The Shortcomings Of The Current International Trade

System Essay, Research Paper

The issue of trade has been a factor in the interrelations between nations since their conception. Throughout history there have been many different structures that encompass these trade relations. In essence, the state of trade between counties coincided with, and depended upon, their economies, social structure, willingness to trade, and their available resources (tradable products and services). Today’s trade system is still formulated by these factors. However, there are many more concerns and actors which must be weighed. The current international trade system is, to say the least, much more complex. In its complexity, the trade system has also inherited a very controversial nature.

This controversy is focused on the true benefits of the current structure itself, which is labeled as trade liberalization. Within this paper I would like to address this controversy, and pose the argument that, The international trade system, as currently structured, does not serve to advance the interests of the North or South. Concentration will be directed toward the negative effects to the South, and secondarily on the long-term detrimental effects on the North.

In order to understand the current structure fully, one must know the history. With the close of the Second World War, the world’s leaders resolved to build a global economy that would be far more institutionalized and constitutionalized than the prewar model. In their initial design, the United Nations would provide the international political stability. Furthermore, economic growth among nations would be characterized by “free multilateralism,” driven by such organizations as the General Agreement on Tariffs and Trade (GATT), the World Bank, and the International Monetary Fund (IMF).

In terms of trade in the postwar, the United States and Great Britain tried to setup the International Trade Organization (ITO) to work along with the World Bank and IMF in an effort to promote free trade. However, because of confusion about the implications of free trade, the ITO never came to be. Most notably, the United States and Europe (mainly Britain) clashed in their concepts of free trade. The United States saw free trade as a great means of helping world prosperity and encouraging peace. Europe was however skeptical of this structural change while power was so unevenly shifted in favor of the United States.

With the threat of the US slipping into another depression, which would also hurt Europe’s economy, and presence of the Soviet Union’s ideals lurking in the background, a determination on trade became essential. Finally, the GATT was established with the sole concern of reducing trade barriers.

After several years of operation, the first of the South’s voice would be heard as they began to complain of unfair tariffs that industrialized countries still had in place that were detrimental to the developing counties. It was reported by an investigative committee that, “barriers of all kinds in developed counties contributed significantly to the trade problems of developing countries.” A major subject of the 1961 United Nations General Assembly was the large trade gap between developed and undeveloped worlds. The Group of 77 (G-77), made up of developing countries, pointed out the shortcomings of GATT and helped form the United Nations Conference on Trade and Development (UNCTAD) as a response. This new organization improved exposure to the “special and differential” needs of the South and supported the push for greater liberalization of the North’s markets and tariff reductions.

This brings the history to the opening of the Uruguay Round of trade negotiation in 1986. This round was one in a series under the GATT’s umbrella. The negotiations took place over eight years and involved 125 countries. Unfortunately, developing countries (the G-77) during this time period were, “in disarray, stricken by debt obligations and the impact of changes in the former Soviet Union and the end of the cold war in world politics. Moreover, developing countries were not…technically prepared for the negotiations while they lacked their own trade objectives and adequate strategies.” They were influenced, or under pressure to except, the dominant views of the time, which glorified the advantages of universal-trade liberalization. For these reasons, the South’s concerns were greatly underrepresented in the Agreement’s result.

The Uruguay Round proved to have a profound impact on world trade. Mainly this impact came from, the transformation of the GATT to the World Trade Organization (WTO), and the establishment of an agenda that would further extend the scope of free trade. Under the new Uruguay Round rules, the primary goal was the liberalization of international trade in such a way that all parties involved would benefit, which would be administered by the WTO. Although this goal had merit, its structure has not “served to advance the interests” of the trading nations, and specifically the South.

This brief history leads us now to where trade policy currently stands, in a state of limbo. This is evidenced by, “the deadlock in negotiations during the recent meetings of the WTO [that] have demonstrated the severe differences among various groups of member countries on such issues as universal and across-the-board trade liberalization.” The fact is that there has been a failure of trade liberalization in the 1980s and 1990s.

A number of factors have brought this failure to the forefront of both developed and developing countries agendas and caused them, “to have second thoughts on the merits of fast, universal and across-the-board trade liberalization.” One of these factors is the development of the balance-of-payment crisis in East Asia and Brazil, which led to financial and economic crisis in the world economy as a whole. The second factor is the failure of trade liberalization in most developing countries, to improve and diversify their manufactured exports. Third, trade liberalization has been followed by worsening income distribution within developing and developed countries, and also between them. Finally, the outcry of developing countries that felt that they had made a much greater commitment to liberalize trade than developed countries through the Uruguay Round Agreement and Structural Adjustments.

