Development is commonly defined as the process in which a nation enables its economic, social and political systems to improve the quality of life and sustain the well being of its people. Central to this task is the eradication or at least reduction of poverty, which is the natural consequence of economic growth. This paper postulates that trade plays an important role in forging such growth. International trade, however, fails to benefit developing countries in a more meaningful way because of trade barriers related to politics and policies, both external and internal.
The relationship between trade and development may be similar to the nexus increasingly seen between security and development. In previous years, security policies on conflict-ridden states were confined to peacekeeping operations but lately these included management of development activities because of realisation that peace cannot be sustained without socio-economic growth. In the same way, it is believed that no country can grow and develop apace without the benefits derived from multilateral trade. The paper then attempts to show that export-led growth is at the heart of successful development in many countries, whilst non-integration with the global economy is the cause of persistent poverty and underdevelopment in others. It also identifies the political conditions occurring at both national and international levels that continue to frustrate efforts to ensure a freer flow of global trade.
The Role of Trade in Development
Entrepreneurship is considered essential to national development but few people in industry are expected to innovate and plan new investments without the challenge posed by multilateral trade. Trade stimulates entrepreneurship and provides entrepreneurs the incentive to produce goods with higher quality and in greater amounts. This in essence is the role of trade in development, which is unlikely to come to a developing nation if it does not make money from exports and receive none of the foreign direct investment that trade generates.
When a developing country is competitively and profitably engaged in trade, it earns precious foreign currency to boost national income and at the same time attracts foreign firms to invest in its economy. For example, China was an impoverished nation before it abandoned the centrally planned economic system in favor of the open market in the 1990s. The Chinese economy began to register a double-digit growth after the former isolated socialist nation accessed the World Trade Organisation (WTO) in 2001. Foreign firms, encouraged by the booming Chinese export trade, started to locate in China such that the country amassed $52.7 billion in foreign investments in 2002, surpassing the US as the world’s largest recipient of FDI. None of this growth and development would have happened if China remained an isolated state without trading partners.
Trade as an economic activity is said to have taken place among nations since prehistoric times, only then it was called barter in which people paid for goods in kind such as obsidian for flint during the Stone Age (Bhagwati, 2004). The advent of the modern currency changed the scope of trade but the rationale and principles remain the same. People basically produce agricultural and manufactured goods for their own consumption. Once this production meets the domestic requirement, self-sufficiency follows but not development because then the market for those goods will be limited to a nation’s borders. Growth and development can only come when a nation produces an economic surplus for trade in the open market, the proceeds from which will help provide more income to its people. Free global trade is especially crucial in the development of poor countries with inefficient tools of production. Based on the theory of comparative advantage set forth by 18th century economist David Ricardo, inefficient production is common among developing countries but there is always an area of production in which one excels.
This theory holds that when a generally inefficient producer sends the raw materials for goods that it produces less efficiently to a country that can finish the goods more efficiently, it will benefit enormously as well that other country (Bumell & Randall, 2008). The Ricardian model of trade also states that countries confine their economic activities to products that they make best, such that the lack of a wide array of products is blamed for continuing poverty in these countries. Akin to this theory is the Heckscher-Ohlin model of trade which says that countries export goods that make intensive use of locally available resources and import goods that make intensive use of locally scarce materials (Rodrik, 2001). The result is a similar lack of an array of goods for more profitable trading in the global market, which means that these countries are effectively shut out from global trade.
When there are many countries in such a position, there is said to be no free trade which is defined as a condition where trade is done between countries with similar factor endowments and productivity levels and involves a large amount of foreign direct investments (Payne, 2005). It is universally acknowledged that trade and FDI integrate nations into the world economy thus leading to poverty eradication and economic growth because they serve to diffuse the gains from technology, which would otherwise accrue only to developed nations. However, many developing nations could not participate meaningfully in the global economy through trade because of the above-mentioned reasons. Without the proceeds from trade, developing countries could not undertake development activities such as providing education and health services, affordable housing, building infrastructure facilities, crime prevention, job creation and retention to achieve a more prosperous and equitable standards of living for their people.
The lack of free trade was believed to be one of the principal causes of the Great Depression in the US, which ended only during World War II. For this reason, the world came together to prevent similar events by basically toppling down national trade barriers, starting with the signing of the Bretton Woods Agreement in 1944 which established the International Monetary Fund and World Bank. This was followed by the General Agreement on Tariffs and Trade (GATT) in 1947 whose goal was to promote global free trade. In 1995, the World Trade Organisation (WTO) was created to also facilitate free trade. The leadership of GATT and WTO have since attempted to create a globally regulated trade structure but the rounds of discussions held from time to time have been marked by disagreements, protests and claims of unfair trade (Daviron & Ponte, 2006).
