Trade, Development and Globalization

Syed Javed Maswood

• Publisher: Routledge
• Year: 2013
• Print ISBN: 9781138956537
• eBook ISBN: 9781135142315
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

This book provides a longitudinal study of developing country involvement in multilateral trade negotiations.

The trade regime established at the end of the Second World War did not cater for, and in some cases excluded, the developmental interests of the newly independent countries. This book offers a detailed analysis of:

• The first attempts to revise the trade regime in the 1960s through the United Nations Conference on Trade and Development and the formation of the Group of 77 to enhance their bargaining potential.
• The mixed coalition strategy, with the Cairns Group in the Uruguay Round of GATT.
• The new bargaining coalition, the Group of Twenty, that took on a much more confrontational and assertive bargaining position in the unsuccessful Doha round of the World Trade Organization.

In part two, the author explores the possibility that economic globalization may finally deliver to developing countries what they had failed to achieve in five decades of multilateral negotiations - an opportunity to climb the industrialization ladder and achieve development. The book offers a proposal for revising the format of trade negotiations in a way that helps overcome stalemates and deadlocks.

Trade, Development and Globalization will be of interest to students and scholars of international trade, trade and development, negotiation, global governance, political economy, international relations and economics.

1 Introduction

Rules invariably produce winners and losers. This is true as much for domestic policy decisions as for international rules and regulations, or regimes. Existing international economic regimes, governing behavior of states on the international stage, were largely a result of national interest considerations of great powers that devised these regimes and are difficult for others to revise. Of course national interests do evolve and this may explain rule modifications over time but for losers in the system, the ability to secure change is not easy. New power centers may emerge but even these states struggle to redefine the nature of regimes. Indeed, there is often a reverse expectation that regimes will socialize new and emerging powers and constrain them from pursuing wholesale changes. This book is about international trade rules established at the end of the Second World War that benefited developed countries and marginalized developing countries. The trade regime was structured around the General Agreement on Tariffs and Trade (GATT) that came into effect in the late 1940s. In the mid-1990s, GATT, already well institutionalized in the fifty years of its existence, was given a hard institutional edge with the formation of the World Trade Organization (WTO). The central principle of GATT and WTO was liberal trade and defense against protectionism, but liberal trade was structured in ways to bring about selective liberalization that failed to address interests of a majority of GATT/WTO members in favor of the particular interests of developed countries.

This book provides an analysis of attempts by a less powerful group of countries to negotiate a better deal for themselves, initially outside the trade regime and later within the GATT and WTO. The World Trade Organization subsumed GATT in 1995 and launched its inaugural trade liberalization round, the so-called Doha Development Round in 2001. This was acclaimed at the time as a window of opportunity for developing countries to claim fair treatment in international trade rules, but has thus far remained deadlocked over the issue of farm trade liberalization. Developing countries insist on liberal farm trade in order to exploit their comparative advantages but governments in developed countries have failed to overcome resistance of domestic farm lobbies. As a result, Doha Round has remained in limbo ever since the first rupture in negotiations in 2003.

Stalemate in negotiations, however, has to be analyzed in the context of a new reality of economic globalization that may have rendered moot actual outcomes in WTO negotiations. These two themes, the quest for regime change and globalization vis-à-vis economic growth and development, are explored in the two parts of this book. In the first part, I provide a longitudinal study of multilateral negotiations and of initiatives by developing countries to realize equitable and fair access to global markets in a way that might kick-start economic growth and development. This is not to suggest that systemic constraints alone were responsible for the plight of this group of countries. The long process of engagement, stretching over 50 years, began with UNCTAD (United Nations Conference on Trade and Development) in the 1960s, and continued through the Uruguay Round of the GATT to the unfinished Doha Round of the World Trade Organization. I will explain that these three episodes were not discrete events but logically connected in so far as bargaining and coalitional strategies of developing countries were concerned. The narrative highlights the relative failure to bring about meaningful and substantial change in rules governing international trade.

