Trade Protectionism and Poverty?

By Mahbubul Karim (Sohel)

May 26, 2003

For the vast majority of our world populace, dire poverty is the reality. The day-by-day struggle to earn the bread, to provide sufficient food for all the family members proves to be daunting for too many poor people around the world. Indeed there are positive initiatives taken. World Bank and other international organizations are working to address this urgent issue. However, still there are more to do, more fair policy needs to be undertaken to establish fair trade among nations that certainly can help reducing poverty.

The poorer nations lack the resources to compete with the richer nations. And the individuals in these poor nations are in further dejected form. Their government can’t provide them subsidies that the richer nations are able to provide to their farmers, their producers, and their manufacturers of various kinds.

Ian Goldin is World Bank’s Vice President of External and UN Affairs. A few weeks back on May 8 he had presented his valuable remarks at the National Economist Club Luncheon. He observed that the trade debate is the single most important issue for the poor people and it may take concerted efforts by everyone involved to reach fair international trade policy that could eliminate the on going trade imbalances that favors disproportionately the richer nations whereas the poorer nations and their people feel depressed and frustrated by the whole unsolved quandary.

Mr. Goldin observed, “In my view, all the rich countries, with some nice exceptions like New Zealand, are really not doing the right things. And so one can find specific policies in the U.S. or in the European countries or Japan that one can argue against, but this isn't to pick on any of them. It's to say that the whole system really needs to be revised and to be thought of in a very different way.”


Subsidies

Every nation tries to protect their interest, their businesses and industries and this is more so for the richer nations due to their immense resources. They provide needed subsidies, implement various tariff on imports to stifle the competition from the foreign nations. Mr. Goldin rightfully pondered that unless there are a level playfield for everyone, the on going trade debate will never be resolved.

Mr. Goldin said that the poor people face double trade barriers from the rich people of the world. One may ask why this is so? Because poor people “are concentrated in production in those sectors which have particularly high trade barriers”. Agriculture is one of these major sectors where double trade barriers are imposed on the poor. Most world’s poor are dependent on agriculture-based economy, they depend on agriculture on “either directly as farmers or indirectly as living in rural villages which are processing or providing inputs to farmers”.

Many economists believe that protectionism might be the barrier that is hindering the “hidden hand” of market to do its supposed wonderful trick in the market economy. Indeed there are poor countries that use the similar protectionism to protect their goods from being obliterated by the beefy foreign competition. And this problem is surely a complex issue, but overall it is the poor nations who are suffering the most. Protectionism in the form of subsidies is one of the major obstacles for international trade to flourish. Mr. Goldin observed, “Clearly, there's no chance that the poor countries can compete in subsidies. The total subsidy in rich countries is greater than the GDP of Africa. It's six times the level of overseas aid. And so the idea that somehow one could create a level playing field by everyone equally applying distortions is clearly a non-starter. And so the only solution--and also the right solution, I think, from many economists' point of view--is to ensure that these subsidies get reduced.”

Also, even in the richer nations, there are wide disparities of these subsidies where the majority of these subsidies do not go to the regular farmers. They go to the much richer farmers in the region. These subsidies “tend to push small farmers off the land in the rich countries because they capitalize their land, they lead to production patterns which are basically not supporting small farmers.” These policies are also detrimental to the environment. Mr. Goldin observed that 70 percent of the nitrogen oxide pollution, a fifth of the contributions to the global warming, comes from these trade protectionism policies. There are possible impacts on public health as well “through changing of diets and also through the types of production patterns that lead to concentration of production.”


Trade Distortionary Policies

In democracy, the politicians must look after their constituency, the interest of people they represent in the Government, and hence Mr. Goldin believes that “it's the sort of thing that should and will happen in a democratic political process.” However, he clearly objects to the interventions that he termed as trade distortionary. Subsidies are a form of interventions in trade. And Mr. Goldin said that it is the prime objective in a democratic process where looking after one’s constituency is equally important using those interventions “which can both meet the political objectives of supporting a countryside and which are not trade distortionary.” Mr. Goldin mentioned border controls and phytosanitary controls which prevent the exports and distort world prices.

Distortionary trade policies have heavy impacts on poor nations. Since the poor countries cannot produce products in lower prices comparing to the subsidized local products in the rich countries, they are unable to sell their products in competitive prices that surely reduces the demand for their products in relation to the substituting products with lower price.

Also, for the producers of these products in the poorer nations, they have limited preferential access at preferential prices and the opportunities for diversification out of them are extremely limited. [1] Mr. Goldin gives a simple example to clarify this point: “If you're a coffee producer in Nigeria or El Salvador, or wherever you are, and you decide that the coffee price is too bad for you, you want to get out of coffee, what are your options? What are your options? If the sugar quota is limited, you're not going to get into more sugar. But what else can you get into? Can you get into fruit? Can you get into higher-value products? Can you get into other products? And the answer on most of these things for most of these producers is that basically the options are progressively eroded both because of tariff and increasingly non-tariff barriers in these countries.”


