fanfare, has made an offer worth essentially zero to the developing countries and berated them for not taking it up on its “generous” offer. ...

In short, trade liberalization should be “asymmetric”, but it needs to be asymmetric in a precisely opposite way to its present configuration. Today, liberalization discriminates against developing countries. It needs to discriminate in their favor. Europe has shown the way by opening up its economy to the poorest countries of the world in an initiative called Everything But Arms. Partly because of complicated regulations (“rules of origin”), however, the amount of increased trade that this policy has led to has been very disappointing thus far. Because agriculture is still highly subsidized and restricted, some call the policy “Everything But Farms.” There is a need for this initiative to be broadened. ... In fact, the advanced industrial countries as a whole would be better off, and special interests in these countries would suffer.

There is, in fact, a broad agenda of trade liberalization (going well beyond agriculture) that would help the developing countries. But trade is too important to be left to trade ministers. If the global trade regime is to reflect common shared values, then negotiations over the terms of that trade regime cannot be left to ministers who, at least in most countries, are more beholden to corporate and special interests than almost any other ministry. In the last round, trade ministers negotiated over the terms of the intellectual property agreement. This is a subject of enormous concern to almost everyone in today’s society. ... It reflected the interests of U.S. drug and entertainment industries, not the most important producers of knowledge, those in academia. And it certainly did not reflect the interests of users, either in the developed or less-developed countries. But the negotiations were conducted in secret, in Geneva. The U.S. Trade Representative (like most other trade ministers) was not an expert in intellectual property; he received his short course from the drug companies, and he quickly learned how to espouse their views. The agreement reflected this one-sided perspective.

Several reforms in the structure of trade talks are likely to lead to better outcomes. The first is that the basic way in which trade talks are approached should be changed. Now they are commercial negotiations. Each country seeks to get the best deal for its firms. This stands in marked contrast to how legislation in all other arenas of public policy is approached. Typically, we ask what our objectives are, and how we can best achieve them. ... If we began trade talks from this position of debate and inquiry, we could arrive at a picture of what a true development round look like. ...

As more and more countries have demanded a voice in trade negotiations, there is often nostalgia for the old system in which four partners (the U.S., EU, Canada and Japan) could hammer out a deal. There are complaints that the current system with so many members is simply unworkable. We have learned how to deal with this problem in other contexts, however, using the principles of representation. We must form a governing council with representatives of various “groups”—a group of the least developed countries, of the agricultural exporting countries, etc. Each representative makes sure that the concerns of his or her constituency are heard. ...

Finally, trade talks need to have more focus. Broadening the agenda also puts developing countries at a particular disadvantage, because they do not have the resources to engage on a broad front of issues.

The most important changes are, however, not institutional changes, but changes in mindset. There should be an effort on the part of each of the countries to think about what kind of international rules and regulations would contribute to a global trading system that would be fair and efficient, and that would promote development.

Fifteen years ago, there was a great deal of optimism about the benefits which globalization and trade would bring to all countries. It has brought enormous benefits to some countries; but not to all. Some have even been made worse off. Development is hard enough. An unfair trade regime makes it even more difficult. Reforming the WTO would not guarantee that we would get a fair and efficient global trade regime, but it would enhance the chances that trade and globalization come closer to living up to their potential for enhancing the welfare of everyone.

Comments

[Bruce Wilder]

The "U.S. drug and entertainment industries" practically own the U.S. Congress. The corruption of trade policy is just one bad consequence among many.

[brad setser]

hmmm -- at least one country -- China -- has found an innovative way to overcome that discrimination, with central bank export subsidies ... . setting agriculture and IP (drugs) aside, i suspect that the trading system has in many ways been qutie advantageous to some developing countries. China joined the WTO and got to benefit from all the concessions others negotiated for their manufacturing goods. But the WTO is silent on exchange rate neo-mercantilism (too frame the issue in its most blunt way). Certainly, WTO rules that work against developig countries have not stood in the way of a triping of Chinese exports since 2000.

Realistically, tho, i don't think the emerging world can rely as much on export led growth in the future as it hsa in the past. US cannot sustain current rates of import growth forever ... in that sense, i found stiglitz's arguments disappointing. his critique of the trade regime is fair, but it is divorced from broader macro developments, and the fact that US imports from the developing world have been growing very, very, fast ... (and not just commodity imports).

[a]

China is not the only country that benefits from trade. Although it is much in the news and some US people would like to blame China for many dis-satifactions they feel.

Japan, Korea, Taiwan, Singapore...

China was anxious to join WTO not because WTO is intrinsically fair, but because joining WTO (and hence the trade community of the world) is better than no trade. With the size of its market, China also has more bargain power than most of the developing countries. Strong government intervention might also be a factor of the countries that had benefited from trading.

There is no deny that with the massive production/financial/intellectual and military advantage
developed countries have, they normally care only about their special interest groups and their citizens (for political reasons) and have not much mercy for the developing countries. The best example to illustrate the unfairness of the trade is Zambia, see the documentary "t-Shirt travels" for yourself:
http://www.pbs.org/independentlens/tshirttravels/film.html

[anne]

Brad Setser

"I suspect that the trading system has in many ways been quite advantageous to some developing countries."

