Article > The global slump makes a fair trade revolution more urgent than ever

THE DEVELOPING WORLD

The global slump makes a fair trade revolution more urgent than ever

Spring 2010

by Peter Lilley

A radical change in the handicaps to export-led growth by the world's poorest countries is now urgently needed, says Peter Lilley, a veteran Tory politician who is co-founder of an all-party British pressure group

Commentary:

by Moses Ikiara

The worldwide recession has had an enormous impact on financial security, national budgets, and economic confidence from London and New York or Tokyo to the poorest nations, where for the bottom billion poorest people, economic contraction can be a matter of life or death. Yet an attainable solution is close to hand, and that's why my colleagues Clare Short, John Battle, Ming Campbell, Lord Hastings and myself have launched an All-Party UK-based campaign called "Trade Out of Poverty".

It is always tempting at times of economic uncertainty to turn inwards and raise the draw bridge in the belief that one is doing the right thing by tending to one’s own and putting the rest on hold to be dealt with in better times. But this risks compounding the negative effects of the recession, not least for the countries that most need our help. We should know better than to give in to this sort of protectionism. In the 1930s protectionism turned recession into a prolonged slump that was counter-productive for the rich and catastrophic for the poor.

EW BACKGROUND BRIEFING

EU heads for 70% of aid to Third World

The economic downturn has so far done little to dampen Europeans’ enthusiasm for development aid. In a recent Eurobarometer survey, 90% said they think development is important, with 50% saying that poverty is the greatest challenge faced by developing countries. Dishearteningly, though, only 25% of those questioned had heard of the Millennium Development Goals, the UN’s blueprint for tackling extreme poverty by 2015.

Almost three-quarters (72%) of the people surveyed think that European countries should honour, or even go beyond, their commitments to the developing world, but only 26% said the EU is the best suited to assist developing countries. The United Nations is widely seen as the key player.

EU governments appear to be taking note of the general public desire to give more aid. In 2003, the European Commission pledged that EU aid commitments should be at least 0.39% of Gross National Income, and in 2008 and last year the member states honoured this promise.

Aid contributions by EU member states have grown steadily in the last decade. In 2000 they donated less than €29bn to poorer countries, but by 2008 that had doubled to almost €60bn.

Sweden is the most generous EU country, having given1.3% of its GNI in aid in 2008, with the Netherlands next at 0.83%. Greece and Italy are the least generous, spending 0.21% and 0.22% of GNI on aid respectively.

The OECD’s aid simulation for this year suggests that the economic crisis will have done little to reduce EU spending. It forecasts the EU again topping the global list of aid donors with a total €70bn in development assistance, a handsome 70% of all official development assistance worldwide.

The EU puts other large aid donors to shame. The U.S. aid total of €10bn in 2001 had doubled to €20bn in 2008, but still only represented 0.19% of GNI. In that year, EU member states spent 0.4% of GNI on aid, that totalled almost €40bn more than the U.S. Japan’s development aid stood at €7bn, or 0.19% of GNI, and Canada gave €5bn, or 0.32% of GNI.

Fortunately for today's rich but cash-strapped countries, the less developed countries, unlike our banks, don’t need a bail-out package, nor do most of them want one. As Mo Ibrahim wrote recently in Europe's World, Africa doesn’t need rescuing, it needs a square deal. This sentiment was echoed by Rwanda's President Paul Kagame in the British newspaper The Guardian when he called for solutions in which Africa would be an active participant and not just a recipient.

African countries, and the Third World as a whole, need to be given the opportunity to create their own wealth. Historically, the single most important driver out of poverty for countries from Japan to South Korea and Brazil to Mauritius has been trade with other countries. Increased opportunities for trade could ensure that the recession does not set back the poorest countries and, better yet, trade will ensure it lifts itself out of poverty.

Although the developed world pays lip service to the need to open its markets to the poorest countries, it maintains a number of barriers that impede their efforts to trade their way out of poverty. The developed world’s trade policies not only limit access to developed markets, but also impose complex and costly trade regulations and support unfair subsidies which render uncompetitive products from developing countries. "Trade Out of Poverty" is now actively working towards making the necessary changes to these unfair trade policies. We advocate five clear steps that the developed and developing world must take together to make it possible for the poorest countries to beat the recession and earn their way out of poverty.

