World trade

World Trade

International Trade
and the
Struggle Against Poverty

by  Gonzalo Fanjul Suárezny

Normally  tax is based on income – the more you earn the more you pay. However, international tariffs work the other way round. Poorer countries pay more than wealthier countries to get their products across borders. This is the perversity of the present system of world trade.
The expression “international trade” calls up images of big firms, big economic super-powers and negotiations in big international organisations like the World Trade Organisation (WTO).

But world trade also has a human face.  In South Asia it is the face of a young girl sewing shirts for an important chain of shops in Europe and the United States. In Africa it is the face of a coffee grower. In West Asia the face of a woman assembling electronic circuits for computers. And in Latin America, of a peasant who has to compete with imported products from the United States.  So trade links the lives of people like these with the businesses and consumers of the wealthiest countries in the world.
But in our world, only a few take the decisions which marginalize millions of poor and vulnerable people. The rules they impose generate huge differences: in world trade only a few countries and big firms dictate the norms. It is as if they were playing with stacked cards, as if the football field were not equally level on both sides, as if the runners in a race set off at different times and were handicapped by weights.

Unjust trade generates inequality and poverty

Why is it important to act so as to change the rules of world trade? And why is it important to do it as soon as possible?  There are three replies to this question.
In the first place, it is unacceptable that world trade should continue in its present model.  No civilized community should tolerate the extremes of prosperity and poverty generated by the present conditions of world trade.  And nobody should be obliged to accept the abuse of power, injustice or suffering that these extremes produce.

Perhaps more than any other economic phenomenon, trade has been the main motor of the globalization process we are living.  Over the last twenty years international trade flows have grown twice as fast as the total of world wealth, and have become an essential source of income for most regions in the world.  Poor countries, in particular, are increasingly dependent on international trade although, in volume, trade continues to belong to the rich.  One in every three dollars of the Gross Domestic Product (GDP) of low income countries comes from exports.
The participation of poor countries in the multilateral trade system is plagued by ambiguities. Although they import more and more industrial and technological products, developing countries in general depend mainly on the exportation of primary products.  And the prices of these have fallen substantially over the past twenty years.
The greater part of the extraordinary benefits generated by trade are concentrated in a disproportionate manner in a handful of industrialised countries and, increasingly, in a small group of their transnational corporations.  Rich countries and big firms have become the real winners in this model of international trade.  The losers are the faces of world trade:  hundreds of millions of peasants and workers whose future depends on an increasingly unstable and unsustainable system.
An example of this paradox is sub-Saharan Africa. If its share of world exports (that is, sales to other countries) were raised by only one percent, an annual income would be generated five times greater than all they receive in aid and debt relief.
Yet Africa is increasingly replaced in trade circles, condemned to produce primary products for export. Thus the poorest continent in the world remains outside the opportunities trade offers for development, a fact that poses serious doubts about it future.

Other regions show that involvement in trade offers very positive results.  For example, in Southwest Asia trade has permitted considerable reduction in levels of poverty.  In the last forty years, this region of the world has succeeded in wresting from poverty more than 400 million people, thanks to a development strategy based on increasing exports.  In this way it has obtained income, developed technology and generated opportunities.

The second reason for acting is well-informed self-interest. What is happening is not only indefensible but also unsustainable. There are huge areas in poor countries that are turning into enclaves of despair and marginalization, among other things because they remain outside the wealth generated by trade.  One thousand two hundred million people are living in the world today on less than a dollar a day.  In many cases their expectations are progressively worse. According to the 2003 Human Development Report, 21 countries in the world are worse off today than at the beginning of the 90’s. Their populations have less access to drinking water or health care, there is greater illiteracy and more children die before reaching the age of five.

Like the economic forces of globalization, the anger, despair and social tension accompanying such enormous inequalities in wealth and opportunities do not respect national frontiers. They generate an instability that threatens all. The experience of the past two years shows that, as a global community, we swim or sink together. No country, however powerful or rich it may be, is an island.

It is possible to change the rules

The third reason is the conviction that change is possible. The international trade system is not a force of nature.  It is a system of exchange regulated by norms and institutions that reflect political options. These options can give priority to the interests of the weak and vulnerable or the interests of the rich and powerful. Trade, as it is organised at the moment, increases poverty and inequality in the world.  The rules of the game are designed to maintain power and acquired privileges. But this can be changed by a coalition uniting North and South in an organised public campaign. The best proof of this was the World Trade Organisation Conference in Cancún in September 2003 whose result allows one to entertain some hope with regard to the future of that institution.

