Charlotte Rook: Free trade is the most effective way of promoting economic growth in developing countries
Charlotte Rook is a 21 year old student of African Studies at Birmingham University who is passionate about international aid and has done a number of stints of volunteering abroad. Her latest placement for Regeneris Ltd was in drought-ridden Kenya (as in the picture further down) where she fed, educated and delivered medical care to children.
Africa is currently the world’s poorest continent. For years international aid has been propping up African economies but the majority of these countries have yet to see any significant development or growth. International aid and loans, have so far, been unable to prove themselves capable of bringing about the economic growth required to lift the 314 million Africans (estimated) living on under $1 a day, out of poverty.
So if international aid, loans and debt relief are all unable to set the conditions for African countries to develop economically, then what other options are there? I believe that the most effective form of economic growth comes in the shape of Free Trade - something which the majority of developing countries are currently denied for one reason or another.
I have set out here the reasons why developing countries are kept out of the international market and how Africa, and the rest of the world, could benefit from a change in trade policies. And to better understand why developing countries are too often unable to be part of the global market, we need to have a basic understanding of Europe and America's attitude towards trade.
After the Second World War, Britain, America and other industrialised countries started discussions on trade reform. The purpose of such reform was to bring about recovery, growth and development to post war countries. The discussions ended with the General Agreement on Tariffs and Trade (GATT) and the outcome of liberalisation did indeed drive recovery and growth. The liberalisation of trade barriers focused on opening up markets for industrialised goods. Agriculture and textiles were excluded and heavily protected. This was due to the post-war mentality of protectionism.
Countries were mainly concerned with being able to feed themselves if war broke out once again. The exclusion of agriculture and textiles was to become a key problem for developing countries, once they were able to start joining the GATT in the post-independence years. Having no industrialised goods to sell and not being able to sell agricultural and textiles goods at which they were most competitive meant that developing countries were unable to compete in the global market.
Today, the protectionist mentality of the developed world still exists. We can see clearly see this in the high trade barriers and subsidies that remain.
EU and American Farmers receive large amounts of subsidies from government. These subsidies are designed to keep farmers in business and to prevent the prices of British goods rising higher than foreign imports. Whilst this may seem like an understandable necessity for British farmers, the impact it has on African farmers is enormous. Subsidies mean that agricultural goods can be produced at extremely low prices. This means that the global prices of the goods go down, preventing African farmers from getting a fair price or even being able to sell their goods at all.
Sugar beet will be harder to grow in the European climate than in the African sun, it will also cost more to produce (two to three times the cost of growing sugar cane in Malawi or Mozambique), however European subsidies enable farmers in Finland and France to continue to grow sugar beet. As a consequence, all the sugar that we consume in the UK comes from Europe.
It is the same story for cotton growers. The American cotton market is totally inaccessible to African farmers due to huge subsidies given to the American cotton farmers. It is estimated that American taxpayers paid out $3.9 billion in cotton subsidies in 2001 and 2002. That's three times the amount that the US gave in international aid during the same period.
American and EU subsidies are estimated to cost West African cotton producers $250 million a year. Their exports could potentially go up by 75% if these subsidies were dropped.
But subsidies also affect African farmers at home. Because of subsidies, farmers in the developed world often grow more goods than can be consumed at home. Taxpayers then pay an export subsidy to send surplus goods to Africa. Once these goods make their way into African markets, they are still cheaper than the local farmers'. These goods undercut the local farmers, potentially putting them out of business.
According to Tony Blair’s Commission for Africa, these terms are “unacceptable... they are politically antiquated, economically destructive and ethically indefensible... they must go”.
Taxes and Tariffs
As we have seen, when there is competition from the developed world, the developing world doesn't stand a chance. But what about when there is no competition? Developing countries produce some goods that Europe and America simply cannot, such as coffee and cocoa. But the Western world still manages to find a way of reaping the majority of the profits from these goods for themselves. Taxes on raw materials are virtually non-existent, however more processed goods come in at a much higher tax level. The reason for this is so that Europe and America can process the coffee and cocoa themselves, selling the finished goods for a much higher profit.