Rich nations like those of the EU, the United States and other OECD members must open their markets unconditionally to all those defined by the World Bank as Low Income Countries. The tariffs levied by developed countries have come down substantially during successive trade rounds, but the highest remaining tariffs tend to be those levied on agricultural products and labour intensive manufactured goods – precisely the goods that the poorest countries can most readily produce. The U.S., for example, levies more duty on imports from Bangladesh and Cambodia than on French and British imports that are six times greater in value; American duties on imports from Bangladesh and Cambodia in fact exceed by far the development aid each receives from the U.S.

The normal procedure under the rules of the World Trade Organisation is for tariff reductions to be reciprocal. But the important step to be taken now is for rich countries to open-up their markets to the poorest unconditionally, without requiring them to open up their markets to exports from the industrialised world.

The world's poorest countries represent a fifth of the global population, but account for less than a fiftieth of world trade. The export industries of the poorest countries are small in scale, unsophisticated and usually specialised in products which cannot easily be produced in the developed world. By no stretch of the imagination are they a ‘threat’ to the industries of the developed world.

Since the poorest countries take less than 2% of the rest of the world’s exports it is of minimal significance to rich countries whether those markets are opened wider or not. By contrast, the rich countries represent the market for over 90 % of the exports of the poorest countries, so the barriers we impose are absolutely crucial to them.

A number of trade arrangements such as the EU’s 'Everything But Arms' already claim to give unconditional access to least developed countries. Unfortunately, the devil is in the detail, and those details comprise rules of origin and other non-tariff regulations that undo much of the good intended by this kind of agreement. In short, trade rules must be simplified.

Complex rules of origin mean that countries entitled in theory to tariff-free access to developed markets actually end up paying tariffs. Rules of origin also impede developing countries’ ability to take part in the complex supply chains that characterise modern manufacturing. The importance of Rules of Origin was demonstrated by the relative performance of exports under the African Growth and Opportunities Act (AGOA) introduced by the U.S. in 2000 and the EU's Everything But Arms initiative of 2001. Exports from sub-Saharan Africa to the U.S. and Europe were fairly similar during the 1990s but since then exports to the U.S. have quadrupled whereas exports to the EU have stagnated. The main reason was the AGOA's simple rule of origin, allowing African garment makers to use textiles from elsewhere.

Other non-tariff trade barriers that limit poor countries’ ability to trade include differing sanitary and phyto-sanitary regulations set by developed countries that impose prohibitively high compliance costs on developing countries. Harmonising regulations across developed markets would facilitate trade and lower the cost of compliance.

In addition to these changes in external trade policies, rich countries should remove their export and domestic subsidies, particularly on products that the poorest countries are best placed to grow and manufacture. This change, though apparently daunting, is not that far from the expected evolution of trade policy. In the Doha Development Round, the EU tentatively agreed to abolish export subsidies by 2013, although the offer was withdrawn when the Doha negotiations stalled. As far as domestic subsidies are concerned, fears that their removal will harm EU agriculture are grossly exaggerated, since only a few agricultural products from low income countries are in direct competition with those grown in Europe, and in any case EU farmers have alternative crops to turn to.

Ironically, the highest tariffs in the world are between neighbouring poor countries, which partly reflects the fact that tariffs are the easiest source of government revenue to collect. The high tariffs that poor countries impose on each other are one reason why less than a tenth of African exports go to other African countries, while nearly three-quarters of European trade is within Europe. To beat the present recession, the poorest countries need to remove the barriers between each other even if they retain tariffs against exports from the developed world. Rich countries can facilitate this move by providing the advice and expertise to re-design tax systems, while at the same time providing aid to top up lost revenues during the period that tariffs are being replaced by revenue from domestic taxes.

These are policy changes that could do much to help the poorest countries weather the recession. This does not mean, however, that there is no place for development assistance in the form of aid. Poor countries will only be able to take advantage of the opportunities provided by preferential market access if they develop their own export capacity. This requires as high priority more investment in physical infrastructure like roads, ports and electricity and also in administrative infrastructure to meet international trading standards of quality, traceability and so on. Yet over the last 20 years the proportion of aid budgets devoted to infrastructure has fallen by two-thirds. Donor countries in the EU and elsewhere must put renewed emphasis on aid-for-trade to help developing countries build up capacity for trade.

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Re:The global slump makes a fair trade revolution more urgent than ever

Is the EU the free trade champion it claims to be?

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By Europe's World - Vox Pop on

2/22/2010