FREE TRADE and FAIRNESS

QUESTION: To what extent is it true to say that the developing countries have not had a fair share of the gains from trade?

The issue of trade and the gains thereof are of great significance to economists, sociologists, political scientists and non-academic alike. Trade directly and profoundly impacts on peoples' welfare. As such, many proponents in favour of international trade do blindly ascribe to the gains from trade and the benefits there from. But, is it the case; is it fair to say that developing countries have not had a fair share of the gains from trade as their developing counterparts?

In relation to the vexed issue of unfair gains from trade, many political pundits from developing countries including Mr. Buddan from the department of Government at the University of the West Indies argue that the very nature of the establishment of the WTO is to rubber stamp the policies and programmes of the developed economies. Mr. Buddan in his article published in the Sunday Gleaner dated 18th September suggested that the WTO/Cancun meeting that was adrupted ended is as a result of the developing countries converging on a point of principle that the meeting was to advance the will of the developed world economies.

In my opinion, the issue of unfairness can not be established on the premise of the absolute trade figures as are published by that organization on trade. As the developing countries are innately at a disadvantage by their very nature of high inefficiency, low levels of technologies, high dependence on primary product and a corruption system, the benefits of trade are equally beneficial to both group of countries. As developing economies continue to import skills, technical capabilities by way of comparative advantage, the gains from trade will only transform the economic and social well being of their citizenry.

What is trade? Trade denotes the voluntary agreement between countries to buy and-or sell goods to each other. So, what are the gains from trade? Gains from trade speak to the increased consumption derived outside of the normal capacity of the country's resources. Continuing, for the purpose of this essay, developing countries are seen as constituting inadequate and poor social and physical infrastructure; high level of unemployment and corruption; low use of technology, high dependence on primary products; imperfect markets and information coupled with poor work attitude of the populous.

Ricardo's Theory of Comparative Advantage predicts that all those who participate in international trade as specialists in their area of greater factor productivity will benefit from their involvement. Countries that lack some natural resource or other capacity can benefit by exchanging goods or services that they can produce ?'efficiently' for those they cannot. This concept was also upheld and endorsed by Heckscher and Ohlin in their trade model. From my readings, my own position is that, trade enhances the GDP of developing countries. In that, they are able to import needed technical capabilities, capital, raw materials and tangible products that they would have being unable to produce either through geographical limitation or because of the state of their economies.

Then, what is argument of fairness of gains from trade being purported by developing countries? Many political pundits in seeking to argue their case of unfair gains from trade flatly use the absolute trade figures as quoted in the World Trade Organization's statistics. They would say that in 1980 the figures for exports for the world stood at approximately 2.l trillion, and of this the developed countries had 1.3 trillion with the developing world exporting some 978 million. In 1990, the world export figure stood at some 3.4 trillion with the developed world having 2.5 trillion of the total and the developing economies having approximately 899 million of the total. In 2000, the world exports rose to some 6.3 trillion and of that, the developing world shared only 2.1 trillion.

Based on the figures, the developed economies at any period maintained not less than 65 percent of the world export trade value. This appears on the surface to be unfair as the developed world's population is only 20 percent of the total human population. This argument is emotional. So one should understand why the developing economies politicians use this reasoning to foster their position of unfairness as it relate to the gains from trade.

Is international trade really beneficial to all? Within the context of international trade, because all such trade relations are carried out through voluntary involvement, one would assume that no sensible people would venture into such an arrangement without mutual benefits. Therefore, the argument can not be in relation to benefits but the extent of benefits from trade relations with other economies.

The position taken by many people as it relates to trade is simply that you should export more than you import. But, let us critically examine that position. When a country exports its products and its account is credited with foreign exchange from the buyer country, this money is of absolutely not benefit to the receiving country. As money can not be consumed and so does not increase ones welfare. Based on the arguments forwarded by Paul R Krugman et al (2000) in their book ?'International Economics, Theory and Policy', gains from trade arise from external consumption. Therefore, does export constitutes an increase in consumption and by extension an improvement of people's welfare?

Therefore, the issues of benefits from trade arise as a result of imports. As the people of the receiving country will have available to them a wide cross-section of products and -or services for consumption. Because ones economic welfare is increased from consumption, the peoples of developing economies will benefit from trade relations with the developed world. As without such relations, the developing world would still be in a primitive state. Given their inadequacies and poor social and physical infrastructures, without trade, the developing world could not transform their economies to possible emerging economies and-or developed status.
Without international trade relations, Jamaica would not have being able to manufacture electricity, telephones, road network, hospital facilities, machines for factories, automobiles, some raw materials for building and foodstuff. Therefore, without trade, the Jamaican economy would disintegrate into mere subsistence and anarchy. Another example is the Singaporean economy.

By opening the economy to international trading relation with the outside world and more so developed countries, developing economies see the incentive of reduced inefficiencies that is translated into the lowering of prices for the consumer. Those price reductions will see the consumer, consuming more products and-or service. This is had through importation.