In the second part, I trace the more recent emergence of economic globalization and its potential for reintegration, industrialization and development. There are many critics of globalization but there are as well positive aspects to it that cannot be ignored. My central claim is that globalization has created new trade opportunities and made it possible for developing countries to trade their way out of backwardness, by-pass protectionist measures in developed countries, and achieve development. As such, globalization promises to deliver for many developing countries what they had failed to achieve through negotiations in a multilateral setting. On a note of caution, however, it should be added that globalization is not a simple and sure answer for all, and developing countries have to be strategic and clever in how they use it to fulfill their developmental aspirations. Nor has globalization diminished the relevance of continued efforts to renegotiate trade rules at the multilateral level. This is so because while globalization has provided new opportunities for export of intermediate goods, existing rules continue to inhibit export of traditional products from developing countries and because many new issues on the trade agenda require rule-making, developing countries cannot be absent from this process. Reforms remain a worthy long-term objective and in the final chapter I will look at an alternative proposal that might level the playing field for all countries in the global economy.

Failure of multilateral negotiations and the contrary potential for success in globalization are big concepts and I do not use them as categoric absolutes, rather as convenient and broad markers of assessments. I am aware that assertions of failure of multilateral negotiations to institute regime change are an oversimplification. There were some noteworthy achievements, but these could not compensate for a general inability, on the part of developing countries, to significantly alter the broad parameters of the international trade regime. UNCTAD, for example, did introduce some new measures to assist developing countries but these only partially ameliorated the more fundamental inequities in the system. Even here however, what was conceded by developed countries in principle failed in practice to change the overall condition of trade asymmetry.

The study of negotiations to bring about structural change is significant not only because of its importance to a majority of states in the international trade system but also because of rhetorical commitments to the promotion of development from countries that have already crossed the development divide. Nonetheless, consensus on reform proved difficult to craft because of national interest and domestic political considerations. This first phase, lasting more than five decades, was a single and continuous process but for the sake of convenience and clarity can be segmented into three periods based both on the forums for negotiations and the adopted bargaining strategy. The shifts in bargaining strategies and forum can be explained in terms of path dependence and learned behavior. But important as path dependence was, it is neither to be interpreted as an absolute constraint nor to deny agency to states.

The liberal trade regime established at the end of the Second World War was largely a western construct and did not reflect interests of developing countries. As the former colonies entered the world stage, it soon became apparent that trade rules discriminated against their exports of agricultural commodities and labor-intensive manufactured goods. A system of escalating tariffs, where developed countries applied higher tariff rates on semi-processed and processed commodities than on raw or unprocessed commodities, was also a hindrance to industrialization strategies. For instance, in the early 2000s, UK applied a 3 per cent import tariff on cocoa beans but a 16 per cent tariff on chocolate bars, a structural disincentive to cocoa producing countries from adding value to their raw products. Tariff escalation, consequently, inhibited the spread of industrialization and the establishment of a diversified economic structure that is considered an important feature of development.

Aware of the potential for trade to act as an engine for development, developing countries began a sustained attempt to rebalance trade rules in order to achieve equity. The quest for equity may simply mean fairness of trade rules and non-discrimination but for developing countries it also meant special concessions that would positively facilitate industrialization and development, an ‘affirmative action’ amendment to assist disadvantaged members in the global community of states.

As mentioned, the book is in two parts. Part I consists of four chapters which analyze the relative marginalization of developing countries from the trade system structured around the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) and their attempts to renegotiate the rules. Contrary to a commonly held view, this journey did not begin with the Uruguay Round (UR), the eighth and final trade negotiating round of GATT in the mid-1980s, even though this was when developing countries first engaged in active negotiations inside the GATT system to restructure trade rules. The GATT phase was simply a continuation of the UNCTAD process outside the GATT, in the 1960s and 1970s. For twenty years, developing countries worked tirelessly, yet with limited success, through UNCTAD to engineer a more balanced trade regime. Their subsequent engagement in the UR negotiations was, in other words, simply an ‘insider’ shift compared to the ‘outsider’ strategy that defined the UNCTAD process. Developing-country activism in the UR was not, as such, a new beginning replacing passivism or disinterest. It is misleading to suggest that these countries were either inactive or unconcerned about global trade rules in the first three postwar decades. And efforts to renegotiate global trade rules continued when the World Trade Organization launched its inaugural round in 2001. The long and continuous period of engagement can be segmented into three discrete periods depending on the nature of bargaining strategies and approaches. In the first period, until the early 1980s, developing countries relied on the outsider UNCTAD mechanism to secure improved access to global markets. This was followed by engagement from within in the Uruguay Round of GATT and this insider engagement, albeit on a different basis, continued in the third period of the Doha Round of WTO negotiations.

