John Rapley
TRADE IS good for growth. On that point, trade theory is all but unanimous. The principle is simple: the larger the economy, the more the players, hence the greater the competition. More competition translates into greater productive and allocative efficiency.
Productive efficiency refers to how firms manage to increase their output while containing their costs, thereby capturing or protecting market share from competitors. Allocative efficiency refers to the way an economy allocates its resources. If it is engaged in free trade, it is more likely to invest in those areas in which it enjoys greatest comparative advantage. Inefficient firms which depend on government protection or subsidies are driven out of business by imports. Efficient ones, given access to new markets, thrive.
Overall, an economy that maximises its efficiency yields more output. This translates into greater national income and lower prices. Ultimately, everyone benefits. True, liberalisation can be painful firms go under, industries disappear. But that 'creative destruction', as the economist Joseph Schumpeter once called it, lies at the heart of development. To generate the resources needed by dynamic sectors and firms, an economy must release those locked up in stagnant ones.
That, in a nutshell, is the theory. And where it has been applied, the results have generally vindicated it.
The problem is that the practice of trade has all too often ignored its theoretical prescriptions. That is the crux of the matter at this week's trade summit in Hong Kong. It is now widely acknowledged that the international trading regime governed by the World Trade Organisation has been biased in favour of developed countries. That led developing countries to shut down the 1999 Seattle Summit, where they were all but excluded from the negotiations.
In response, the 2001 summit in Doha put trade talks back on course by dedicating them to developing countries. In particular, it was agreed that First World countries were closing markets to imports in which developing countries enjoyed a particular comparative advantage, namely, agricultural products. Equally, it was felt that developing countries should get access to the markets of developed countries that was not always based on reciprocity, since their industries might need start-up times. Also put on the agenda was the need to couple aid with trade, to enable poor countries to realise the advantages trade brought to them.
That was fine in principle. Once again, the practice has proved difficult to implement. The U.S. and Europe, which both subsidise their farmers heavily, got bogged down in a squabble over subsidies. In both, domestic interests made it difficult for politicians to deliver on promises of a better deal.
Significantly, the tide in the U.S. has turned noticeably against trade in the last few years. In hindsight, the 1990s was a missed opportunity. Then, the U.S. economy was booming, and it would have been the right time for the administration to make major concessions on trade. Instead, it played hard until the Seattle revolt ended its bullying.
But today, although the U.S. administration has shown some openness to the concerns of poor countries, the U.S. economy is performing less well. Its trade deficit is surging, and there is endless talk of China's killing U.S. jobs with its exports. In just over a year, President Bush's fast-track authority on trade expires. After that, it will be difficult for him to negotiate a trade deal.
So while the key players may be committed to the ideals of fairer trade, the Hong Kong summit will struggle against politics. A major new initiative, backed by courageous leadership, will be needed to save it. Don't bet much on that happening.
John Rapley is a senior lecturer in the Department of Government, UWI, Mona.