It is these factors, that have brought the North and South to the “table” to reconsider the international trade system. As Julius Katz, Deputy Trade Negotiator for the former Bush Administration states, “Things are going to just limp along until there can be wholesale rethinking of the trade strategy.”

There are two main arguments that lead one to believe that the current international trade system is not beneficial to the South or the North. In short these arguments are the existence of current barriers to trade, such as tariffs or quotas; and contradictions within GATT/WTO policy.

Although much effort has been given to reduce the amount of barriers to trade within the liberalized system, there are still many in use. In several cases there are mechanism is place that have replaced the discouraged tariffs. This includes non-tariff barriers (NTBs), export and import quotas, licensing schemes, and limits put on goods. These are sometimes considered more detrimental to trade than a straight tariff barrier, “because efficient foreign producers cannot undercut the barriers by reducing their costs and thus their prices.” Furthermore, “A high percentage of products subject to nontariff barriers indicates a protectionist trade regime.”

One particular example deals with the actual conversion from non-tariff agricultural barriers to a tariff, which is restricted by a “bound” tariff rate. In theory this is meant to help trade by reducing the range of trade policies and creating a price ceiling that can be eventually negotiated down. However, many countries took this opportunity to create high bound tariffs on such commodities as rice, coarse grains, and sugar. “These tariffs are highly damaging,” for two reasons. First, they raise the prices for domestic consumers. Second, they make the goods less marketable as exports.

Of considerable concern has been the disproportionate implementation of barriers in favor of industrialized countries, while at the same time being detrimental to developing nations. An example that comes from the Uruguay Round Agreement, is the reduction of a trade-weighted import duty on manufactures in industrialized countries to 3.4 percent. While duties on labor-intensive goods (exported by developing nations) are set four-times as high as those paid in developed counties.

In the past, many developing countries have looked to the WTO to help them gain a portion of the market. In theory, the system is supposed to prohibit unfair restrictions on trade, such as high tariffs and quotas. But in practice, WTO rules have allowed industrialized countries to restrict imports from developing countries while they also force the latter to accept market liberalization rules, which in-turn benefit developed nations anyway. For instance, the WTO restricts tariffs on manufactured goods, but ignores high tariffs placed on commodities that developing countries export. One example is that, the US tariff on orange juice is set at 31 percent, while industrial tariffs are on average below 5 percent.

Contradictions in the design and implementation of GATT/WTO rules have emerged from the trade liberalization system, which emphasizes the severe shortcomings of the international trade system. These contradictions include issues in agricultural trade, labor-intensive products exported from developing countries, and the infant industry clause.

As structured, GATT’s rules concerning agriculture portrayed a message that; “International trade should be free, but not for agricultural goods.” Consequently, rules governing agricultural goods, many of interest to developing countries, were not even addressed in the GATT Agreement. Moreover, when regulation of the agricultural sector had been raised for review in the past, such as in the Tokyo Round, it was met by strong opposition from industrialized nations. In such a case of the Tokyo Round, the European Community refused to discuss its Common Agricultural Policy in any degree. Except for a few commodities, trade in agricultural products has escaped international regulations.

To elaborate on this point, both the United States and European Commission/European Union (EEC/EU) have intervened in production and trade of their agricultural products through supportive and stabilization measures. In particular, their intervention comes in the form of price support and subsidies to domestic farmers. This practice makes it virtually impossible for developing countries to compete in the agricultural market. In fact, “Developing countries lose about $60 billion a year in potential exports because their farmers can’t compete with heavily subsidized agricultural goods produced in industrial countries.”

The second design contradiction of GATT/WTO rules involves labor-intensive products, such as textiles, clothing, and footwear. These products are of particular interest to developing countries. According to GATT rules, “International trade in manufactured goods should be subject to reductions in tariffs and other barriers, but not for the main labor-intensive products of export interest to developing counties.” Rules which govern manufactured goods, but exclude textiles and clothing at the same time, are expressly contrary to the “spirit of GATT” and thus trade liberalization. These products become subject to import barriers, such as the Multi-fibre Agreement (MFA). The MFA places restrictive quotas on imports of these goods from developing countries.

Further design contradictions have surfaced in regard to textiles and clothing. While developing countries, were pressured to rapidly implement Uruguay Round Agreement (URA) provisions, the MFA imposed by developed countries is only to be phased out over a ten year period. This is a clear example of the unequal treatment within the international trade system.