Non-Tariff Barriers

What are the non-tariff barriers? Mr. Goldin said that these are implicit and explicit protectionism that take the guise of phytosanitary controls. In the richer nations these food controls are used to protect their domestic consumers from badly produced products, to provide them good quality food that they eat, good quality cloth they wear. However, Mr. Goldin strongly believes that the way these phytosanitary controls are being applied has led to very, very high barriers to entry and often implicit protection; in other words, these things are not applied for health reasons but for reasons which are really to do with implicit protectionism or explicit protectionism.[1]

Here is an example that Mr. Goldin provides to explain the subtle trade barriers imposed on poorer nations: “Some camel herders in Mauritania really wanted to diversify out of camels, nomadic existence--these are amongst the poorest of the poor living under $1 a day--and through a technical assistance project came to realize that if they produced camel cheese, this would be a very good opportunity for them. It sells for $10 a kilo. That's $23 a pound or something, $20 a pound. And they did some testing, and they discovered that the most luxurious stores in Paris … and other stores like Harrods, would take their products. But then they were told that they couldn't export this product because there was no tariff line and they would have to come in under other dairy products and the tariff rate was extremely high. And I can give you some of these tariff rates. They were also told that because these camels were not mechanically milked, they did not qualify under the veterinary standards of the European Union. They were also told that if they wanted to contest any of these rulings, they could, of course, contest, but that would cost, what they worked out, about a million dollars, at least. Well, the total annual production value is $3 million. This is not a very interesting proposition for them. So they started looking at other markets, like the U.S. and so on. But then they discovered that wherever they went to, because there's only one flight out of Mauritania which is to Paris, they would have to transit through Paris, and they would be subject to European controls, anyway.”

The poor camel farmers! What can they do? In market economy, finding profitable markets are the paramount goals of the producers, which is very much true for the poorer nations. And to reduce poverty, to get these poorer nations out of poverty ridden economy there must be investment climate that would give better opportunity for the poor people emerging from poverty. But as Mr. Goldin observed, the basic questions for these poor farmers is: where are their market? When various types of trade barriers are imposed, these poor farmers do not have opportunities to sell their products in profitable markets, thus no investment climate is produced, and the severe poverty continues as unending curse. Mr. Goldin pointedly observe that trade constrained policies of rich nations are responsible for seemingly unbreakable poverty cycle.

Mr. Goldin asks, “where do phytosanitary controls really have an impact on health and where are they there to protect local interests”?


Price Instability

These distortionary trade policies also affect on the instability of prices “because very small parts of the world market now are traded in core commodities”, and “the smaller the share of the world market that’s traded, the more that any shock of course, is felt on that market.” And due to this reason if a severe drought breaks out in one of the richer producing nations that produces one of these core commodities, “it has a dramatic impact on the global market, and there’s higher levels of instability.”

This type of instability affects both the producers and the consumers. Due to instability, if price of that commodity increases like grain prices, the consumers suffer by having to pay more. And if due to the instability the price of that commodity plunges to severe low, producers suffer, they lose their profits and savings, which in turn “reduce the opportunities for diversification and investment.”


Tariff Escalation

Tariff escalation is a serious problem. By escalated tariff, nations put escalated barriers for more processed products. Mr. Goldin provides two examples to clarify his point. The duty for the Chilean fresh tomatoes into the U.S. is 2.8 percent. However when these same tomatoes are dried and packaged, their duties are raised to 9 percent. And if the same Chilean tomatoes come as ingredients of salsa or ketchup, the duties are raised to 12 percent. Another example is cocoa beans. European Union puts 1 percent duty for imported cocoa beans, but the same cocoa beans processed as chocolate is 30 percent. Mr. Goldin observes that tariff escalation by the richer nations prevents developing countries adding value themselves on their products, which prevents them using their cows, their dairy products, their sugar, and their cocoa beans to produce chocolate and export it [1] that could provide them better profit and that would in turn reduce poverty in these poverty shackled nations.

Mr. Goldin doesn’t believe in pointing fingers to any particular countries since all the rich nations are adopting similar trade policies that are detrimental to reducing poverty in the poorer nations. While keeping in mind that the richer nations that are democratic, they have their responsibilities to their own citizens, their farmers, their producers and consumers, but on the same token, better policies might be taken to reduce this blatant disparity in trade imbalance “which would be hugely beneficial to developing countries”.

As Mr. Goldin clearly observed that the poorer countries need to continue their struggles as well in eradicating corruption from their government and business sectors, lowering their tariff on various products, adopting necessary “legal and regulatory reforms” that can allow a better investment climate in the poorer nations. World Bank and other international financial institutions are working to address these issues.

But it does not matter a great deal on how much progress the poor nations can make in creating viable investment climate, “if you find that the opportunities that are generated by them are hugely restricted” due to trade barriers imposed by the richer nations, all the good deeds of World Bank or other institutions and the sincere efforts of the poorer nations to get rid of poverty will never work. The aspirations of poorer nations to be independent, to elevate themselves in respectable contributing status in the world economy will always be frustrated by trade distortionary policies.

And this is a central issue that the richer nations must look hard at if they wish to see an equitable world where poverty is reduced and the depressions and angers of the poor are replaced by hopefulness toward progress.


References

1. Ian Goldin, “Protectionism and Poverty”, World Bank, Washington, D.C., May 8, 2003.
2. Picture Reference: "Children of the Basti", Tear Australia.


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Mahbubul Karim (Sohel) is a freelance writer. His email address is: sohelkarim@yahoo.com.

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