Ridley Hall, Cambridge

Free Trade and Fair Trade - Christian Aid's View by Justin Macmullan

Christian Aid, along with other campaigning organisations, do believe that protectionist and interventionist policies are needed to help developing countries. Justin Macmullan puts the case for a system of trade rules that allows their governments flexibility in meeting the needs of poor people.

It is clear that trade is not working for poor people. Half the world's population continues to live on less than £1.60 a day. Although the global economy as a whole has grown over the last 20 years, the economies of many poor countries, particularly in Africa, have actually shrunk. Although this is not solely due to trade injustice - corruption, lawlessness and war are also contributory factors - trade is essential for their recovery. While their share of world trade is tiny, trade for individual poor countries is actually a far more significant contributor of their national income than for most rich countries. The 48 poorest countries account for only 0.4% of the world's trade, but even that is worth eight times as much as what they receive in aid. Many of them are still living with the colonial legacy that has locked them into production of one or two primary commodities such as coffee, copper, cocoa or timber, which are exported in their raw, unmanufactured state. Commodity prices are not only very erratic - rising or falling by as much as 20% in a year - but also in long-term decline.

The Trade Justice Campaign is calling for fundamental changes to the rules that govern international trade, so that they work in the interests of the world's poorest people. Without such radical change, trade will continue predominantly to serve the interests of the more affluent, and poor communities in poor countries will become more and more economically marginalised.

Double standards and level playing fields

A scandal of the current trading system is that, while liberalisation and the opening up of markets have been rigorously promoted and applied in poor countries, rich countries have written agreements in such a way that many of their own sectors continue to receive government support and protection. Developed countries subsidise their farming to the tune of more that US$300 billion a year¹, either in the form of direct payments to farmers or subsidies to traders, to help them export excess production. Additionally these schemes protect key sectors from international competition, many of them of interest to developing country exporters. The Common Agricultural Policy is the culprit in Europe, but the USA and Japan support their agricultural sectors in similar ways.

These double standards clearly increase inequalities between producers in rich and poor countries. Such policies not only make it difficult for poor producers to penetrate Western markets but also to compete in their own. Their own markets are flooded by cheap produce.

True, some supporters of rapid and far-reaching liberalisation have advocated creating a ‘level playing field' by cutting rich countries' subsidies and opening their markets to poor countries' exports. This would be welcome, but on its own it is not enough. Even without subsidies, producers in rich countries will be in a much stronger position. Richer economies have massive advantages in terms of more advanced technology, skilled labour, economies of scale, market intelligence and infrastructure.

Managed Economies as the Key to Growth

Historical evidence suggests that trade liberalisation has not been associated with the same kind of success in terms of development and poverty reduction as has been the case in countries where governments have played some intervening role in the economy - and been more flexible in their choice of policies.

South Korea is a notable recent example of a managed route to economic growth. In the early 1960s and 1970s, small and emergent companies were provided with a range of incentives, including subsidies, and initially protected from competition with foreign firms. In addition, the government invested heavily in developing a technology infrastructure, and in education and training, in order to create the conditions for high technology export development to flourish. This provided the groundwork for lowering tariffs at a later date. Care was taken that the incentives provided served to encourage innovation, export promotion and the development of new productive capacity.²

Mauritius provides an even more recent example of a successful economic development strategy. Growth per head averaged 4.2% between 1975 and 2000. Productivity has increased and life expectancy has increased by ten years. Mauritius has succeeded in diversifying away from an almost total dependence on sugar exports to an economy comprising services, manufacture and agriculture. It protected its own economy while at the same time gaining access to EU and US markets. ³

The experience of today's industrialised countries in the 19th century, as well as some of the more successful developing countries in the 20th century, shows that a more ‘managed' and interventionist trade policy has been the key to growth and the reduction of poverty. Both the development of the Model T Ford car in the United States and the growth of the Japanese car industry took place under relatively interventionist policy regimes. Crucially however both policies rewarded, rather than stifled innovation. Careful government intervention in the economy and then the gradual opening up to world markets when economies were stronger and more able to compete has led to the development of stronger economies. If we in the West used a pragmatic mix of protectionism and free trade when we were at the developing stage, why shouldn't today's developing countries?

Flexibility

This is not to claim that protectionist and interventionist policies will always work. Such policies have also been associated with economies that have failed to diversify and grow. The countries of the former Soviet Union are an obvious example of the damage that can be done through excessive government intervention. Developing countries have also had their fair share of failed experiments.

However, whilst it is clear there is no simple panacea for ‘making poverty history', Christian Aid, along with other campaigning organisations, believes that just as blanket intervention is not the answer, neither is the imposition of a one-size-fits-all trade liberalisation model. Yet this is what is currently promoted by powerful international organisations like the World Bank, the International Monetary Fund and the World Trade Organisation. What is needed is a system of trade rules that enables poor countries to place the needs of poor people above the strict application of free trade ideology. By its very nature, trade policy must be flexible. A ‘one size fits all' system can never work because of the sheer diversity of economic situations. But by prioritising the needs of people - both as economic and social beings - trade policies could begin to serve rather than to exploit or to dominate. This new understanding might be termed ‘trade justice economics'.

The current Trade Justice campaign is therefore calling for world leaders and international organisations such as the WTO, IMF and World Bank to stop forcing poor countries to open up their economies to the full force of global markets. Instead, poor countries should be allowed the flexibility as in other trade blocs to give special help to their own farmers and industries, so they can give priority to reducing poverty.

Christians and Churches cannot remain silent about this issue. By raising their voice with others, they have the potential to make a huge difference in tackling these fundamental issues of poverty and injustice.

Notes

1 Agricultural policies in OECD countries: at a glance - 2004 edition, OECD, 2004.

2 See the chapter on South Korea in Ssanjaya Lall. Learning from the Asian Tigers: Studies in Technology and Industrial Policy, Macmillan, 1997.

3 See Arvind Subramanian and Roy Devesh, Who can explain the Mauritian Miracle: Meade, Romer, Sachs or Rodrik?, IMF Working Paper, WP/01/116, 2001.