Free Trade is not the solution

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Economy

"I was wrong on free trade", says Stephen Byers, British Labour MP and former trade secretary. He realised that the policy of unfettered free trade is indeed a great handicap for developing nations and may be what keeps them in poverty, rather than helping them get out on their own steam.

"....there are an increasing number of countries in which full-scale trade liberalisation has been applied and then failed to deliver economic growth while allowing domestic markets to be dominated by imports - often with devastating effects. Zambia and Ghana are examples of countries in which the opening up of markets has led to sudden falls in growth rates, with sectors being unable to compete with foreign goods."

See also this great article by Dr. Edward Ayoub "nothing but a tail" on the significance of debt and the mantra of free trade that is so convincingly being spread to heads of state and governors.

I was wrong on free trade

June 23 2003

Only after getting out into the real world did Stephen Byers realise that untrammelled trade liberalisation carries inherent dangers.

In November 1999, during the World Trade Organisation ministerial conference in Seattle, I watched from my hotel room as thousands demonstrated against the evils of globalisation. Anarchists clad in black marched alongside grandmothers dressed as turtles and steelworkers from Philadelphia. They saw international trade as a threat - to their jobs, the environment - or simply as part of a capitalist conspiracy.

As leader of the delegation from Britain, I was convinced the expansion of world trade had the potential to bring major benefits to developing countries and would be one of the key means by which world poverty would be tackled.

To achieve this, I believed developing countries would need to embrace trade liberalisation. This would mean opening up their domestic markets to international competition - the thinking being that the discipline of the market would resolve problems of underperformance, a strong economy would emerge and, as a result, the poor would benefit. This remains the position of major international bodies such as the International Monetary Fund and World Bank and is reflected in the system of incentives and penalties they incorporate in their loan agreements with developing countries.

But my mind has changed.

I now believe this approach is wrong and misguided. Since leaving the British cabinet a year ago, I've had the opportunity to see at first hand the consequences of trade policy. No longer sitting in the air-conditioned offices of fellow government ministers I have, instead, been meeting farmers and communities at the sharp end.

It is this experience that has led me to the conclusion that full trade liberalisation is not the way forward. A different approach is needed: one that recognises the importance of managing trade with the objective of achieving development goals.

No one should doubt the hugely significant role international trade could play in tackling poverty. In terms of income, trade has the potential to be far more important than aid or debt relief for developing countries. For example, an increase in Africa's share of world exports by just 1 per cent could generate around five times the total amount of aid received by African countries.

This has led President Yoweri Museveni of Uganda to say: "Africa does need development assistance, just as it needs debt relief from its crushing international debt burden. But aid and debt relief can only go so far. We are asking for the opportunity to compete, to sell our goods in Western markets. In short, we want to trade our way out of poverty."

The World Bank estimates reform of the international trade rules could take 300 million people out of poverty. Reform is essential because, to put it bluntly, the rules are rigged against the poorest countries.

Rich nations may be prepared to open up their own markets, but still keep in place massive subsidies. The quid pro quo for doing this is that developing countries open up their domestic markets. These are then vulnerable to heavily subsidised exports from the developed world.

The course of international trade since 1945 shows that an unfettered global market can fail the poor and that full trade liberalisation brings huge risks and rarely provides the desired outcome. It is more often the case that developing countries that have successfully expanded their economies are those that have been prepared to put in place measures to protect industries while they gain strength and give communities the time to diversify into new areas.

This is not intervention for the sake of it or to prop up failing enterprises, but part of a transitional phase to create strong businesses that can compete on equal terms in the global marketplace without the need for continued protection.

Just look at some examples. Taiwan and South Korea are often held out as being good illustrations of the benefits of trade liberalisation. In fact, they built their international trading strength on the foundations of government subsidies and heavy investment in infrastructure and skills development while being protected from competition by overseas firms. More recently, those countries that have been able to reduce levels of poverty by increasing economic growth - such as China, Vietnam, India and Mozambique - have all had high levels of intervention as part of an overall policy of strengthening domestic sectors.

On the other hand, there are an increasing number of countries in which full-scale trade liberalisation has been applied and then failed to deliver economic growth while allowing domestic markets to be dominated by imports - often with devastating effects. Zambia and Ghana are examples of countries in which the opening up of markets has led to sudden falls in growth rates, with sectors being unable to compete with foreign goods.