Developing-country bargaining strategy in DR was determined by lessons learned during the UR process. Since 2003 the Doha Round has been mired in a negotiating impasse over conflicting demands by developed and developing countries. The round may be brought to a close with some nominal agreement that allows both developed and developing countries to claim success but more likely the round will quietly fade into oblivion. Pessimists might despair, as indeed they did when the UR faced a similar stalemate in the 1980s, that failure to conclude the round will unravel the structure of liberal trade, but there has been no significant protectionist drift since 2003. This, in spite of a series of global economic crises, which are frequently seen as strengthening protectionist sentiments and inimical to liberal trade. The stalemate has not been an unmitigated disaster for developing countries. The sky has not fallen in on developing countries even though they have failed to achieve some of their key goals. The question then is whether Doha really matters either for the longevity of the trade regime or for developing countries.

Completion of the round with substantial farm liberalization and restoration of special privileges will definitely benefit many developing countries and yet many developing countries, not just India and China, have prospered even following the collapse of DR. The less than dire consequences of the failure of Doha can be attributed to the new reality of economic globalization and also to some positive outcomes of the Doha Round. In the DR members may fail to reach a final agreement on outcomes but the round itself will not be a complete failure in terms of processes of inclusion.

Part II consists of two chapters and explores the impact of globalization on developing countries. First, I look at the emerging international division of labor, not as before at the industry level but at the intra-industry level. Globalization has, firstly, enabled at least some developing countries to kick-start industrialization with the manufacture of less sophisticated components and parts that make up a final product, and secondly, provided them new opportunities to expand their presence in the new structure of world trade, where trade is increasingly at the firm level rather than country-based, and increasingly also in parts and components rather than finished products. This new feature of globalization may mean that ‘failure’ of DR has less than dire implications for developing countries because globalization itself is a compensating development that allows developing countries opportunities to bypass existing obstacles to industrial growth and development. Certainly, there are other potential consequences of globalization, including new forms of marginalization, and these issues will be explored in Chapter 6. Amid the great fanfare that globalization is an all-embracing positive development, a view associated with the multilateral agencies, there are voices of dissent and both Stiglitz (2003) and Chang (2007) point out the pitfalls for many developing countries of premature liberalization and engagement in the global economy. The results of economic globalization may be mixed but if properly managed the new reality offers possibilities for developing countries to move up the industrialization ladder.

The second chapter in Part II will develop a plan for reforming the trade system that not only creates a level playing field but is consistent also with the new reality of progressive globalization. In this chapter, in order to contextualize the analysis, I provide an overview of the main arguments running through this book and explain both the structure of the international trade system that was established after the Second World War and the centrality of trade to developmental concerns. Following this I look at the more recent phenomenon of economic globalization. Details about the two periods will be provided in each of the two parts that make up this book.

Three postwar developments

Liberal trade

Twentieth-century economic relations can be conveniently segmented at mid-point. The first half was a period of economic nationalism when countries jostled ‘rationally’ to position and re-position themselves in order to secure additional benefits at the expense of trade partners only to see the world hurtle down the path of another global conflict. This economic conflict was reflected both in spiraling import tariffs and currency devaluations. Rational self interest and tit-for-tat trade strategies saw global trade levels plummet and the world spiral into a viscous cycle of economic depression and global conflict. Soon, economic conflict spilled over into political conflict and war. As the Second World War drew to a close, Allied Powers began planning for a postwar world order to prevent a repeat of prewar protectionism and to establish instead a virtuous cycle of peace, wealth and prosperity. In their vision for the future, international trade was no longer to be treated as a zero-sum exchange. Replacing mercantilism was the principle of economic liberalism, one that implicitly assumed that trade was a positive sum game for all.

