It’s a South-South Issue

MOST writing you see on the World Trade Organisation assumes that developing countries want to liberalise trade in agriculture and textiles. Formally, all developing countries criticise OECD countries for not liberalising these sectors. Murasoli Maran insists that top priority must be given to this unfinished business of the Uruguay Round.

In fact, over 100 developing countries do rather well out of existing quotas and tariffs. Unsurprisingly, many are working quietly to preserve the status quo. Consider Bangladesh. Today, almost three-quarters of its exports consist of garments.

Come 2005, when textile quotas are slated to disappear, Bangladesh will have to compete with China without any assured quota. It is terrified of being overwhelmed by China, and is informally quite willing to accept backsliding by the rich countries on quota abolition.

India still insists bravely that it will benefit from the abolition of quotas, claiming it will be able to gain more market share from countries like Korea than what it loses to China. I hope this is true, though I am far from certain.

Pakistan has just benefited from trade preferences given by the European Union for its textile exports. This gives it an edge over competitors like India and China, who face both quotas and high tariffs. Will Pakistan really welcome the abolition of quotas and tariffs? Not on your life.

Preferential trade agreements are now proliferating. Europe has long given preferential access to the ACP (Africa, Caribbean, Pacific) countries. The US has given preferences to Mexico under NAFTA, to the Caribbean basin countries, and now proposes a Free Trade Area of the Americas. The EU has signed Euro-Med agreements with North African countries.

ASEAN countries have formed the Asian Free Trade Area. East European countries are getting preferential access to the EU. In every case, members of the preferential group enjoy access over outsiders. Will such members welcome the lowering of trade barriers? No, they will try to sabotage this.

Several developing countries benefit from high agricultural barriers. This is graphically illustrated in a paper* on trade preferences by Vernon Topp of ABARE, an Australian research agency. This shows that developing countries with preferential access can enjoy export prices that are double, triple or quadruple the world price, which other developing countries face. The very fact that some developing countries get preferential access at high prices means that others get artificially depressed prices. More than 100 developing countries are beneficiaries of one preferential regime or another.

Topp illustrates the case of raw sugar. In 1999, developing countries that exported virtually all their sugar under preferential arrangements reaped a bonanza. Mauritius got an average price of $600 per tonne, Barbados $554 per tonne. Only a quarter of Zimbabwe’s exports are covered by quotas, so it got $262 per tonne. And countries without preferences got peanuts — Thailand averaged $163 per tonne.

Consider bananas. Surinam, Saint Vincent and Dominica get preferential access for their entire exports, and so enjoyed prices in 1999 of $636, $503 and $542 per tonne respectively. Colombia has preferential access for around one-third of its exports, and averaged $302 per tonne.

The Philippines, with no preferential access, got just $182 per tonne. Topp argues against trade preferences. These are often justified as ways of helping developing countries. In fact, they penalise some developing countries in order to help others. There is nothing particularly poverty-reducing about this. Often the beneficiaries are richer than those without preferential access. Mauritus, with a per capita income of $3,500, gains at the expense of India, with a per capita income of $440.

Second, preferential arrangements create undesirable dependency. Take away preferences, and the economy of some small countries will collapse. This is one reason for the banana war between the US and European Union. The US objects to Caribbean islands getting preference in the EU over Costa Rica or Ecuador (where big US companies operate). The EU argues that it is protecting not itself but small economies that would collapse without preferences. But is such dependency desirable, or sustainable?

Third, preferences create serious economic distortions which are bad in the long term even for the beneficiary. Resources are drawn away from fundamentally competitive sectors to those that are less competitive but subsidised implicitly by preferences. Preferential margins drive up the wealth of plantation owners and land owners in general, who are neither the really deprived nor really productive.

Worse, the big businessmen thriving on preferences are regarded as captains of industry, instead of being seen, accurately, as parasites. Their capacity to lobby and distort policies increases.

What are the lessons for countries like India, which have virtually no trade preferences? First, we should be happy that, while we lack the short-term benefits of preferences, we gain greatly by not becoming dependencies whose fate is linked to unsustainable preferences.

Second, do not think that giving trade preferences to SAARC countries will provide them major benefits. They might instead promote unwarranted investment in uncompetitive industries that survive only because of preferences (this is evident in Nepal’s case).

Third, please see the WTO as a powerful tool to reduce trade barriers globally, reducing the preferential access of Third World competitors. We talk as though all beneficiaries of the OECD are rich countries. In fact many developing countries too are parasites living off the system, at our expense.

Fourth, do not expect wholehearted support from other developing countries in reducing trade barriers in agriculture or textiles. On the contrary, expect quiet sabotage behind the scenes. Expect Caribbean and African countries to work for the continuance of quotas on sugar, bananas and other items of their special interest.

Expect Sri Lanka, Pakistan Bangladesh to try and sabotage free trade in garments. Do not view the lowering of trade barriers in agriculture and textiles as a North-South issue. It is a South-South issue too.

* Trade Preferences: Are They Helpful in Advancing Economic development? Vernon Topp 2001. ABARE Report, Canberra

What do you think?