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By
Robin Koshy
(This article was first published on May 10, 2005,
in Business Standard under the title ‘Fair Trade: For Better or Worse?’
The author is with Centad) In 2003, the United States exported 3.8
million tonnes of rice, making it the third largest exporter in the world, trailing
only behind Thailand and Vietnam. This, despite the fact that it costs twice as
much in the US to grow rice than it does in the other two countries. Such sterling
export performance has been aided by the US$ 1.3 billion (72% of the total cost)
that the American rice farmers got as subsidies in 2003! (Oxfam Briefing Paper
72: ‘Kicking Down the Door', 2005) Not all countries can afford to bankroll
their way to a comparative advantage in trade, especially when there is none.
Certainly, not the developing countries. The dictum of classical economic theory
where trade specialisation takes place according to comparative advantages is
out of operation in a trading architecture riddled with trade-distorting domestic
support and high tariff boundaries. Will free trade that removes these distortions
especially in developed countries, restore comparative advantages of developing
countries in agricultural commodities, increase their export earnings, boost the
wages of their unskilled labour and stimulate economic growth in general? Arvind
Panagariya of Columbia University thinks otherwise. His conclusions are born out
of the fact that most Least Developed Countries (LDCs) are net importers of agricultural
commodities -– 45 of the 49 LDCs import more food than they export. In his paper
‘Agricultural Liberalisation and the Developing Countries: Debunking the Fallacies'
(2004), he contends that if subsidies are removed, the net importers of food will
end up paying more for food. This loss will not be offset, unless they can become
sufficiently large net exporters. Cuts in rich country subsidies would therefore
benefit only big agricultural exporters such as Brazil and Argentina, while most
LDCs would be worse off than they were before. Although Panagariya's arguments
are not backed by substantive empirical analyses, other studies estimate that
larger countries would benefit, while smaller countries in the same regions would
suffer (for example, India would benefit while the rest of South Asia would lose
out). If poor countries emerge as net losers, it could stem their enthusiasm for
the Doha Development Agenda and jeopardise liberalisation of trade in future.
Therefore, he argues that the poorest nations are better off with high
domestic subsidies in developed countries so long as they get preferential access,
while larger developing country exporters are kept out by high tariffs. He cites
the European Union's Everything But Arms (EBA) initiative (more precisely, Everything
But Arms, Bananas, Rice and Sugar initiative!), that gives duty- and quota-free
access for LDCS to sell at the high prices prevalent in EU markets. William
Cline of the Centre for Global Development draws diametrically different conclusions
about the impact of trade liberalisation, on the basis of his empirical analysis
and economic modelling, in his book Trade Policy and Global Poverty (2004).
He argues that liberalisation of agricultural markets is the most important way
to reduce global poverty, as three-fourth of the world's poor (living on less
than US$ 2 a day) are in rural areas. Rural poor are more likely to be dependent
on farming, and any increase in export opportunities will increase their income.
The gains of the rural poor will outweigh the losses of the urban poor, and there
will also be a redistribution of income from cities to villages. Cline estimates
that global free trade could increase agricultural prices by 10%, hike real wages
of unskilled labour in developing countries by 5% and boost the global economic
welfare of developing countries by $ 90 billion annually. This, he estimates,
could pull 200 million people out of poverty, or 650 million people if one factors
in capital investment and a longer-term period of 10-20 years. Welfare gains are
highest from liberalisation of agriculture, followed by textiles and apparel.
The US$ 90 billion that developing countries could gain will dwarf the
US$ 50 billion that developing countries receive as aid. Yet another argument
in favour of freer and fairer trade over aid and preferences. Interestingly, this
corroborates Oxfam's calculation in its 2002 trade report (‘Rigged Rules, Double
Standards') that put the loss to developing countries due to rich-country trade
restrictions at US$ 100 billion a year. Cline cites evidence that only a sixth
of the world's poor live in the net food-importing countries, and estimates that
over 130 million people could be pulled out of poverty in India and China alone.
If this were put in the perspective of the global target of halving poverty by
2015, it would reflect significant advances in the two biggest battlefields. Here,
one of Panagariya's arguments merits consideration -- trade liberalisation has
adjustment costs that could impact smaller and poorer countries more. Hence, compensation
programmes need to be designed smartly to factor these costs in and prevent these
countries from becoming disenchanted. However, to cite these adaptation
pangs and static losses to net food-importing countries as reasons enough to preserve
the status quo and debunk trade liberalisation where it is needed most, is strange.
As strange as the American comparative advantage in rice. Moreover, it cannot
be ignored that many LDCs are net food-importers today due to pressures from beyond
their borders. Rice imports to Haiti, an LDC, increased by 150% between 1994 and
2003 after the International Monetary Fund forced it to cut rice tariffs from
35% to 3%. Ironically, three out of four plates of rice consumed in Haiti today
come from the US. Any guesses on the number of empty plates in the homes of impoverished
Haitian rice farmers? References:
Panagariya,
A, ‘Agricultural Liberalisation and the Developing Countries: Debunking the Fallacies',
2004
Cline, W, ‘Trade Policy and Global Poverty', Centre for Global Development,
2004
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