Trade and development


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Trade - separating fact from fiction

International trade is beneficial for developing countries, just as it is for developed countries. These emerging economies would see real gains from trade liberalisation and a successful conclusion of the Doha Development Round of trade negotiations.

Do developing countries need to protect their infant industries (as developed economies did before them)?

The infant industry argument is that certain industries or sectors need to be protected from competition (usually by high tariffs or import bans) until such time as they have been able to grow strong and competitive.

This is a good argument only if governments can accurately identify those industries that can become internationally competitive after initial nurturing and if such support can be time-limited and designed so as not to discourage firm and industry-wide innovation. Experience suggests that these conditions are hard to meet; the failure of agriculture to develop and become competitive in some countries while high levels of support and protection persist is a case in point.

Infant-industry support is rarely successful compared to policies that address obstacles to industry competitiveness at source, for example, those that provide adequate education and health services, ensure appropriate infrastructure is in place, encourage appropriate technology development and adoption, enable efficient input and output markets, and so on.


Would loss of preferential treatment of tariff revenues offset the benefits of open markets?


Developing countries worry that the relative advantage they have in trade when they are charged lower tariffs than others will disappear as the general level of tariffs is reduced. However, research shows that for the vast majority of them, the benefits of broad-based liberalisation, with all tariffs lowered, will offset losses from preference erosion. And for the handful of countries where this is not the case, the answer is not to impede liberalisation but to provide development assistance to reduce preference dependence.


Similarly, for countries dependent on tariffs for revenue, the answer is to broaden the tax base, as a number of developing countries have done, not to forgo the gains from market opening. In addition to offsetting the revenue loss, a broader tax base can ensure that those who can afford to pay do so, while lower income groups pay less. This is not generally the case with tariff regimes.


Are trade liberalisation agreements biased against developing countries?


In the past, developing countries were not always very active in multilateral negotiations, leaving developed countries free to scale down trade barriers on products that they were interested in importing, while maintaining higher tariffs on some products of export interest to developing countries. Various preferential agreements now address this issue at least in part, and many less developed economies have tariff free (or nearly tariff free) access to some developed country markets.


Today, developing countries are much more engaged, and influential, in the process of multilateral trade reform. Current  World Trade Organization (WTO) negotiations include ‘special and differential’ provisions for developing countries which allow them to reduce tariffs by a smaller percentage or at a slower pace when compared to the more developed countries, or to exempt certain sectors.


How can trade contribute to poverty alleviation?


Trade contributes to economic growth – the most important factor for poverty alleviation. The experience of South Korea, which liberalised its trade policies in the 1960s and Chile, which liberalised in the 1970s clearly shows that economies with more open trade policies perform better than those with more restrictive policies. In more recent history, openness has also served the BRIICS countries (Brazil, Russia, India, Indonesia, China, and South Africa) very well.


The most open segments of the BRIICS economies have done the best, and overall the BRIICS countries have significantly reduced their border protection and expanded their exports much faster than the leading developed countries.


Would developing countries benefit from conclusion of current WTO negotiations?


In agriculture, a 75% cut in tariffs and subsidies is estimated to raise developing country incomes by some $23 billion, with GDP rising by 0.3% in Sub-Saharan Africa, South Asia and Latin America. Of an estimated $97 billion gain from improved non-agricultural market access, $68 billion would go to developing countries.


Fully unrestricted access to the markets of the United States, European Union, Japan and Canada is estimated to benefit Sub-Saharan Africa considerably, leading to a 14% increase in non-oil exports and boosting real income by about one percent. Developing country gains are bigger if they commit to deeper cuts in their own tariffs.


Developing countries would be among the major potential beneficiaries of services liberalisation, both as exporters and as importers. And developing countries are estimated to reap some two thirds of potential gains from a Doha Round Agreement on trade facilitation.


But trade policy alone will not ensure development and poverty alleviation…


The impact of trade and trade liberalisation is not uniform, and various segments of the population will be affected in different ways. There will be winners and losers, and the effect of trade on the poor will depend on a range of factors: how changes in border prices translate into prices paid by the poor; how trade changes government revenue and expenditure; and whether the poor are equipped to take advantage of new job opportunities. It follows that deriving benefits from greater market openness will depend on factors going well beyond trade liberalisation.


Market opening needs to be accompanied by sound macroeconomic settings, flexible labour markets and institution building to allow labour and capital to move from declining to expanding areas of activity, and by social safety nets, improved education and training and the strengthening of property rights in order to address the underlying causes of poverty.


Improved education is of particular importance. There is evidence that trade liberalisation is associated with falling inequality in countries that are well endowed with primary-educated labour. In China it has been found that one extra year of schooling boosts a worker’s chance of finding off-farm employment by 14%.
Development assistance and Aid for Trade that address country specific needs are also needed.


Efficiency improvements in maritime transport could significantly increase bilateral trade possibilities for many countries; landlocked countries face an even greater challenge, with poor infrastructure accounting for some 60 percent of transport costs. While pesticide residues once kept Kenyan flowers out of the US and EU markets, an Aid for Trade grant from the EU helped the Kenyan industry phase out pesticides and emerge as one of the world’s leading exporters.


In conclusion …


Trade plays a part in a wider strategy to enhance the productive capacity of a country and to improve the prosperity of its citizens. It facilitates the availability of technology, know-how, products, and services. It increases choice at lower cost.

But open markets require parallel investments in human capital (education, health and nutrition) and physical infrastructure, access to credit and technical assistance, as well as social safety nets and policies to promote stability. Such policies reduce the vulnerability of the poor and help them adjust to make the most of new opportunities that are created.


Aid for Trade

Find out about the program to maximise the effectiveness of aid and help developing countries benefit more from trade.

See also:

 Does trade kill jobs ... or create them?

 Is trade good or bad for the environment?

 What is the link between trade, innovation and growth?




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