International Trade and Sustainable Development

Economic, Historical and Moral Arguments for Asymmetric Global Trade

Bob Milward

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429626630
• Edition: 1
• Topic: Économie
• Subtopic: Économie du développement

The contemporary orthodox view of world trade has centred, generally unchallenged, on the ideas of free trade, based on the theoretical construct of comparative advantage. This bookwill engage in a critique of the orthodox position based on the underlying theoretical economic construct, the historical development of the now developed economies and the morally unsustainable position of the free-trade regime.

The author examines alternatives such as Most Favoured Nation and Preferential Trading Agreements before making the argument in favour of Asymmetric Trading, where the underdeveloped economies can develop behind tariff barriers and quotas, whilst the triadic nations maintain a lack of barriers to the exports of these economies. He outlines how such a trading regime would be mutually beneficial in the long term, in the sense that development through industrialisation takes place and the increase in GDP per capita would allow markets for exports to be sustainable, thus widening the market for the goods and services of the developed economies. However, the author demonstrates that free trade actually increases the development gap by maintaining the status quo in terms of the underdeveloped economies specialising in and exporting low value-added primary products and importing high value-added manufactures.

The book analyses contemporary and historical data to illustrate how an alternative trading regime can be truly advantageous to both the developed and underdeveloped regions of the world: a global trading regime that is capable of increasing GDP in a sustainable manner without transferring a surplus from the poor to the rich nations and without a long-term commitment on the part of the developed nations to altruism.

1 Introduction

It would not be an over-exaggeration to suggest that we find ourselves in troubled and problematic times, yet some of us live in material and financial circumstances that are beyond the wildest dreams of our grandparents and great-grandparents. It is also no hyperbole to point out that we live in a divided world, between the haves, the have much less and the have nots – globally, nationally and locally, this inequality reveals itself not just in terms of income, wealth and power but also in the form of health, education, security and access to basic necessities. In Britain, the soup kitchens of the 1930s for the unemployed have been replaced by the food banks of the 2010s for the low paid: Rough sleeping, homelessness alongside ostentation. Some would argue that this is the way of the world, that somehow inequality is the outcome that is to be expected and whether one is born into a wealthy family on the west coast of the United States or in an impoverished village in the Democratic Republic of Congo is just ‘the luck of the draw.’ There tend to be three main types of reaction to this inequality: The TINA response is simply to accept that inequality has always been the way and always will be, justified by employing religious cants, philosophical positions and/or economic theoretical positions in order to give gravitas to the idea of doing nothing. Individuals, if they wish, can help as individuals as if inequality were an existentialist problem. There are those who wish to address the problem of inequality through a ‘do as we do’ mantra where the advanced countries suggest that as they operate within free markets, free trade and ‘democracy,’ then the underdeveloped economies¹ should follow suit if they wish to catch up. This is the modus operandi of the International Financial Institutions (IFIs) of the World Bank (WB), the International Monetary Fund (IMF) and the World Trade Organisation (WTO) and of the leading forums of the advanced countries (G7/G8). The third approach is to seek alternatives that are credible as policies to promote economic development, economic growth and rising prosperity in the underdeveloped economies. Therefore, if the first response is morally bankrupt and the second response is morally questionable, then an alternative should be sought. Rather than ‘do as we do’ a much better slogan for development strategy would be ‘do as we did.’ Therefore, it follows that there must be a moral and a historical element to the formulation of a credible alternative strategy that can address the problem of global inequality.

The idea of a common humanity and a Rawlsian social contract may be appealing in this context; however, it does not sit well with orthodox theory, particularly concerning trade and development. Thus, we turn to historical evidence to assist us in the formulation of a workable set of policies to reduce inequality on the global scale. That is, how did the now advanced economies become advanced economies? What internal and external policies did they pursue? What was the role of the state and what was the role of the free market? Were trade and the patterns of trade determined by the forces of supply and demand in a market that was not distorted by the imposition of tariffs and quotas? If we are able to use history as our guide and ethical considerations to underline our proposals, then an alternative economic and political strategy could be formulated that properly addresses our contemporary concerns. For example, on the issue of climate change, notwithstanding there are those that deny that it exists as a phenomenon at all, there are some with the attitude that the advanced economies caused it through their industrial revolutions and subsequent reliance on fossil fuels, but if underdeveloped countries wish to industrialise, they must adhere to the principle that thou shalt not add to it. Others take the position that we should assist the underdeveloped economies to industrialise and develop by transferring the best ‘green’ technology; This treats the planet as a whole in order to reduce CO₂ emissions and reverse the damage done in the main by the industrialisations of the past 300 years, but also to ensure that underdeveloped economies are not blocked in their desire to industrialise and develop.

