----- Original Message -----
From: Robert Naiman <[EMAIL PROTECTED]>
To: <[EMAIL PROTECTED]>
Sent: Thursday, June 13, 2002 3:27 PM
Subject: [j2000-policy] CEPR: The Relative Impact
of Trade Liberalization on Developing Countries
[more on what Uncle Whiskers called "that
unconscionable freedom, 'Free Trade'"]
-------
The Relative Impact of Trade Liberalization on
Developing Countries
By Mark Weisbrot and Dean Baker
June 11, 2002
[full text at www.cepr.net]
Executive Summary
In recent years, new trade agreements
have often been promoted on the basis of their
potential benefit to developing countries.
Political leaders, international financial
institutions, and even advocacy groups have argued
that rich countries such as the United States have
an obligation to expand trade in order to help
poorer countries grow and develop.
These claims are often grossly
exaggerated, as can be seen from an examination of
the economic literature on trade. Furthermore,
there are costs associated with trade
liberalization in the developing countries, and
with the changes required by such agreements as
the WTO's TRIPS (Trade-Related Aspects of
Intellectual Property Rights). When the benefits
and costs of continued liberalization along the
lines set out in these agreements are evaluated
according to standard economic research, it is not
clear that the developing countries as a group are
facing a net gain.
Regarding the gains from increased access to
the markets of rich countries:
The removal of all of the rich countries' barriers
to the merchandise exports of developing
countries-including agriculture, textiles, and
other manufactured goods-would result in very
little additional income for the exporting
countries. According to the World Bank's
estimates, when such changes were fully
implemented by 2015, they would add 0.6 percent to
the GDP of low and middle-income countries. This
means that a country in Sub-Saharan Africa that
would, under present trade arrangements have a per
capita income of $500 per year in 2015, would
instead have a per capita income of $503.
Some of the most widely used economic models show
that many developing countries will actually lose
from trade liberalization in important sectors,
such as agriculture and textiles. There are three
reasons for this outcome. First, some countries
will be hurt by the elimination of quotas that now
allow them to sell a fixed amount of exports at a
price that exceeds the competitive market price.
Second, trade liberalization changes the relative
prices of various goods, and some countries will
find that their export prices fall relative to the
price of imports (the "terms-of-trade" effect).
Third, some developing countries currently benefit
from access to cheap, subsidized agricultural
exports from the rich countries.
In standard trade models, the gains to
developing countries from removing their own
barriers are much greater than the gains from
increased access to the markets of rich countries.
However, developing countries also incur
substantial costs from opening their markets,
which are often overlooked:
Developing countries incur substantial problems
from reducing their trade barriers. In many
developing countries, tariff revenue accounts for
10-20 percent of government revenue, and in some
cases considerably more. If tariffs are reduced or
eliminated, these countries will have to impose
large increases in other taxes in order to keep
their budgets in line. The distortionary effect of
these tax increases, as well as the costs and
problems associated with collecting taxes from
other sources, are generally ignored in economic
models that project gains from eliminating trade
barriers.
The removal of trade barriers is also likely to
lead to large disruptions in agriculture. In most
developing countries, a large portion of the
population is still tied to the agricultural
sector. If barriers to agricultural imports are
removed too quickly, it can lead to large-scale
displacement of the rural population. Standard
economic models implicitly assume that these
people are re-employed in other sectors of the
economy, but rapid import liberalization can lead
to substantial unemployment and underemployment,
as well as dangerous levels of social and economic
instability.
There are two other sets of costs that
have been attached to trade liberalization that
must also be taken into account:
Recent trade agreements, such as the TRIPS
provisions in the WTO, have sought to impose
U.S.-style patent and copyright protections in
developing countries. This will lead to the
transfer of billions of dollars from developing to
high-income countries in the form of royalties and
licensing fees. In addition, the efficiency loss
resulting from higher prices of patented and
copyrighted items is likely to be even larger. The
World Bank's estimates indicate that the cost of
TRIPS to developing countries is likely to be
comparable to any gains they might receive from
trade liberalization.
As a result of increasing instability in world
financial markets, developing countries have felt
the need to vastly increase their holdings of
foreign exchange reserves. These reserves are held
in the form of short-term deposits that pay little
or no real interest. By contrast, this money could
otherwise be invested in building up the
infrastructure or the physical and human capital
in a developing country. The opportunity costs of
these increased reserve holdings are also of the
same magnitude as the World Bank's projections for
the benefits of trade liberalization.
The implication of this analysis is
that developing countries may benefit at least as
much from measures such as the repeal of TRIPS, or
a restructuring of the international financial
system that restored its stability, as from any
progress on trade liberalization. At the least,
the costs associated with these changes deserve
much more attention in policy discussions than
they have thus far received.
Furthermore, if the costs and benefits of
increased liberalization along the lines of recent
agreements are evaluated according to standard
economic research and evidence, there is no basis
for assertions that these policies will
qualitatively improve the plight of the poor in
developing countries. In fact, the research
provides substantial evidence that these policies
may actually cause a net loss for low and
middle-income countries as a group.
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