Global Policy Forum

Trade Liberalization and Its Consequences


By Supuchai Panitchpakdi*

South Centre
April 26, 2006

"If a free society cannot help the many who are poor, it cannot save the few who are rich." That statement by John F. Kennedy, in a sentiment echoing Franklin D. Roosevelt, was quoted by Dr. Supachai Panitchpakdi, the Secretary-General of UNCTAD while addressing the above-titled theme. Speaking at the Stanford University in California on 26 April, 2006, Dr. Supachai added, "I believe that trade can, and should, contribute to this goal." Following are extracts from his statement.

"Having long been an admirer of the intellectual and economic work emanating from Stanford, and particularly your Center for International Development, I am very honoured to be addressing you this evening on the relationship between trade and development. This subject is, as you know, the centrepiece of my own career.

Tonight I would like to tackle this relationship by focusing on the impact of trade, liberalization and globalization, particularly on developing countries. How can these countries benefit from the trends towards greater global integration, and what should their developed-country partners do to assist in this process? Does trade in fact accelerate growth in the developing world, and can that role be made even more positive, contributing also to sustainable development and poverty reduction? What does all this mean for the multilateral trading system, and what future for the trade talks?

First, let me briefly review recent trends in trade and investment flows worldwide, with which I am sure you are all familiar. While it is generally true that the contribution of trade to any given economy is largely a function of the size of that economy, it is evident from the recent trends and experiences that trade remains a growth engine for developing countries. This is good news.

Worldwide, merchandise exports grew by 22.5% in current dollars in 2004, partly due to increasing volume and partly to rising dollar prices, e.g. for oil and other commodities. As for developing countries, they now account for about a third of global trade, and some 40% of all their trade is between themselves. This South-South trade is also growing about three times faster than world trade. China and India, of course, are garnering a large share of this rise in trade, accompanied by soaring GDP. China´s average export growth rate rose fairly steadily - barring a few blips - from 12.8% in 1980-90 to 31% in 2003-04. In the same period its GDP has stayed largely on a growth course, climbing from 7.5% in 1980-90 to 9.5% in 2003-04. The Indian figures follow much the same pattern.

Generally strong and rapid growth also characterizes recent flows in foreign direct investment. According to UNCTAD estimates, global FDI inflows last year were up 29%, to $897 billion, generated by the world´s 70,000 transnational corporations (TNCs) and their 690,000 affiliates abroad, employing 57 million people worldwide. Here as well, developing countries are getting a bigger and bigger piece of the pie. FDI inflows to these countries surged to $233 billion in 2004, up 40%, and by a further 13% last year. South-South investment flows now represent more than a third of all investment flows to the South, where 20,000 TNCs are based.

But there is worrying news as well - namely, that not all developing nations are benefiting from this growth. Much of it is concentrated in a handful of countries, with many others becoming increasingly marginalized. Merchandise exports of sub-Saharan Africa, for example, have declined as a percentage of world exports, from 1.6% in 1990 to 1.35% in 2004. The share of the world´s 50 poorest countries - which we at the UN call the "least developed countries" - rose minimally over the same period, from 0.56% to 0.64%. The services picture is similarly bleak. These figures are extremely alarming, given the intertwined evils of poverty, economic instability and terrorism.

However, assuming we agree that trade in fact promotes development and economic growth in much of the developing world, then we need to ask why it is that some countries gain more, and others gain less, or even lose, from trade liberalization and globalization. Aside from the sheer comparative advantage of some countries in terms of location, natural resources and so forth, it would appear that trade liberalization has had its costs - and that openness to trade is simply not enough. There have been some optimistic forecasts of tremendous income gains, export revenue gains and new jobs to come from the expiration of the ATC, for instance. But there have also been some dire predictions of how devastating these same reductions in trade barriers, and removal of preferences, will be for a number of textile-producing nations.

Thus, as I said, openness alone is not enough. What else should developing countries do to ensure that liberalization boosts trade and helps them to generate higher income, which is essential to kick-start development and reduce poverty? UNCTAD´s Trade and Development Index, introduced last year with the active support of Professor Lawrence Klein, attempts to measure the complex relationship between trade and development in a precise and quantitative manner. It shows that, in addition to trade liberalization measures, other factors are needed to guarantee that openness brings concrete benefits. These include macroeconomic discipline, good governance, infrastructure, skills, institutional capacity and investments in health and education. In effect, this implies that in conjunction with liberalization, developing countries must develop their comparative and competitive advantages and their capacity to deliver goods and services efficiently. They must also diversify and move away in particular from volatile commodity markets. They must increase their share of the global export revenues, move up the value chain by tapping into world distribution networks and create backward linkages from multinational investments to the local economy. Furthermore, they need to reduce their dependence on fossil fuels, especially given the rise in oil prices as well as environmental imperatives.