Another contradiction, which follows the same theme of inequitable design and implementation specification between developed and undeveloped nations, is that of infant industry protection. Infant industry protection allows for the restriction of imports and foreign direct investment so that a new domestic industry can establish itself in a particular market. Once again, laws allow industrialized countries to implement this tool, but developing countries are forbidden to do so.

It is important to note that the existence of inequitable trade barriers and institutional rules do, in fact, have adverse effects on the North in the long run as well. First of all, it is essential to allude to the interconnectivity between the North and South economically. According to UNCTAD data, developing country markets, as a whole, account for 24 percent of exports of developed countries, 15.2 percent of exports of EU, 52 percent of Japan and 42 percent of the US.

To begin, developing countries do not run surpluses, and thus must be careful not to increase their imports without matching it with exports. To do so would lead to an account deficit. Trade liberalization has been blamed in several cases for the current account deficits of developing countries. In explanation, “The current account deficits of non-oil exporting countries increased nearly threefold between 1990 and 1994, when a large number of developing counties undertook trade liberalization through World Bank and IMF Structural Adjustment Programmes and Stabilization Programmes.” This activity leads to a financial crisis, such as occurred in Asia and Latin America. These crises cause a ripple effect in the world economy, which will undoubtedly effect the industrialized world negatively.

Often when researching a specific topic, it can be beneficial to look at the contradictory perspective in a hope to get a better understanding of your own side of the issue. From the pro-side of this topic, the current international trade system is seen to advance the interests of both the North and South.

The strongest argument that I see developing from this side is that current trade liberalism gives the developing countries of the world a substantial opportunity to flourish. It can be said that the current system gives the South more of a ‘voice’ in the political economy, therefore increasing its chances for meeting its needs. “Free trade offers the best hope for poor countries to escape misery.” However, as discussed above, the current trade system is not one that can be characterized by a free and open system, which would be necessary for the substantial advancement of the South. In reality, “The WTO and its member countries adhere to a policy of lopsided liberalization easily infringing on the ideology of openness to protect their markets or their products.” Furthermore, “The definition of ‘free trade’ promoted by the WTO consists of selective protection of ICs [industrialized countries] special interests…coupled with a radical quick opening of developing economies to global markets.” These descriptions of the trade system certainly do not portray one of free trade.

As we begin a new millenium, the international trade system stands at a crossroads. Will trade reform prevail, to help the interests of the South and create an equal and fair set of rules? Or will nations succumb to a growing backlash against reforms, and retreat behind more and more borders, damaging opportunities for growth? The goal of a system that truly exemplifies free trade should still continue to be the ultimate concern of all countries. A productive system can only exist once all actors are treated on a level playing field. There is a need for revision of current international trade rules. In the future design of the rules more attention should be paid to the level of development and industrial capacity of developing countries. To improve equitability developing countries must remain proactive in their push for reform. Developing countries should formulate a clear trade and industrial policy to enter into negotiations with. Moreover, in their common negotiation strategy, they should not settle on an unbalanced agreement, but instead attempt to coordinate trading rules that are sensitive to helping their development needs and most of all universal applied.

Bibliography

Footnotes

1. Kapstein, Ethan B. “Distributing the Gains: Justice and International Trade.” Journal of International Affairs v.52 (1999): 533-55.

2. Ibid. pg. 538

3. Ibid.

4. United Nations Conference on Trade and Development, Publications. Shafaeddin, Mehdi. Free Trade or Fair Trade? No. 153 : 2000.

5. Ibid. pg. 2

6. Ibid. pg. 3

7. Ibid.

8. The World Bank. World Development Indicators. pg. 311-333 Washington: 2000.

9. Evernett, Simon. “The World Trading System: the Road Ahead.” Finance & Development v.36 no.4 (1999): 22-5.

10. World Bank pg. 311

11. Smith, Jackie; Moran, Timothy. “WTO 101: myths about the World Trade Organization.” Dissent v.47 no.2 (2000): 66-70.

12. UNCTAD pg. 21

13. Islam, Shada. “East-West divide. Seattle WTO meeting to discuss child labor and other issues.” Far Eastern Economic Review v.162 no.48 (1999).

14. UNCTAD pg. 22

15. Ibid. pg. 29

16. Legrain, Philippe. “Not an Ogre, but a Friend to the Poor.” New Statesman v.128 no.4438 (1996): 17

17. Smith; Moran pg. 66

18. Ibid. pg. 68