Even in those countries that have experienced overall economic growth as a result of trade liberalisation, poverty has not necessarily been reduced. In Mexico during the first half of the 1990s there was economic growth, yet the number of people living below the poverty line increased by 14 million in the 10 years from the mid-1980s - because the benefits of a more open market all went to the large commercial operators, with the small concerns being squeezed out.

The benefits that would flow from increased international trade will not materialise if markets are simply left alone. When this happens, liberalisation is used by rich and powerful international players to make quick gains from short-term investments.

The role of the IMF and World Bank is also of concern. The conditions placed on their loans often force countries into rapid liberalisation, with scant regard to the impact on the poor. The way forward is through a regime of managed trade in which markets are slowly opened up and trade policy levers such as subsidies and tariffs are used to help achieve development goals.

The IMF and World Bank should recognise that questions of trade liberalisation are the responsibility of the WTO where they can be considered in the overall context of achieving poverty reduction and that it is therefore inappropriate to include trade liberalisation as part of a loan agreement.

This represents a departure from the current orthodoxy. It will be opposed by multinational companies that see rich and easy pickings in the markets of the developing world. But such a change would benefit the world's poorest people and that's why it should happen.

Stephen Byers is a British Labour MP and former trade secretary.

This article first appeared in The Guardian.

It was later re-published by The Age.

Here another article, Times of India 25 July 2003

Trade Fair
Friday, July 25, 2003

Oxfam, an international humanitarian aid organisation, has been in news for causing a "Big Noise" against what it calls the rigged rules of world trade. As the September 10-14 Cancun meeting of the trade ministers from over 140 WTO member countries draws closer, Oxfam has intensified its campaign for a global trade system that is fair to the poor countries. Stewart Wallis, Oxfam's international division director, talks to Priya Ranjan Dash:

Why is a humanitarian and development aid organisation like Oxfam engaged in global trade issues?
Trade has an amazing potential of lifting people out of poverty. Trade affects poor people, either positively or negatively. If Africa, East Asia, South Asia and Latin America were to increase their share of world exports by one per cent each, the resulting gains in income could lift 128 million people out of poverty. But at the moment, the global trade rules are rigged against the poor. That's why we are campaigning for making trade fair.

Are you for or against globalisation?
We are in the middle. It's a difficult place to be in. So let me explain: We want global trade rules. The rules are at present rigged, but it would be worse to have no rules at all. The rich countries would then pick off the poor countries in a bigger way than they are doing now. So, it is not globalisation per se that we are against. We are opposed to the present rigged rules.

How would you like globalisation to be managed?
We would like things to be turned on their head. The rich countries at present are keeping their markets closed to developing country products even as they are dumping subsidised products on the poor countries' markets. We would like it to be the other way round. Tthe markets of rich countries should be open for goods from developing countries whereas the poor countries should be able to protect sectors that are important in terms of food security and small farmers. We would also like to see some democracy in terms of world governance. The world is very inter-connected. And, as a global community, we sink or swim together. So we need to find effective ways of managing the world system in a more democratic and fair way.

How is Oxfam influencing rich countries to be fair to the poor?
We are doing a lot of research and preparing policy papers. We are lobbying government officials and ministers and backing that up by campaigning and getting a huge body of support for our message. We already have about two million people, who have signed up for what we call the "Big Noise", which is a way to join up our trade campaign online. We will have three million people before the Cancun meeting of WTO.

We also have people like Desmond Tutu, Mary Robinson and other world leaders on our side. We are trying to influence the agenda by a set of well-researched papers on topics such as what happens to poor people as a
result of subsidies and dumping by the rich countries. We give the facts. We argue the economics. We lobby in the media. We have had meetings with the heads of state of most of the European countries and the American trade negotiator. We have lobbied with British MPs as well.

What is your success rate?
We have managed to turn this into a movement over the last one-and-a-half years, particularly regarding intellectual property rights on the question of low cost medicines for countries facing public health crisis. We have been very influential on that. Also, we believe we have made some progress on the issue of investment agreement. Three-four months ago, the British government was saying that it is absolutely crucial to get a WTO mandate to negotiate a multilateral investment agreement in Cancun. Now, they are saying it would be a good thing to have.

Similarly, the American trade representative Robert B Zoellick is now implying that the US would not push the investment agreement that strongly. So, our work on investment is having some impact. But we still have a long way to go. Also, on agriculture, we have got our issues on the agenda. The British government is now opposing subsidies given to agriculture in Europe. Other European countries such as France and Germany are however much less supportive. We have had meetings with leaders such as the French president Jacques Chirac, and we have pushed our issues strongly.

Do you subscribe to the view that the cheap labour of