One example of this is the Japanese cocoa tariffs:
- Tariff on beans – 0%
- Tariff on cocoa paste – 5%
- Tariff on defatted cocoa paste – 10%
- Tariff on cocoa powder – 13%
- Tariff on finished chocolate – 250%
As a result of these tariffs, Europe remains the biggest exporter of Cocoa and Germany is the fourth largest exporter of coffee. Retail sales of coffee worldwide are worth approximately $70 billion. Coffee producing countries – not all of which are African countries – receives only $5.5 billion between them. That is only 8%. Recently the West has committed to giving tax free exports to the worlds poorest countries, however, some key goods have been excluded. Excluded goods include coffee, cocoa, sugar and cotton.
Benefits of lowering Trade Barriers
The benefits of lowering trade barriers are potentially many. Access to the global market and increased trade will also bring increased foreign exchange. This foreign exchange will allow governments to have assets overseas. This will lead to increased government expenditure which would hopefully be spent on health services, education facilities and other public services. This kind of spending is key to lowering poverty levels.
Increased trade will also lead to specialisation. Countries engaging in trade will at first usually specialise in one key product. To enhance their competitiveness the industry will have to make sure it is cheaper and better at producing these goods. This will bring about a more skilled workforce which will in turn bring better living standards and more education opportunities. There is however a downside to specialisation: overdependence on one product could leave the industry vulnerable if there was a sudden lack of demand or in the case of a recession.
If trade barriers were lowered we would also see an increase in Foreign Direct Investment (FDI), whereby multinational corporations from developed countries invest in poor countries, such as Shell's investment in Nigeria. FDI can dramatically decrease unemployment, increase technical knowledge and create a labour force with the skills to go into other professions and jobs. Currently only 1% of global FDI flows into Africa. This was worth $11 billion dollars in 2001 and was concentrated in only a few economies (Nigeria, South Africa and Botswana).
The general benefits of lowering trade barriers for African nations will be the stronger economies and more jobs. According to the UN, poor countries are $700 billion a year worse of because global trading systems don’t work for them.
It will benefit us too
Lowering trade barriers not only benefits the developing world but it would also benefit us, as taxpayers and consumers. When foreign competitors are denied access to the European market the prices in supermarkets are consequently higher than they would be if a free market system existed providing competition amongst agricultural producers.
The Consumers' Association found that a typical family of four was spending £16 more a week because of a combination of European Agricultural Subsidies and higher prices at checkout. This equates to roughly £832 a year per family. Every European household paid out 64 euros a year to support the sugar regime alone.
Not only would a competitive market lead to cheaper prices, but it would also give us, the consumers, more choice and better quality goods.
The agricultural sector in the EU and America wouldn’t need to suffer because of decreased subsidies. The money that the taxpayer would save on subsidies could be used to help farmers grow more economically and ethically friendly crops. In all probability, lower trade barriers would boost the economies of poor countries, meaning that in the long term we would be able to decrease the amount of money we spend on International Aid.
In recent years we have seen China and India make huge progress due to increased exports. Not only have they strengthened their economies, but they have lifted millions out of poverty. Africa too can follow suit: it just needs the West to provide the tools to allow it to do so.
Although they are a huge factor, Western trade barriers are not the only reason why African exports are so limited. Clearly, weak rule of law, corruption and poor infrastructure all play a key role in the lack of trade. Improvements on these issues must come from within, however the West can give the tools to set them on the right track.
A popular mantra is “Trade not Aid”. This is an ideal which hopefully we will be in a position to reach in the future. For now though, one way of helping developing countries reach that ideal could be aid for trade. A fraction of the billions of dollars spent on international aid could go to improving infrastructure in developing countries. The Commission for Africa report estimated that transport costs alone can be three quarters of the value of exports in land-locked African countries.
There is huge potential for trade in Africa. There is an abundance of untapped resources and biodiversity which may hopefully give Africa bargaining power in the future.
Due to the nature of the modern world in which we live, globalisation means that the actions of one country have significant effects on another country. This is more true now than ever before and we have a responsibility to make our actions – especially in trade – more ethical. We need to think of long term social and economic development as a priority over short term profitability.