ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Rules for Fair Trade

Fair Trade for All: How Trade Can Promote Development by Joseph E Stiglitz and Andrew Charlton; Oxford University Press, Oxford, 2005; DEV NATHAN In the market system there is a manner of equality that has both positive and negative effects. As compared to feudal or casteist systems that prescribe who can consume what, the market does not recognise the individual behind the buyer. This is a positive advance due to the market system. At the same time, the market is blind to the strengths and weaknesses and the capabilities that the buyer and seller bring to the market. Equality of access is taken to be equality of opportunity. The perniciousness of this doctrine of equality of access is seen vividly in the case of international trade. Does equal access mean equal opportunity? In the current version of the three worlds (developed, developing and least developed countries (LDCs)) equal access to each other

Rules for Fair Trade

Fair Trade for All: How Trade Can Promote Development

by Joseph E Stiglitz and Andrew Charlton; Oxford University Press, Oxford, 2005; pp xx + 315, US $ 30.

DEV NATHAN

I
n the market system there is a manner of equality that has both positive and negative effects. As compared to feudal or casteist systems that prescribe who can consume what, the market does not recognise the individual behind the buyer. This is a positive advance due to the market system. At the same time, the market is blind to the strengths and weaknesses and the capabilities that the buyer and seller bring to the market. Equality of access is taken to be equality of opportunity. The perniciousness of this doctrine of equality of access is seen vividly in the case of international trade. Does equal access mean equal opportunity? In the current version of the three worlds (developed, developing and least developed countries (LDCs)) equal access to each other’s markets, in the absence of equal capabilities, is likely to lead to highly unequal outcomes in terms of both market shares and incomes.

Take the case of garment exports. In the MFA quota regime, countries like Bangladesh and Cambodia were able to utilise the quotas to develop some segments of garment manufacturing. It is highly unlikely that they would have been able to make this advance in the absence of export quotas, which both set limits to exports from countries with scale advantage, like China, and enabled LDCs to pick up some market share. This is an example of infant-industry protection, not through tariffs but through quotas, and not for imports but for exports.

There have been many systems of differential access. In the colonial period, colonies had preferential access to empire markets. The now defunct MFA was the best such example of differential access. More recently the EU’s Everything But Arms (EBA) and USA’s African Growth and Opportunity Act (AGOA), give some limited preferential access to a number of African countries, though often with rule of origin restrictions that serve as a method of protection. How can one generalise a system of differential access? This is the key problem that Stiglitz and Charlton deal with and they come up with a solution that is not only elegant in its simplicity, but also workable.

Discussions on differential access have usually focused on developed country markets. Among those for whom this access is sought, a distinction might be made, and nowadays is commonly made, of LDCs within the broader group of developing countries. Stiglitz and Charlton go beyond that to raise the issue of access even in regard to some developing country markets so as to promote south-south trade. The problem not only lies with developed countries with better developed technological capabilities, but also with large economies like India and China, which are able to achieve significant economies of scale. Both technological advantage and economies of scale can allow some producers to sell more cheaply than others from less developed or smaller economies. What the authors propose is: “…all WTO members commit themselves to providing free access in all goods to all developing countries poorer and smaller than themselves” (p 94). This rule would apply to all countries, developed and developing alike. Consequently, all developing countries “could expect free access to all markets with (1) a larger GDP, and (2) a larger GDP per capita” (p 94).

The second clause would provide all developing countries access to all developed country markets. While the first clause would provide smaller and poorer countries, including but not limited to LDCs, access to large developing country markets, like China and India. While India seeks full access to developed country markets, it does not want to provide the same to poorer and smaller countries, like Bangladesh. It is interesting to note that in trade between India and Bangladesh there are specific restrictions to counter

Economic and Political Weekly May 13, 2006 likely Bangladeshi garment exports to India. The Stiglitz-Charlton proposal would both give India access to developed country markets, and, in addition, give Bangladesh free access, without tariff or quota restrictions, to the Indian market.

Advantages

In elaborating this proposal the authors claim a number of advantages for it. (1) It involves significant liberalisation. (2) In particular, it involves significant southsouth liberalisation. (3) Obligations are distributed progressively, with more obligations on developed countries, less on large developing countries, and so on.

(4) Countries can manage major import threats. One should add though, not all import threats, as those for instance, now facing large sub-sectors of manufacturing in the developed economies, but import threats from economies with “cost advantages derived either from the scale of their economies (read, China and India) or technological advantages (read, developed countries)”. (5) It is consistent with MFN liberalisation schemes. (6) It transforms discretionary schemes into well-defined obligations within the WTO. Rather than the current patchwork of discretionary schemes, often arrived at with great political cost, there would be clear rules and obligations. (7) The scheme includes an inbuilt flexibility that removes the need for renegotiation over time. “As countries develop and overtake others, they will, after an implementation period, lose some preferences and accept obligations to poorer countries. Alternatively, the scheme could be designed to include a ‘one-way’ provision so that free trade would increase monotonically in a dynamic world where rankings change” (p 102).