We are advised on all sides of the debate about economic development that trade is the key to achieving mutually beneficial outcomes. That is, nations that trade can expect to increase their GDP as opposed to those that rely on autarky alone. Indeed, trade in general and international trade in particular can have wide ranging consequences, not just in terms of narrowing global inequality, but in terms of many contemporary economic and political problems and conflicts. For example, mass migration is a ‘problem’ for many, ‘solutions’ to which range from the building of walls and fences to keep migrants out of countries to which they wish to migrate, the formation of populist movements to promote nationalism and outright racist policies to deter migration. Alternatives to which include an advocacy of open borders internationally or the active support for underdeveloped countries financially and with policies that promote their economic development intended to remove the overriding motives for migration. The European Union is a case in point – even before the Brexit referendum, Polish workers in Britain had begun returning to a country supported by regional funds that saw GDP per capita rising.² Hence, prosperity appears to be the key in terms of migration; ensure rising prosperity in underdeveloped economies across the globe. Why attempt to move to the US if your capabilities can be fulfilled in the country of your birth? Therefore, removal of the motivation for migration, a major one of which is poverty, would certainly have a greater impact than many of the measures that are being employed today. Another major motivation for migration is the lack of security in the form of conflict and/or the lack of freedom and human rights. Such an absence of security, it could be argued, arises alongside poverty and the lack of armed conflict often appears to increase in probability with a rise in prosperity.

Perhaps it is the case that there tends to be less likelihood of such an occurrence between the advanced nations. Certainly, since 1945 we have seen many proxy wars (Korea, Vietnam), continuous diplomatic wars, trade wars, digital warfare. Conflict has often been between states with very different levels of economic political and military power (Iraq, Afghanistan, Crimea, Ukraine). However, conflicts in underdeveloped economies, both internal and external, are very often caused by a lack of economic resources, which more readily lead to, war over territory, conflict caused by political and religious difference and oppression of minorities. These appear to be more prevalent in underdeveloped countries. Prosperous countries do not engage in armed conflict with each other in the contemporary world. Over-ambition caused two world wars in the last century and taught us an important lesson, that is, prosperity is destroyed when advanced nations go to war with each other. Keeping the peace through economic and political alliances has also been important (NATO, EU, UN, NAFTA, ASEAN etc.). The political elite in North Korea feel that they have little to lose by engaging in provocation and posturing on the world stage, but also, much to gain if the advanced nations take notice and attempt to mollify through aid and/or trade. Religious intolerance in the Middle East, lack of development caused by sanctions and blockades become counter-productive. On a global scale, prosperity requires stability and a lack of armed conflict, poverty does not.

Education is not simply a matter of literacy and numeracy; it instils rational thoughts and ideas with the ability to articulate those thoughts and ideas. A more educated population is a more productive population and our common humanity makes education a human right as a means to attain one’s capabilities. Universal education requires prosperity and prosperity requires economic development. The existence of externalities in education ensures that the benefits are transmitted to the whole economy, but also requires that the state must intervene to guarantee an equality of provision. Indeed, the lack of education and poverty can be viewed as bedfellows whereby economic development is the key to increased provision of education at all levels and therefore, a rising level of educational attainment that is of benefit to the whole economy. Health care is also dominated by externalities, but these can be global in their effect through communicable diseases such as Ebola and HIV/AIDS.

Good health in a community is predicated by good prevention which, in turn, requires resources to provide sanitation, clean water and nutrition. Given the externalities, state intervention is again essential if health care is to be universal in scope and based on need. Hence, good health is reflected in higher life expectancy, lower infant mortality and the improvement in maternal survival rates. It predicates falling birth rates with falling death rates, through the Boserup effect³ as economic development progresses.

Taken together, education and health can provide the fit and healthy and knowledge based economy that a growing and productive economy requires. If technology and technical change are the keys to rising GDP, as so many schools of economic thought suggest them to be, then education and health care are essential to the process. Technology transfer can, therefore, be a major driver of economic development either imported or through Foreign Direct Investment (FDI). The question remains as to how to raise the level of GDP in underdeveloped economies sufficiently that the problems outlined can be addressed through rising living standards across the globe. We do this by critically appraising economic orthodoxy, particularly orthodox trade policy, to examine whether continued adherence to this school of thought can produce the outcomes that we seek on a global scale. If this is not the case, then we require an alternative theoretical framework that can deliver these outcomes. In order to inform the formulation of an alternative international trade regime, knowledge of how contemporary advanced economies achieved their current status as advanced economies is crucial. Therefore, what is described as the waves of capitalism will be examined in order to understand the application of economic policy in these economies. In addition, it is recognised that there must be a moral and ethical element both to the framework to be recommended and to the desired outcomes. Justification for the moral and ethical stance that underlies the economic framework is arrived at using value judgement and rational argument. The idea that economics has a moral aspect is anathema to positivists and falsification theorists, but positivism as a paradigm for the investigation of economic phenomena is rejected here in favour of political economy and the more interpretivist approach of critical realism.

