Benefits and Costs
Provided that such a comprehensive, multi-pronged approach could be followed, a substantial reduction of subsidies and trade barriers could become politically realistic. Full liberalisation is not on the cards. A 25 per cent reduction of tariffs, subsidies and barriers should politically be possible. However, the coverage is more important than the size of the cuts. It is likely that agricultural products – though not all – will be included. It is also likely that tariffs and subsidies will be more heavily reduced than other NTBs. Including services and investment is still disputed strongly. The inclusion of the latter could lead to more dynamism in the world economy than the more likely further reductions of trade barriers in agriculture and industry.
Additional dynamic gains will be higher the wider the coverage of trade liberalisation. Reducing only tariffs will produce less additional endogenous economic growth than reducing tariffs and subsidies and NTBs. The latter will provide more certainties to entrepreneurs and a greater incentive to investment. Including services and investment will lead to further dynamic gains, because new investment opportunities will arise and new markets will open up. Anderson assumes that trade reforms may boost economic growth in developing countries by one-third and in developed countries by one-sixth. In his view, this is a conservative assumption in the light of the experience of successful reformers such as China, India, Korea and Chile. I agree. I have no reason to dispute the summary estimates presented by him: GDP growth in 2015 of 3.1 per cent for developed countries, 6.1 per cent for developing countries and thus 3.8 per cent for the world as a whole. However, I wonder whether it is justified to assume that those rates will continue until 2050. The dynamic gains from trade will gradually diminish, sustaining them may require new initiatives.
The growth rate of 6.1 per cent for developing countries is in line with internationally agreed policy targets for GDP growth of developing countries that since 1960 have been laid down in the subsequent Strategies for the United Nations Development Decades. However, such rates will not easily be achieved. Why not? There are three reasons. First, the benefits are not distributed equally among trading partners. Research shows that agricultural liberalisation offers a mixed set of results, even against expectations: positive for Europe, Asia and Northern Africa, negative for SSA, potentially negative for the Asia-Pacific region and North America, neutral for Latin America. China will be hurt by a liberalisation of manufacturing. It will meet stiffer competition from other developing countries and experience a decreasing terms of trade. Moreover, unlike the Asian experience, export-led growth in Latin America has proved so far to be anything but a ‘development miracle’. For some Latin American countries free trade can have a negative impact on agriculture which is not compensated by sufficient employment and income growth in other sectors, So, for good reasons, different negotiation partners will have different expectations. Many countries, aware of the unequal distribution of the benefits of trade liberalization, will remain reluctant.
The second reason is that the benefits per country are also distributed unequally. The benefits of international trade liberalization so far have been utterly unequal. It was free trade à la carte, selective and characterized by a fair amount of arbitrariness in the granting of preferences and the mix between reciprocity and non-reciprocity. The benefits were bought at the cost of many poor countries and many poor people, within both more and less advanced economies. Europe, for instance, in combining ACP free trade with the continuation of its Common Agricultural Policy has done much harm to farmers both in many developing countries. Poor farmers world-wide have suffered from the functioning of international commodity markets (sugar, bananas, cotton, rubber, cocoa and others) with decreasing terms of trade, overproduction, subsidies to commodity producing farmers in the USA and the EU, preferential treatments, unilaterally set rules of origin, market speculation and the development of technologically new substitutes. International talks to remove all of these and other barriers will create a new perspective for the victims of these practices. But the winners of today will be the losers of tomorrow and it is not only a matter of rich versus poor. It is more complicated. Negotiations in the field of trade will have to be complemented by internationally harmonised domestic policies that can result in a fair balance in all countries.
The third reason is that for all negotiation partners there are costs involved. Anderson argues that these costs – private costs of adjustment for firms and workers and social costs in the form of social safety nets, unemployment schemes and retraining and reintegration – are minor. They are one-off costs, transitional, and should be weighed against the non-stop flow of economic benefits from reform. Anderson presents an estimate of the costs up to 40 per cent of the gross static benefits under full liberalization. He also assumes that these costs will last no longer than five years. In my view, however, the costs are higher and will last longer. In macro terms the costs may be far less than the benefits, but per sector or region this is different. In some cases, for instance when full liberalisation threatens the continuation of an industry, these are higher than the benefits. The benefits will accrue elsewhere and will not easily be used to finance compensation or restructuring benefiting the industry or region concerned. For a number of traditional sectors one cannot speak of one-off costs. They will have to be borne by a whole generation consisting of people that can no longer be retrained and reintegrated in the economy. In such cases one may have to take into account a period of twenty-five rather than five years. Often the next generation – the children of workers laid off in extractive industries or in traditional manufacturing enterprises that are downsized or closed – will also be affected. In agriculture the costs will also be borne by others: people living in rural areas, not only in the less productive agricultural sectors in Europe and the USA, but above all in developing countries. For many of these people small-scale subsistence agriculture is more than an economic activity; it is a means to survive, a living, a culture, a way of life. Some of these people can be hired as farm laborers, others as unskilled laborers in industry. Many would be fully uprooted, they themselves as well as their families and the next generation. The economic, social, psychological and cultural costs are neither minor, nor one-off or transitional. They are long-term, structural and major.
