2007 Imani West Africa University Seminar ------------------------------------------------- Is Trade a Free or Fair Conc

1. 2007 Imani West Africa University Seminar-------------------------------------------------Is Trade a Free or Fair Concept? By Robert Darko Osei Institute of Statistical Social and Economic Research University of Ghana

2. Overview of Presentation • Why Should Countries Trade with Each Other? • What is the evidence on trade and Development? • Have All Countries Benefited from Trade? • Free Trade Versus Fair Trade • Is Fair Trade the Solution to Current Problems in International Trade? • Summary and Conclusion

3. Why Trade with Other Countries? “While it is quite legitimate to look at trade from the point of view of the balance of payments (BoPs), and to regard the balance of payments as a development problem that can be solved only by new trade policies, the benefits of trade in traditional trade theory is not measured by the foreign exchange earned but by the increase in the value of output and real income from domestic resources that trade permits”. Thirlwall, A. P. (2003) p-626 • The benefits from trade goes beyond Balance of Payments issues that confronts every country

4. Gains from Trade • Here our concern is with output gains from trade • We distinguish between • Static Gains – Gains which accrue according to comparative advantage doctrine • Dynamic gains – gains resulting from impact on production possibilities

5. 3 2 11 2 Absolute Versus Comparative Advantage • Illustrating Absolute Advantage Ghana has absolute advantage in cocoa production and so produce cocoa Nigeria has absolute advantage in cassava production and so produce cassava • With specialisation and trade total world output will be • 3 tonnes of cocoa • 11 tonnes of cassava

6. (1) (2) 2 2 (1/2) (1) 2 3 Absolute Versus Comparative Advantage • Illustrating Comparative Advantage Ghana has absolute advantage in both cocoa and cassava production But Ghana has a comp. disadvantage in cassava production. Ghana produces cocoa and Nigeria produces cassava • With specialisation and trade total world output will be • 2 tonnes of cocoa • 3 tonnes of cassava

7. Benefits of Trade • Some of the benefits are as follows: • Increased specialization – related to the comparative advantage theory. Usually referred to as the Static gains from trade. Here each country produces with greater efficiency and the surplus is traded. • This is consistent with the idea of trade being a vent for surplus - • Dynamic Gains - • Larger markets enable countries to take advantage of the economies of scale (Note that specialization is limited by the size of the market) • Large Scale Investments in capital equipment will go to countries that have ‘larger markets’ – This will in turn drive real output and incomes • Increased competition drives efficiency • Dissemination of technical knowledge • It provides the Greater product choice for consumers

8. There has been a significant increase in trade over the last 40 years • The level of trade in 2003 is over 58 times the level for 1960 Trends in Total World Trade US$ 263 Billion US$ 15,337 Billion

9. World Per Capita GDP Trends US$ 5,345 US$ 2,417

10. Trade and Output Relationship

11. What does the Evidence say? • Generally, we find a positive correlation between trade and well-being (as measured by per capita GDP) • World trade has increased significantly over the last 40 years • Also per capita income of the world has increased • However the strength of the correlation differs from one set of countries to the other • In other words countries have not benefited equally from the increased world trade • Sub-Saharan African countries have not benefited significantly from the trade-induced welfare improvements

12. Empirical Literature seem to show that trade does impact on growth • Sachs and Warner 1995 – they find a positive relationship between growth and trade • Dani Rodrik (1998) - • Dollar (1992) • Edwards (1992) • Feder (1983) • ‘Key Dissident’ • Francisco Rodriguez and Dani Rodrik (2000) • Also trade impacts positively on poverty • Winters et al (2000) • Niimi et al (2003) • Ocran et al (2005)

13. Why Have SSA countries not Benfited Significantly from Trade? • Inward Trade policies pursued in the 1960s and 1970s • For instance, World Bank (1997) classification of Developing countries according to their trade orientation show that • Between 1963-1973, all SSAs (except Cameroon) were classified as inward oriented • Between 1973 and 1985, all SSAs were classified as inward oriented

14. Distortions in the terms of trade that is induced by policies of the advanced countries • Riedl and Markheim (2007) of the Heritage Foundation notes that • WTO members report an average of over $221 billion/year – about 18% of total agriculture value-added • More than two-thirds of these subsidies are being paid in the EU and the US. • These subsidies adversely affect developing countries as they are unable to turn their comparative advantage into a competitive one • Supply is artificially stimulated by subsidising countries. By removing these subsidies developed countries will import more from the developing countries. • William Cline of the Center for Global Development has argued that the benefits that will be conferred on Developing countries with the removal of trade barriers will be more than 2 times foreign aid • The World Bank (2004) estimates that a reduction of tariffs on manufactured goods, the elimination of subsidies and non-tariff barriers, and a modest 10 percent to 15 percent reduction in global agricultural tariffs would allow developing countries to gain nearly $350 billion in additional income by 2015. Developed countries would stand to gain roughly $170 billion.

15. Is Fair Trade the Answer? • What is Fair trade? • One could use an example to explain the notion of fair trade: • Scenario: A company moves production to a developing country that has an infant economy with no labour, health and safety or environmental standards. Potentially this represents a reduction in production costs. This results in the ‘sweatshops’ that the media loves to portray. • The fair trade approach will therefore require this firm to meet some standards and in return be rewarded with higher prices • So whilst free trade seeks the realization of economic benefits, fair trade seeks to balance economic benefits with other values

16. But… • Fair trade does not have the same outcome as free trade • It can potentially distort the markets • Who or what determines the minimum wage? Paying higher product prices as a reward for a distortion in the labour market is not consistent with the ideals of free market • It can be used as a basis to perpetuate the existence of trade barriers • Example is the anti-dumping tariff which may in effect be used as an argument by firms in a given country to stifle competition • It is important to note that free trade is an economic concept that is underlined by proper working markets which deliver efficient outcomes. • Unfortunately, an efficient outcome is not the same as an equitable outcome! • The true role of fair trade as pointed out by Paul Gunstensen (2004) • “…is in drawing attention to the exploitative effects of free trade agreements in agriculture and food production and the apparent hypocrisy of the industrialised nations when conducting trade”

17. Conclusions • Trade is good for growth and poverty reduction • Developed countries will stand to gain if they change their policies in support of free trade • Fair trade may have good intentions but cannot be a substitute for free trade

18. End of Presentation