Access To Markets

Most tax systems are based on the principle of progressivity: the more one earns, the more one pays. International trade works the other way round. The poorest countries of the world pay the highest taxes. Articles produced by the poor of these countries are subject to the highest taxes. Put in simple language, international trade is controlled by a tax system based on a perverse scale: the less one earns, the more one pays.

Governments in the wealthy countries like to present fairly low tariffs (taxes on the entry of goods from other countries) as an example of their commitment to open markets. But the complexity of tariffs hides a common and very simple characteristic of commercial policy by the governments of the North. The lower the incomes of the producers seeking to enter the market, the higher the tariffs imposed on entry. If the governments of the wealthy countries applied the principles of their commercial policy to their internal tax system, unmarried mothers on a minimum wage would pay higher taxes than a telephone company director.
The average tariffs imposed by industrialized countries on developing countries are between four and five times higher that those on trade between the industrialized countries. The reason is very simple: products in which the developing countries have a comparative advantage are subject to the highest import taxes. For the most part, the products involved are the labour-intensive ones whose export would allow a large reduction in poverty.

The discrimination against developing countries is systematic. Poor countries are responsible for less than a third of the imports to rich countries yet suffer two-thirds of the imports subject to the highest tariffs, more than 15 per cent. In the USA and Canada the highest tariffs are concentrated on textiles and clothing, products of special interest for poor countries. In the EU the highest tariffs are concentrated in agriculture: 290 types of agricultural products are subject to tariffs over 15 percent. Many of the products affected, which include meat, sugar, fruit, vegetables and milk products, are of special interest for poor countries.

The less you earn, the more you pay

The norms for charging customs duties in industrialized countries confirm that their policies for tariffs are based on an inverted scale. Oxfam has analysed the data from the US Trade Department for 2001. Comparing the value of imports into the USA from certain countries with the charge of customs duties for each country, it shows a substantial inequality between charges made to rich countries and poor countries.

The general tax applied to imports in the USA is 1.6 percent. This rate increases considerably for many developing countries: average tariffs range from 4 per cent for India and Peru to 7 per cent for Nicaragua, and rise to 14-15 per cent for Bangladesh, Cambodia and Nepal.

Some of the key findings of the enquiry are well illustrated in comparing specific countries:

- Bangladesh and France: Bangladesh has an average per capita income of $1,602 and France of more than $24,000. Some 41 million inhabitants of Bangladesh live in extreme poverty, below the survival line. Yet an import tax of 14 per cent is applied to Bangladesh, as against one per cent to France.

- Vietnam and the Low Countries: Vietnam is number 109 in the UNDP Index of Human Development, 101 places below the Low Countries. Its average per capita income is less than $2,000 a year, and that of the Low Countries $25,657. The average tariff applied to articles from Vietnam entering the USA is 8 per cent. For the Low Countries the rate is one per cent. This means Vietnam pays higher customs duties for the products it sells to the USA than the Low Countries whose exports are four times greater.

Difficulty in getting data makes direct comparisons with the EU problematic. Nevertheless, available proofs suggest that the EU Common External Tariff (CET) is slanted against poor countries. Here also we find the same principle of an inverted scale. In Great Britain taxes on articles imported from India are some four times greater than those levied on the USA, and some eight times greater for countries like Sri Lanka and Uruguay. India represents less than one per cent of the value of British imports, but more than three per cent of the value of customs duties entering the UK.

Though governments of the North talk much about drawing up a trade policy in favour of the poor, the reality tells a very different story. The million women in Bangladesh who live in the suburbs of Dacca and produce shirts for export to the USA confront trade taxes twenty times greater than those applied to articles exported by British or Franch engineers. In India 35 million workers in the textile industry produce articles subject to tariffs of 20 per cent in the USA. Meanwhile ten million workers in the shoe industry in the same country, many of them from the lowest castes and with appalling levels of poverty, pay taxes of 10 per cent in the EU, which are double for some lines of products.

The case of textiles

The debate which takes place in the WTO about the access of developing countries to Northern markets, highlights the controversy generated by the failure to fulfill the so-called Agreement on Textiles and Clothing (ATV). Exports in this sector are an important source of benefits for many developing countries. It is also a source of employment, especially for women. The dependence on textiles and articles of clothing is especially high in South Asia. In India the sector represents four per cent of GNP and a quarter of commercial exports, and in Bangladesh it rises to 80 per cent of benefits from exports.

The combined effect of tariffs from the wealthy countries and quotas on textile and clothing products cost the poor countries losses of some 40,000 million dollars a year in their export earnings. India alone loses nearly 10,000 million. The financial losses are on the same level as losses in jobs. The protectionism of the wealthy countries in articles of clothing is calculated to cost developing countries some 27 million jobs, many of which would be taken up by women living below the threshold of poverty.