In our search for a model of international trade that could enrich rather than impoverish underdeveloped economies, it is important to examine the orthodox position and present its formulation, and supposed outcomes, in some detail.

Hence, we begin by presenting the theory of Comparative Advantage, as it evolved from Adam Smith’s critique of Mercantilism and David Ricardo’s subsequent critique of Absolute Advantage, highlighting the fact that, in Ricardo’s version of Comparative Advantage, labour productivity is employed as a proxy for economic efficiency, which in turn emphasises differences in technology between nations. Hence for Ricardo, free trade results in mutually beneficial outcomes as these nations would concentrate their scarce resources in the most efficient sectors of their economies. David Ricardo’s motivation here was his opposition to the continued imposition of the Corn Laws and he was at pains to point out that impediments to free trade would only impart damaging effect on all trading nations. We then present the arguments of the neo-classical approach to Comparative Advantage, illustrating how differences in technology in the Ricardian construct is replaced by differences in factor endowment in the Heckscher-Ohlin (and others) version. This results in specialisation in either labour-intensive or capital-intensive production, which, the proponents argue, results in mutually beneficial outcomes for free trading partners. A major question that arises is that of the theoretical versus the empirical, the mathematical model versus the reality. In theory it appears that Comparative Advantage can deliver mutually beneficial trade through the vehicle of specialisation and that this can be shown to be the case theoretically and mathematically. However, the empirical results tend not to bear out this tendency in reality. The major reason for such a disparity involves the assumptions that are required in order to arrive at a mutually beneficial outcome.

In order to highlight these problems, the next section presents a critique of the theories of free trade, in both of the versions of Comparative Advantage. Concentrating on the unreal nature of the assumptions of the models that are required to attain an outcome that is mutually beneficial to all of the participants in free trade, but also examining the underlying theoretical proposition of the need for free markets. It is shown that the existence of public goods and externalities, natural monopoly, merit and demerit goods and distributional distortions means that state intervention to correct adverse market outcomes is essential and that market equilibrium is not necessarily an outcome that we would welcome. We then scrutinise the neo-classical argument that, given free trade, there would be factor price equalisation over time: This is examined using the Prebisch-Singer hypothesis as to the instability of primary product prices, which has adverse consequences for underdeveloped economies that engage in free trade. Power relationships are highlighted, as unequal power between parties negotiating trade deals results in disadvantageous terms for the weaker party. Empirical evidence also suggests that factor price equalisation will not occur, indeed, what seems to be a forceful set of theoretical propositions that support free trade unequivocally, are in fact merely the justification of a special case, rather than the basis for a general rule. It is also the case that when the theoretical construct of the gravity model of international trade is employed to investigate the relevance of the factor endowment version of Comparative Advantage, it is shown to have greater credence, in terms of its estimates of trade flows between countries and also, the gravity equation is much more robust in the face of real world complexities.

The importance of the historical analysis of international trade lies in the manner in which the now advanced capitalist nations were able to become advanced economies in the contemporary situation. In particular, the trading regimes that were initiated by the now advanced nations during their periods of economic development that enabled them to become advanced, industrial economies. Identifying the beginnings of mercantilism in England in 1485 and the commercial expansion that occurred during the Tudor reign, we see the setting in train of the transformation of a country supplying raw materials on international markets to its position as the first industrial nation. In effect, Britain used state intervention, maritime power and infant industry protection in order to prosper through the structural change that followed. The role of multi-angular trade, and in particular the trade in human beings between West Africa and the Americas, gave British merchants the capital and the mercantile contacts to undertake this structural change, with the support of an interventionist state. In the US, the use of mercantilist policies in order to follow import substitution industrialisation and to protect its infant industry, began with Alexander Hamilton’s tenure as treasury secretary in 1789 and with full adoption of the package of mercantilist measures in 1812. The ‘golden age’ of US manufacturing from 1865 to 1920 saw the continuation of high tariff rates and state intervention. Only after World War II did the US move towards freer international trade. Similarly, the developmental state approach adopted by Japan is arguably the classic case of infant industry protection designed to achieve industrialisation and economic development beginning with the Meiji restoration of 1868. This pattern of protectionism in the early phases of industrialisation is observed in almost all European economies and only when advanced status is attained, do we observe reductions in tariff levels and state intervention. Therefore, none of the successive waves of capitalist development involved free trade: From the mercantilism of Britain and the US, the developmental state in Japan and reconstruction of Europe and Japan in the immediate post-World War II period, the use of state intervention and trade tariffs was the orthodox policy. Thus, the history of international trade illustrates that economic development requires protectionism and a central role for the state.