At the same time, they must aim to attract the right kind of foreign investment and avoid the wrong kind. By the right kind, I mean investment that brings know-how and transfers technology; investment that creates skills at home and prevents brain drain. The right kind of FDI, in short, creates a virtuous circle: it brings capital and knowledge that stimulate domestic investment (both public and private) in productive capacity, skills and physical infrastructure, thereby building a strong nation. The wrong kind means investment that favours enclave development, where profits tend to be repatriated back to the home country and where there is no value-added or know-how passed onto the local economy, whether in terms of new skills, new industries or new enterprises.

I referred at the outset to the future of the global trading system, and the more immediate future of the current Doha Round of trade talks. Most would agree that this ambitious Round, intended as the so-called "development round", achieved only modest progress at Hong Kong last December. The next deadline is April 30, but it appears there will be further slippage. Accordingly, there is much to do if the negotiations are to be completed before the expiry of the US fast-track negotiating authority next March.

Naturally, we at UNCTAD - and I imagine all of us in this room tonight - hope the Round will create ever-greater opportunities for developing countries. Rising trade trends suggest that the multilateral trading system is indeed working. What is missing is the political will and commitment to see through the rest of the negotiations and realize the development objectives promised in the Doha Ministerial Declaration.

The delays in concluding the Round are especially frustrating for poor nations, such as the cotton producers in West Africa, who had hoped the trading system would lift them out of the poverty trap. Brinksmanship does not help to yield the development dividend.

However, let me take issue with one argument that is often heard these days. It is said that the inability to reach agreement will affect the credibility of the WTO as an institution. I do not believe that this is a fair assessment of the situation. In fact, today the WTO-centred multilateral trading system has become the main body of law governing international economic relations across a wide spectrum of activities. The institution and the body of WTO law provide for security and predictability in international trade and investment. It provides for scrutiny through its Trade Policies Review Mechanism, and it offers a forum for resolving disputes in the Dispute Settlement and Appellate Bodies, in a system that was unified and made binding as a result of the Uruguay Round negotiations. This framework facilitates trade and investment as the foundation for sustainable economic growth, and apart from some further spelling out of rules, none of this will change as a result of the current negotiations, no matter what the outcome.

Regardless of how the Round turns out, developing countries will still require help in coping with the ongoing reforms and meeting the costs of adjustment to market openness and globalization. Removing subsidies, barriers and preferential trade terms can be harmful, causing the loss of livelihoods and tariff revenue as well as greater vulnerability for infant industries. International support is desperately needed to help poorer economies build their capacity to compete, retrain the workforce, shore up their infrastructure and facilitate trade. It is also essential that such funding be in addition to current levels of international aid, and that it not create new debt. In this regard, it is timely that at the Hong Kong ministerial conference, "Aid for Trade" was recognized as necessary for facilitating the smooth integration of developing countries into the international trading system. But if aid for trade is to be meaningful, it must be relevant, targeted and adequate and, as I just said, it must be additional to resources currently being made available. As the case with all aid for development, aid for trade should also reflect the priorities of the recipients. It must be demand-driven.

At a recent UNCTAD meeting on this subject, I said that aid for trade is not a panacea for all trade-related problems. Nor should it substitute for development benefits that must arise from a successful outcome of the Round, as the Hong Kong declaration itself pointed out. It must, rather, complement any such outcome; it must, in short, keep the development promise of the DDA. That means that if it is adequately designed, managed and implemented, it can help developing countries to really use trade and trade liberalization as an engine of development and poverty reduction. We look forward to the recommendations of the Aid for Trade Task Force established by the WTO´s Director-General, pursuant to the mandate given in Hong Kong last December.

And this brings me to my final point this evening. We hear a lot in the news these days about creeping protectionist tendencies in both developed and developing countries. An op-ed in the Financial Times of April 6 warned that eroding the WTO principles could "risk unleashing a vicious spiral of beggar-my-neighbour nationalism" and increase the risk of "economic conflict". Some fears of job losses, high adjustment costs and so forth are well founded; but others are simply not justified. I am reminded of the famous satire by the 19th-century French economist Frédéric Bastiat, who wrote of candle makers petitioning Parliament to block out the sun because of unfair competition. But the sun can be stopped no less than the relentless march of globalization. As the Federal Reserve Bank of Dallas wrote in an April 10 op-ed in the New York Times, "nations can no longer sit within their borders and pursue policies incompatible with an increasingly integrated world economy".

In the long run, I think that we as internationalists would agree: protectionism is a dead end. The Dallas Bank article said that "the more globalized nations tend to pursue policies that achieve faster economic growth, lower inflation, higher incomes and greater economic freedom".

The bottom line is self-interest, which must be enlightened. John F. Kennedy, in a sentiment echoing Franklin D. Roosevelt, famously said that if a free society cannot help the many who are poor, it cannot save the few who are rich.

I believe that trade can, and should, contribute to this goal."

About the Author: Dr. Supuchai Panitchpakdi is the Secretary-General of the United Nations Conference on Trade and Development (UNCTAD).



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