In theory, policies to redress and compensate this ought to be financed out of the benefits resulting from reform. However, not all costs are of an economic character, lending themselves to compensation. Moreover, the losses in jobs and asset values are often concentrated, for instance in declining industries, whereas the gains in terms of new jobs and investment opportunities are thinly spread, taken up by people other than those losing from the reform. This holds true for Western as well as for developing countries such as India, where the middle class is benefiting from new opportunities due to the opening of markets such as in information services. In agriculture in less advanced Northern economies and in the Third World, it is the other way around: the losses are widely spread and cut deeply into the existence of people while the initial concrete benefits are concentrated in the hands of a new class. In both cases those who loose will be politically more vocal than those who gain. The latter often do not realize that their progress is attributable to trade reform. Governments will remain reluctant to engage themselves in opening up their economies. Moreover, potential losers are always more easily identified than potential winners. And the benefits often accrue to population strata that cannot easily be taxed by the government, in particular because the reforms take place in the framework of an economic philosophy that emphasizes the market and demands a retreat of the public sector. The economic costs last longer than a transition period of five years, but whether there will be long-term benefits in the form of structural employment opportunities for many people is unclear. New industries, often financed with foreign capital, are inclined to choose capital-intensive production technologies. In a more and more globalized economy, the ample availability of labor becomes a relatively less important factor in decisions to invest and to choose a particular location. This is, for governments, an additional reason to go slow with reforms.
I am also less positive than Anderson about the relation between trade reform and poverty alleviation. Trade reform can reduce the income gap between developed and developing countries, provided that it takes place within a comprehensive approach. In doing so, trade reform will enhance the capacity and help increase the resources necessary to implement pro-poor policies within poorer countries. It will also contribute to higher economic growth within developing countries. Whether the increased capacity will be used for that purpose, however, remains to be seen. In the past that was not the case. The 1990s witnessed much economic liberalization and market reform, resulting in substantial growth rates of world trade and income. However, despite official commitments to use the additional resources set free by reforms and growth to finance anti-poverty programs in the fields of water, health, education and food and agriculture, world economic inequality and poverty increased. The promises have not been kept.. No wonder that poor countries are suspicious with regard to the promise that new trade negotiations will lead to less poverty.
They may even lead to more poverty. Market reforms can lead to new distortions and new inequalities, to the detriment of the poor people. Some market liberalization in the field of agriculture, for instance, will lead to increased consumer prices in food-importing developing countries. Other reforms will result in upsetting traditional agrarian systems and land use patterns, depriving the poor of the use of essential resources. Market reforms aiming at price liberalization, a retreat of the public sector and more incentives for private enterprise in essential sectors such as health and education have similar consequences. Criteria of good governance accompanying market reform and applied in international policies concerning trade, finance, aid and debt have often produced counterproductive effects. Governments were more or less forced to diminish public efforts to decrease poverty. Expectations concerning the number of poor people in rural areas who could find a better living after reforms, because there would be an increased demand for both farm products and their off-farm labor have not been fulfilled. China was an exception, but in Africa and in South Asia urban and rural poverty increased, despite a certain degree of liberalization. One could argue that these reforms did not go far enough, However, those who realize how much policy change has been implemented since 1980 – first as a necessity due to adjustment policies, later on the basis of the universally applied ‘Washington Consensus’ – will understand the scepticism regarding the acclaimed future speed, depth and benefits of further reforms.
A similar line of reasoning applies to the relation between trade reform and the environment. Rather than assuming that trade does have a direct impact on the environment, be it positive or negative, I prefer to discuss environmental effects as resulting from economic activities in the real sphere, such as investment, production and income growth, transportation, consumption and exploitation of natural resources, including energy. All such economic activities in the real sphere are linked through trade. It is trade that facilitates their combination and provides them with more opportunities to create value added. So, environmental consequences result not from trade in isolation, but from trade in combination with one or more of the other economic categories.
Not all expanded trade in combination with increased investment and production results has negative consequences for the environment. Trade, in so far as this does lead to poverty alleviation, can result in less harmful land use patterns (less slash-and-burn agriculture). It may also result in a substitution of non-renewable sources of energy (wood-cutting, for instance) by other sources. The same is true for a substitution of coal by environmentally less harmful sources of energy that could result from the removal of coal subsidies. However, trade in combination with activities in the real sphere of the economy has other environmental effects as well: increased energy use, increased use of other scarce natural resources, risking depletion, loss in animal welfare, spread of animal diseases, loss of landscape and biodiversity, climate change, depletion of fish resources, over-utilization of water resources, land degradation due to overgrazing and so on. Trade reform and modernization of the economy may also result in a loss of traditional production techniques in harmony with the natural environment and with scarce natural resources. All this may easily translate into political costs: more poverty, less cohesion, more turmoil. Trade itself is not the culprit, production and consumption are. But specific trade policies, including trade liberalization, have consequences for investment, production and consumption patterns, for land use systems and transportation systems. Trade policy rules to a great extent determine the use of the world’s resources. It is also the other way around: trade and the opportunities for trade policy-making are influenced by developments and decisions in other areas and by technological change. The combined effects for the environment cannot be neglected when choices in the field of trade itself are on the agenda.