Benefiting from trade, however, is not only a matter of gaining access. Access is essential; it is necessary but not sufficient. A country must also have the capacity to utilise that access. This is particularly important, given that a large part of such international trade may be in commodities where the developing country or LDC does not have already existing capacity. Comparative advantage points to the direction in which a country can develop exports. Comparative advantage, however, does not mean that a country automatically has such an export capacity. Developing the necessary knowledge, labour and management skills to manage the necessary production and supply system is something that requires adequate development policies within the country concerned. Further, development policies vary with the level of development. Here too, a “one size fits all” policy would be manifestly unjust in not allowing countries to follow policies suited to their level of development.

Stiglitz and Charlton also discuss the necessity of making trade rules that allow more room for required national policy initiatives. The Special and Differential Treatment (SDT) provisions give developing countries more latitude in the use of subsidies and more latitude in tariff reduction. While LDCs are allowed to use subsidies, the Trade-Related Investment Measures (TRIMs) agreement prohibits the use of investment performance measures, like local content and sourcing requirements, that have an effect on trade (p 103).

Trade-Related Aspects of Intellectual Property Rights (TRIPS) is even worse in its protection of what are basically developed country technology monopolies. More than the royalty payments required, it restricts reverse engineering, which, in manufacturing history, has been an important mechanism for developing countries to catch up with developed countries. This catching up requires both access to the larger markets provided by trade with developed countries or larger economies, like China and India. It also requires freer flow of technology and knowledge, something that TRIPS restricts. Discussions of the benefits of trade usually confine attention to the benefits from comparative cost. But, access to larger markets can be a stimulus to learning, a stimulus which, as Pasinetti (1993) points out, may be more relevant in considering the benefits of international trade.

Question about Fairness

Coming back to the main point of the book under review, in what manner does the Stiglitz-Charlton proposal represent “fair” trade for all? The authors use Rawls’ principle of difference that, “Social and economic equalities are to be arranged so that they are…to the greatest benefit of the least advantaged” (quoted in Stiglitz and Charlton, p 81). Provided that trade is of benefit, which is not always the case with LDCs as pointed out in UNCTAD (2004), then the Stiglitz-Charlton proposal does constitute an improvement in trade rules, such that the poorest benefit the most. In this sense it constitutes a Rawls improvement. If such an improvement were taken to be what constitutes fairness, then the proposal is fair. That a proposal leads to an improvement for the least advantaged can be ground for preferring this over other proposals that do not lead to such an improvement. But why is this considered fair?

Or, can there be other senses in which fairness may be understood? The implementation of the Stiglitz-Charlton proposal does not necessarily lead to the achievement of decent work for the export producers. Producers from developing countries may be integrated into buyer-driven supply chains in such a manner that the income benefit is very little, or even none at all. Or, producers in one country may be undercut by producers from another country willing to accept a lower standard of living. The proponents of the various “fair trade” movements might hold that for trade to be fair, prices paid to the producer must meet certain norms of standards of living, in community management or benefits, and so on. That commodities produced with child labour are not fair trade is now quite generally accepted. In other words, some minimum labour standards, even if it be only that of not involving child labour, are accepted as necessary for fair trade.

There can be yet another meaning to fair trade. Trade clearly involves the exchange of unequal amounts of labour – a quantity of labour from developing countries, operating with lower technological levels, exchanges for a smaller quantity of labour from developed countries with higher technological levels [Pasinetti 1993]. Does this constitute unfair trade? One might well argue it to be so.

But there can be no doubt that the Stiglitz-Charlton proposal needs to be taken seriously and would institute a system of rules of access to international markets, which would benefit more the least advantaged. It is certainly superior to the equal access rules that are sought to be implemented under the WTO or the patchwork of schemes under various bilateral and regional trade agreements.

EPW

Email: nathandev@hotmail.com

References

Pasinetti, Luigi (1993): Structural Economic Dynamics: A Theory of the Economic Consequences of Human Learning, Cambridge University Press, Cambridge.

UNCTAD (2004): The Least Developed Countries Report 2004, UN, New York and Geneva.

Economic and Political Weekly May 13, 2006

Dear reader,

To continue reading, become a subscriber.

Explore our attractive subscription offers.

Click here

Comments

(-) Hide

EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.

Back to Top