Barriers to Trade
The contentious issues that cause the collapse of WTO negotiations often boil down to protectionism, which the WTO leadership has tried to address. The latest round of WTO talks in Doha, for example, was held precisely to promote the interests of developing countries against protectionism in developed countries (Bumell & Randall, 2008). When representatives of developed countries declined to provide the requested concessions, the Third World group introduced the so-called Singapore Issues which call for global reforms in the four areas of trade facilitation, investment, competition and transparency. As if indicating that these are difficult issues for developed countries, the US and European countries proposed the “2 plus 2” plan in which they want WTO to address the subjects of trade facilitation and transparency first and shelve the issues of competition and investment for later discussions. Such disagreements suggest that lifting trade barriers is easier said than done.
The barriers to free trade come in three forms: 1) those related to tariffs, quotas and tariff escalation; 2) those related to subsidies and export credits to selected industries; and 3) the indirect barriers arising from developing countries’ lack of institutional capacity to participate in the global economy and multilateral trade on equal terms (Payne, 2005). There are also food regulations and standards imposed in developed countries supposedly to protect the health and welfare of consumers but actually serve to deter competition from agricultural commodity products of developing countries.. Speaking of tariffs, the average rate imposed on agricultural products in high-income countries is estimated at twice the rate for manufactured goods, which is significant for developing countries since most of their economies are based on agriculture. These tariffs are escalated seasonally for reasons that are often unclear to developing countries with poor information regime (Daviron & Ponte, 2006).
According to Rodrik (2001), tariffs on agricultural products cost developing countries about $19.8 billion yearly, and three times that figure from import restrictions placed by OECD countries on textiles and clothing. This happens despite the Uruguay Round WTO agreements, which calls for the reduction of such tariffs. As for subsidies, such support given to certain industries in developed countries is five times the $245-billion international development assistance given in 2000, with the total support to agriculture amounting to $327 billion (Bhagwati, 2004). These huge subsidies result in the dumping of unwanted surplus goods in the world market, which depresses and make prices volatile. On the lack of institutional capacity, this serves as trade barrier for developing countries because they could not match the high-income countries in terms of infrastructures, transportation and marketing, land policies, competitiveness, credit availability and investment. In effect, the institutional, social and structural systems of developing countries fail to stimulate local and foreign investments necessary for producing goods that could compete well in the world market.
Does this mean that developing countries can integrate into global trade better if they pattern their institutional and regulatory frameworks after those of their richer counterparts? The economics literature advises against such an option which is called institutional copycatting because of differences in social, cultural and political conditions. According to Rodrik (2001), institutional copycatting may work for one developing country but not for another. For example, Japan built its institutions with focus on corporate governance and financial market practices whilst the US and European countries emphasise stability and equity. Also in Asia, China gives little importance to property rights, India is slow on deregulation and privatisation, and Singapore expands public investment instead of reducing state presence in the economy, which elements are critical in Western institutions. Nonetheless, Japan and the other three Asian countries are now big players in global trade because their unique institutions serve the purpose of emplacing a system of transparency and free flow of information, promoting efficient civil service, eliminating corruption, protecting the environment, and encouraging the building of relevant infrastructure.
For all these reasons, developing countries do not have enough access to the markets of developed countries such that the multilateral trading system fails to contribute to their sustainable development (Payne, 2005). Thus, the European Union is pushing for a new round of WTO negotiations that would focus on reforms in three areas: 1) substantial improvements in market access for products of interest to developing countries with a show of willingness from their richer trading partners; 2) improved governance of the world economy through the enactment of new WTO rules on investment, competition and trade facilitation; and 3) new WTO rules with a sustainable development perspective.
Trade is inextricably linked to development, which essentially means poverty reduction and elimination. The nexus between trade and development is best demonstrated by China, where hunger and poverty used to stalk people. The picture changed after China engaged in export trade and became a full-fledged member of the WTO. When developing countries, whose number is much greater than developed ones, are thus integrated into global trade and earn foreign exchange they can provide more income for their people and thus improve their quality of life. However, there are many barriers to trade that deny developing countries the benefits from trade. These consist of tariff and non-tariff barriers, including the politics and policies of developing countries.
Bhagwati, J. 2004. Trading for Development: How to Assist Poor Countries. In M. Moore (ed) Doha and Beyond: The Future of the Multilateral Trading System. Cambridge University Press.
Burnell, P. & Randall, V. 2008. Politics in the Developing World. Oxford: OUP.
Daviron, B. & Ponte, S. 2006. The Coffee Paradox: Global Markets, Commodity Trade and the Elusive Promise of Development. London: Zed Books.
Payne, A. 2005. The Global Politics of Unequal Development. Basingstoke: Palgrave.
Rodrik, D. 2001. The Global Governance of Trade as if Development Really Mattered. United Nations Development Programme.