Liberal trade after the Second World War was meant to foster cooperation and closer economic ties that would be costly to break and prohibitively increase the cost of conflict. Self-interested economic nationalism and beggar thy neighbor policies were replaced by a predefined concept of the collective good, peace and prosperity. The architects of the trade system focused on the links between trade and peace as a way to prevent a third global conflagration. For leaders of the Allied Powers, liberal trade was also the appropriate lesson coming out of the Great Depression of the 1930s. The roots of the Great Depression stretched back to the end of the First World War: an ‘unjust’ peace settlement, and extreme economic nationalism.

Much of the blame lay with the United States. It had played an important role in negotiating the Versailles Peace Treaty that ended the First World War but the good work was undone when the US Congress failed to ratify the Peace Treaty and opted instead for a return to isolationism from foreign entanglements. American withdrawal from global politics left the international system rudderless, a situation that permitted the old hostilities to resurface. The US had brought peace but lacked the political will to keep it. Worse still, the United States fuelled global protectionism and economic nationalism and this spiraling of intense economic and political nationalism found manifestation in the Great Depression and, later, in the Second World War.

In liberal thinking, both trade and democracy are interconnected to peaceful international relations. The democratic peace theory is a simple inductive generalization from historical evidence that democracies have never engaged in mutual hostilities. The precise logic is unclear but one possibility is that a functioning democracy has sufficient institutional checks and balances on political leaders to prevent them from embarking too readily on paths that lead to conflict. Democracies have therefore tended to resolve differences peacefully especially in relations involving other democracies. Trade further reinforces the democratic peace theory by including considerations of opportunity costs, that trade disruptions as a result of conflict have significant adverse impacts on national prosperity and that when citizens are the ultimate source of authority, pathways that promote prosperity will always trump welfare losses. Because the opportunity cost of conflict is greater the higher the initial levels of prosperity, and because trade has a strong positive effect on welfare, trade openness will enhance prospects for peace by raising levels of prosperity. This rationale underpinned attempts to create a peaceful word at the end of the Second World War and the institutionalization of liberal international trade. Leaders of the Allied Powers established foundations for a postwar world order that would ensure enduring peace and prosperity, or ‘peace through prosperity’ (Jones, 1983: 6).

Moreover, the urgency of enduring peace was greater than before because of the unthinkable consequences of nuclear conflict. After two world wars in the space of two decades, where the second was largely a product of the first, world leaders could not afford to take the risk of a third world war too lightly. In their plans, both liberal trade and democracy were central to world peace. The vanquished powers were democratized and democracy was also bestowed on the many newly independent countries, although democracy here quickly degenerated to be replaced by various forms of authoritarianism. However, both Germany and Japan emerged as shining examples of enduring democracy and the Japanese Constitution, drafted essentially by the occupation authorities, also included a no-war clause, a denial of the sovereign right to engage in hostilities.

Liberal trade was equally important and ultimately proved more enduring than the postwar democracy project. American policy makers had come around to support liberal trade even before the Second World War had ended. Historically, liberal trade has never been easily accomplished even if the theory of it is intellectually persuasive. Despite sound economic argument for free and unfettered international trade, including unilateral free trade, the reality is that the practice of it has only been achieved with strong global political leadership.

Liberal trade policies had been tried only once before in the nineteenth century when Britain adopted unilateral free trade by repealing its protectionist Corn Laws. The Corn Laws had been introduced earlier to protect British farmers from cheap imports from the Continent. The repeal was not only in the interest of Britain’s manufacturing industrialists and exporters, but also relatively painless because of Britain’s overall dependence on imports of primary products, being itself a resource-poor country. Without a more liberal import regime for primary products, it was obvious that Britain could not continue or expand export of manufactured goods to foreign exchange/cash-strapped continental countries. Even so, some in continental Europe, including the economist List, dismissed the repeal of the Corn Laws as a cynical and shrewd strategy of protecting Britain’s status as the premier ind...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Acknowledgements
• List of abbreviations
• 1 Introduction
• PART I Developing countries in multilateral negotiations
• PART II Developing countries, globalization and institutional reforms
• References
• Index