We then proceed to consider the moral aspect that is attached to the choice of international trade policy. International trade is an essentially human activity with human consequences and, as such, it is important to examine the virtuous aspects of an international trade regime that results in the betterment of the human situation. Morally, should we persist with a system of international trade that can be shown to enrich the few and disenfranchise the many? The morality of the system goes to the heart of the central question regarding inequality of outcomes: Is inequality a good thing or a bad thing? To what do we look for guidance on the moral aspect and what is morally acceptable or not? Particularly the concept of virtue and the common good, associated with Aristotle and the idea that we share a common humanity, which leads to a moral obligation to assist fellow human beings out of poverty. This is outlined using two approaches: the teleological and the deontological, which refer to ‘rightness’ of action and ethical considerations of duty respectively. It follows that, the advanced, developed economies have responsibilities to end world poverty through what Pogge has called a causal contribution principle. Then, invoking Rawls’ maximin rule, where consideration must be focused on the position of the least advantaged and in maximising the position of the poorest in society, and creating a synergy with the prioritarian cosmopolitan position, it is argued that we arrive at a position whereby there is a moral obligation to redistribute resources to effect fairness and justice on a global scale. Hence, by demonstrating that the existing international order is making the position of the poor worse, and that there exists an alternative order that could reverse the situation, it must be the case that the developed countries have an obligation to accept the introduction of the alternative international order.

In addressing the question of Preferential Trade Agreements and their precursor, the Bilateral Investment Treaty, it is argued that these are not the answer to the problems of global inequality. Despite a proliferation of such agreements in recent times, it is argued that they actually result in unequal outcomes in favour of the advanced countries. This is because the potential for economic development in the labour-intensive producing economies is limited. Many commentators have maintained that Preferential Trading Agreements offer a bilateral relationship for international trade that is superior to the ‘straightforward’ free-trade agreements, in that, they can be negotiated and designed to meet the specific requirements of the participants in the agreement and are therefore, more likely to yield beneficial outcomes for all concerned. Empirically, this is not shown to be the case, particularly concerning North-South PTAs. PTAs generally have similar outcomes to free trade agreements, but power relations mean that the underdeveloped economies find themselves agreeing to conditions that replicate those insisted upon by the International Financial Institutions, and in many cases, much worse, particularly when compared to the WTOs non-discriminatory regime. In analysing the impact of the African Growth and Opportunity Act, instituted by the United States, we find that it essentially replicates the conditionality of the IFIs that has been so damaging to underdeveloped economies over the past 40 years. Empirically, studies have found little or no evidence that North-South PTAs have any significant policy implications for trade policy or for increases in material well-being in underdeveloped economies.

The consequences of contemporary protectionism on underdeveloped economies is then considered. Analysis of the effects of the trend towards greater protection on the part of the advanced nations with the rise in Preferential Trade Agreements and Non-Tariff Barrier regimes is undertaken. Facing widespread tariff barriers on labour-intensive manufactures and on primary products, the underdeveloped economies are experiencing reductions in their rates of economic growth and a rising developmental gap. The worst case scenario sees parity between the richest and poorest economies taking more than a millennium to achieve. The rise in PTAs, the trend towards greater protectionism and the ascendency of non-tariff barriers, sees the greatest burden being placed on the underdeveloped economies as trade volumes become ever more concentrated amongst the triadic nations and an increase in the costs that are consequently incurred by infant industries in the underdeveloped economies. The greatest losses are observed in Sub-Saharan Africa, South Asia and Latin America where economies find themselves unable to increase their export volumes to states where protectionism is rising. Faced with trade deals that favour the advanced nations, underdeveloped countries find themselves at a disadvantage due to the power relations that exist. Negotiators for the weaker party find that they must make concessions even if they then arrive at a sub-optimal outcome, on the basis that a deal is better than no deal. The rise in populism and nationalism around the world, not least in the US, places a further burden on underdeveloped countries as their competitive position becomes even more compromised. The rise in populism had seen rising protection with the G-20 countries being responsible for the majority of the post-2008 protectionism. The overall result for the underdeveloped...