On the other hand, export of goods and-or services becomes beneficial, when we can use the foreign currency received to purchase goods we want from other countries. But until we purchase those goods, our gains from trade are non-existent. Therefore, it is imports which represent our gains from trade. So, if this is the case, why send anything at all to the outside world? Our money in the hand of foreigners has absolutely no use unless they are able to purchase our goods or properties with it. Thus, we must continue to export to pay for our imports. Exports therefore are the price we pay for our imports, if we do not want to "sell off the farm".

The peoples of the developing world have come to enjoy an infinitesimal welfare arising from international trade relations. Without the opening of the economies of many developing countries, the welfare of their population would not have been increased beyond a century ago. In that, many of the very products that developing countries produce rest to a large extent of the importation of raw materials, technologies and other components from the outside world. The very capital that is a must in the production process is often times provided by multi-national organizations that are located in the developed economies.

Many political pundits and sociologists argue that economists have not recognized the extent of the damage of importation on the domestic markets. The gains from trade are both topical and controversial. In that, the gains from trade relations must be seen based on whether we speak of the consumers, the politicians or businessmen.

Because many merchants and-or producers in the developing world have been hiding under the umbrella of protectionism for a long time, they are still seeking various protective mechanisms so as to evade being efficient. Over the years, these inefficiencies have been passed onto the consumers in the form of higher prices therefore allowing the traders to make a higher profit-margin. With international trade, the market ceases to be imperfect thereby taking with it a new set of rules that now must be addressed by consumers and producer alike.

In the past, the legislators of many developing countries have imposed tariffs and other protective methods, enabling their domestic industries to build comparative edge to trade with other economies. It appears that over all those years, when infant industries were being offered protectionism, they have not come of age to fend on their own. Political scientists are arguing that with the removal of trade barriers, many businesses will close resulting in countless job losses and this will translate into much social ills. Over one million business fail per day in the United States along and this does not strengthen an argument for further protectionism. As businesses fail, other rise, so opportunities arise for economic activities within the same environment.

The reasons advanced a century ago for the introduction and maintenance of protectionism can no longer be forwarded by businessmen or political scientists. At one point, protectionism was seen as allowing manufacturers the financial space to innovate and to develop competitive muscle; nowadays, tariffs are seen as obstructing innovation and competitiveness. Now, many people rejoice at the bargains that consumers can steal by undercutting local labour through outsourcing goods from overseas, no matter if produced in near slave conditions. It is clear that protectionism encourages laziness in domestic industries, while exposure to international competition encourages replacement of obsolete plant and so greater productivity. Tariffs increase the production costs to the consumers, compounding their uncompetitiveness and flowing through to higher prices throughout the economy.

Because of the very nature of the survival style of politics in the developing economies, often times many decisions of profound economic implications are taken with a grain of salt. Why would a government in power in a developing country, given the nature of survival politics, take a particular economic decision that may topple it tenure in office? Many critical economic decisions have not been taken in developing countries while the peoples within these geographical territories suffer the fatal consequences. The fatal consequences may range from higher prices, more taxation, further corruption, balance of payments problems, budgetary woes and inadequate social and physical infrastructure.

For the most part, it seems that workers in poor countries have more to gain and less to lose from their involvement in trade relations with rich countries. If poor countries lower their barriers to trade and investment, the theory goes; rich foreigner will want to expend some of their capital in those regions. If this inflow of resources arrives in the forms of loans or portfolio investment, it will supplement domestic savings and loosen the financial constraints on additional investment by local companies. This is why workers in FDI-receiving countries should be in an even better situation to profit from integration than workers in FDI-sending countries. So, why are developing countries not been able to transform their economic landscape? The answer lies in the political administration and the system of survival style politics being practiced by such economies.

Data examine as published by the United Nations Conference on Trade and Development suggested that inequalities between industrial and developing nations are on the rise. Since 1965, the proportion of world income of the richest economies has increased from 69 percent to 84 percent in 1990. Whereas, while in 1965 the richest economies that made up 20 percent of the world human population earned 31 times the incomes of the poorest 20 percent and in 1990 they earned 60 times that. Do the figures really constitute unfairness? In my opinion, inequality does not constitute unfairness. If I am paid a salary of 10 times that of another worker because I have sacrificed to acquire a university education while my colleague who did not, does that constitute unfairness? If so, on whose path? This is undoubtedly a clear example of inequality.

Inequalities have also increased within countries. Does that constitute unfairness? If this, according to non-economists, represents unfairness, then why are we not demonstrating for more equality in pay and other benefits? In my opinion, much of the inequalities that have arisen over the years are due to the developing countries political mismanagement, poor work attitude, unprudedent financial mismanagement of the country's resources, the imperfections in the market forms and the inability of their leadership to chart a path of growth and development for the people wherein.

Some proponents of unfairness in the share of the world's wealth argue that the 1999 Human Development Report clearly indicated that the world inequalities have been rising for nearly two centuries. The distance between developed and developing economies was about 3 to 1 in 1820, 11 to one in 1913, 35 to 1 in 1973 and 72 to 1 in 1992. Once again inequality does not constitute unfairness. The question should be, what are the developed countries practicing that developing economies not.

Paul Andrew Bourne
Tutor
Department of Sociology, Psychology and Social Work
University of the West Indies
Kingston 7
Kingston, Jamaica, West Indies