After 60 years, through most of which the trading system has been of remarkably little development assistance for poorer nations, I am rather pleased there has been a change and China has understood how to properly drive a develop bargain with trade partners. Hopefully the model is sufficiently spreading, for accelerated development in poorer nations will be a considerable aid to us.

[anne]

About driving proper bargains, by the way, Cuba, which evidently has a wonderful national baseball team, was allowed to play in the world championship and will finish either first or second, but as a price of playing Cuba will not be allowed to take any of the earned proceeds of the games back to Cuba. Yes; America knows how to be tough on trade but China is also teaching what toughness is.

[anne]

http://select.nytimes.com/search/restricted/article?res=F20812FC34580C708CDDAA0894DB404482

March 3, 2003

Why Mexico's Small Corn Farmers Go Hungry
By Tina Rosenberg

MEXICO CITY - Macario Hernández's grandfather grew corn in the hills of Puebla, Mexico. His father does the same. Mr. Hernández grows corn, too, but not for much longer. Around his village of Guadalupe Victoria, people farm the way they have for centuries, on tiny plots of land watered only by rain, their plows pulled by burros. Mr. Hernández, a thoughtful man of 30, is battling to bring his family and neighbors out of the Middle Ages. But these days modernity is less his goal than his enemy.

This is because he, like other small farmers in Mexico, competes with American products raised on megafarms that use satellite imagery to mete out fertilizer. These products are so heavily subsidized by the government that many are exported for less than it costs to grow them. According to the Institute for Agriculture and Trade Policy in Minneapolis, American corn sells in Mexico for 25 percent less than its cost. The prices Mr. Hernández and others receive are so low that they lose money with each acre they plant.

In January, campesinos from all over the country marched into Mexico City's central plaza to protest. Thousands of men in jeans and straw hats jammed the Zócalo, alongside horses and tractors. Farmers have staged smaller protests around Mexico for months. The protests have won campesino organizations a series of talks with the government. But they are unlikely to get what they want: a renegotiation of the North American Free Trade Agreement, or Nafta, protective temporary tariffs and a new policy that seeks to help small farmers instead of trying to force them off the land.

The problems of rural Mexicans are echoed around the world as countries lower their import barriers, required by free trade treaties and the rules of the World Trade Organization. When markets are open, agricultural products flood in from wealthy nations, which subsidize agriculture and allow agribusiness to export crops cheaply. European farmers get 35 percent of their income in government subsidies, American farmers 20 percent. American subsidies are at record levels, and last year, Washington passed a farm bill that included a $40 billion increase in subsidies to large grain and cotton farmers.

It seems paradoxical to argue that cheap food hurts poor people. But three-quarters of the world's poor are rural. When subsidized imports undercut their products, they starve. Agricultural subsidies, which rob developing countries of the ability to export crops, have become the most important dispute at the W.T.O. Wealthy countries do far more harm to poor nations with these subsidies than they do good with foreign aid.

While such subsidies have been deadly for the 18 million Mexicans who live on small farms -- nearly a fifth of the country -- Mexico's near-complete neglect of the countryside is at fault, too. Mexican officials say openly that they long ago concluded that small agriculture was inefficient, and that the solution for farmers was to find other work. ''The government's solution for the problems of the countryside is to get campesinos to stop being campesinos,'' says Victor Suárez, a leader of a coalition of small farmers....

[anne]

Fed Chief Sees Need to Include Global Factors in Setting Rates
By EDUARDO PORTER

Ben S. Bernanke suggested that the central bank would need to move beyond its usual focus on domestic economic forces.

There will be lots of fun :)

[anne]

When Roche is charging us from $40,000 to $100,000 for a year of critical drugs, I would suggest that moaning about Brazil being tough in bargaining for access to the drugs is just fine. Bargain away Brazil :)

[a]

"The most important changes are, however, not institutional changes, but changes in mindset. There should be an effort on the part of each of the countries to think about what kind of international rules and regulations would contribute to a global trading system that would be fair and efficient, and that would promote development."

Obviously different people trade with different agendas. It would be nice to have a global consensus, a principle that most of the people agree upon, and it is not just what is good of ME, but what is good for everyone.

A global "social contract", sort of.

I don't think there is one yet.

For example, I always wonder about the bombing of a Sudanese pharmaceutical plant --- here is excerpt from Wikipedia "Al-Shifa pharmaceutical factory":

"The factory was a principal source of Sudan's anti-malaria and veterinary drugs. Human Rights Watch reported that as a result of the bombing "many relief efforts have been postponed indefinitely, including a crucial one run by the U.S.-based International Rescue Committee where more than fifty southerners are dying daily", In Summer 2001, Werner Daum (Germany's ambassador to Sudan 1996–2000) wrote an article [4] in which he estimated that the attack "probably led to tens of thousands of deaths" of Sudanese civilians. The regional director of the Near East Foundation, who has direct field experience in the Sudan, published in the Boston Globe another article with the same estimate. By that time, however, the U.S. had changed it's sanctions policy to allow commercial sales of medical products to embargoed destinations, so the Sudanese were allowed to buy pharmaceutical supplies from U.S. companies. [5]"

Excellent for trade!!!