Under the Textile and Clothing Agreement (TCA), the industrialized countries agreed to eliminate progressively quotas on imports over a period of ten years which would end in 2005. They have diligently stuck to the letter of the agreement, though often breaking its spirit. When the last phase of the Agreement began in 2002, over half the quotas should have already been eliminated. But the reality is that the USA had only eliminated 10 per cent of the quotas in force when the Agreement was signed, Canada 20 per cent and the EU 27 per cent.

'Graded' hypocrisy

One of the most pernicious protectionist practices of the wealthy countries is that of 'graded tariffs'. These are trade taxes which increase in proportion to the degree the product is processed. Low tariffs on unprocessed articles encourage exportation of raw materials with little added value and a small profit margin. High tariffs applied to processed articles discourage investment in exporting industries with higher added value. Thus it is very difficult for poor countries to move up the ladder of technology, diversify their exports and make their economies more dynamic. In practice, the benefits generated by trade are transferred from the poor countries to the wealthy.

Graded tariffs have a very negative effect on markets for raw materials, as is shown in the case of cocoa. Cocoa exporters to the EU and the USA don't pay tariffs on unprocessed seeds. But they pay 15 per cent if the seeds are processed to produce paste or chocolate. For this reason Germany processes more cocoa that the Ivory Coast, the world's biggest producer. For the same reason, Great Britain grinds more cocoa than Ghana. Developing countries represent more than 90 per cent of the production of cocoa seeds, but produce less than half of cocoa butter and less than five per cent of chocolate which is produced all over the world.

How to make the poor in rich countries pay

Governments and pressure groups in rich countries sometimes pretend to justify these policies by referring to the interests of vulnerable groups within their own countries. But in reality high protective levels on labour intensive articles also harm a significant group of poor people in the developed world.

Tariffs on the imports of rich countries tend to be higher on products important to the poor and increase their price. In the USA, import tariffs are the only taxes whose real rates rise as incomes fall. Import taxes on clothes and shoes add 1.2 per cent to the tax burden carried by 9.7 million single mothers in the United States (some 308 dollars a year). It is more than double the rate applied to families with high incomes. The highest tariffs fall on articles which the poor consume more (like cotton or synthetic shirts and cheap shoes).

Groups interested in continuing to protect rich country markets claim that protectionism is good for employment. In the USA, the textile magnates from South Carolina have known how to use this argument well to defend import barriers against India and Bangladesh. Similar arguments have been heard in the EU and Canada.

In reality the argument in favour of using import restrictions so as not to destroy low salary and unskilled employments doesn't hold together for three reasons:

In the first place, it doesn't work; in spite of protection, employment in the textile and shoes industries in the USA has fallen at least by half in the last decade.

Secondly, the freeing of imports can create new work opportunities. The US Chamber of Commerce calculates that freeing the market in textiles and clothing would increase general economic wealth by some 13,000 million dollars.

Thirdly, it is much more efficient to tackle problems of low wages and few skills faced by workers in risky industries through an industrial policy of training programmes and social assistance, rather than through import barriers.

To say it another way: to harm the most vulnerable working women in the South Asian clothing industry is not an efficient way of ending the poverty of the most vulnerable working women in South Carolina. Each job saved through import barriers in the industrialized countries costs some 35 jobs in the poor countries.

Some suggestions

A more just control of policies to access markets in the WTO should take into account at least the following measures:

  • Unequal players cannot be treated equally: One should not expect poor countries to take on the same commitments to free imports as the developed countries. At the moment this is happening the other way round!
  • Average tariffs of industrialized countries on imports from poor countries should not be higher than those applied to developed countries. Low income countries should have access without tariffs and without quotas to the markets of industrialized countries.
  • Labour intensive products which generate employment in poor countries, such as textiles and clothing, should be subject to especially low tariffs.
  • Developed countries should fulfill their commitments to abolish import quotas gradually and grant the introduction of a maximum tariff of 5 per cent on imports of textiles and clothing by the year 2005.

Author: Gonzalo Fanjul Suárez is Research Coordinator of the Department of Campaigns and Studies in INTERMON OXFAM.

Source: This is an extract from a booklet entitled Stacked Cards: Trade and Struggle against Poverty by Gonzalo Fanjul Suárez.
CJ Booklets, Cristianisme I Justícia, R. de Llúria 13 – 08010 Barcelona, Spain. ISBN 84-9730-109-9.
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