Additional dynamic gains will be higher the wider the coverage of trade liberalisation. Reducing only tariffs will produce less additional endogenous economic growth than reducing tariffs and subsidies and NTBs. The latter will provide more certainties to entrepreneurs and a greater incentive to investment. Including services and investment will lead to further dynamic gains, because new investment opportunities will arise and new markets will open up. Anderson assumes that trade reforms may boost economic growth in developing countries by one-third and in developed countries by one-sixth. In his view, this is a conservative assumption in the light of the experience of successful reformers such as China, India, Korea and Chile. I agree. I have no reason to dispute the summary estimates presented by him: GDP growth in 2015 of 3.1 per cent for developed countries, 6.1 per cent for developing countries and thus 3.8 per cent for the world as a whole. However, I wonder whether it is justified to assume that those rates will continue until 2050. The dynamic gains from trade will gradually diminish, sustaining them may require new initiatives.
The growth rate of 6.1 per cent for developing countries is in line with internationally agreed policy targets for GDP growth of developing countries that since 1960 have been laid down in the subsequent Strategies for the United Nations Development Decades. However, such rates will not easily be achieved. Why not? There are three reasons. First, the benefits are not distributed equally among trading partners. Research shows that agricultural liberalisation offers a mixed set of results, even against expectations: positive for Europe, Asia and Northern Africa, negative for SSA, potentially negative for the Asia-Pacific region and North America, neutral for Latin America. China will be hurt by a liberalisation of manufacturing. It will meet stiffer competition from other developing countries and experience a decreasing terms of trade. Moreover, unlike the Asian experience, export-led growth in Latin America has proved so far to be anything but a ‘development miracle’. For some Latin American countries free trade can have a negative impact on agriculture which is not compensated by sufficient employment and income growth in other sectors, So, for good reasons, different negotiation partners will have different expectations. Many countries, aware of the unequal distribution of the benefits of trade liberalization, will remain reluctant.
The second reason is that the benefits per country are also distributed unequally. The benefits of international trade liberalization so far have been utterly unequal. It was free trade à la carte, selective and characterized by a fair amount of arbitrariness in the granting of preferences and the mix between reciprocity and non-reciprocity. The benefits were bought at the cost of many poor countries and many poor people, within both more and less advanced economies. Europe, for instance, in combining ACP free trade with the continuation of its Common Agricultural Policy has done much harm to farmers both in many developing countries. Poor farmers world-wide have suffered from the functioning of international commodity markets (sugar, bananas, cotton, rubber, cocoa and others) with decreasing terms of trade, overproduction, subsidies to commodity producing farmers in the USA and the EU, preferential treatments, unilaterally set rules of origin, market speculation and the development of technologically new substitutes. International talks to remove all of these and other barriers will create a new perspective for the victims of these practices. But the winners of today will be the losers of tomorrow and it is not only a matter of rich versus poor. It is more complicated. Negotiations in the field of trade will have to be complemented by internationally harmonised domestic policies that can result in a fair balance in all countries.
The third reason is that for all negotiation partners there are costs involved. Anderson argues that these costs – private costs of adjustment for firms and workers and social costs in the form of social safety nets, unemployment schemes and retraining and reintegration – are minor. They are one-off costs, transitional, and should be weighed against the non-stop flow of economic benefits from reform. Anderson presents an estimate of the costs up to 40 per cent of the gross static benefits under full liberalization. He also assumes that these costs will last no longer than five years. In my view, however, the costs are higher and will last longer. In macro terms the costs may be far less than the benefits, but per sector or region this is different. In some cases, for instance when full liberalisation threatens the continuation of an industry, these are higher than the benefits. The benefits will accrue elsewhere and will not easily be used to finance compensation or restructuring benefiting the industry or region concerned. For a number of traditional sectors one cannot speak of one-off costs. They will have to be borne by a whole generation consisting of people that can no longer be retrained and reintegrated in the economy. In such cases one may have to take into account a period of twenty-five rather than five years. Often the next generation – the children of workers laid off in extractive industries or in traditional manufacturing enterprises that are downsized or closed – will also be affected. In agriculture the costs will also be borne by others: people living in rural areas, not only in the less productive agricultural sectors in Europe and the USA, but above all in developing countries. For many of these people small-scale subsistence agriculture is more than an economic activity; it is a means to survive, a living, a culture, a way of life. Some of these people can be hired as farm laborers, others as unskilled laborers in industry. Many would be fully uprooted, they themselves as well as their families and the next generation. The economic, social, psychological and cultural costs are neither minor, nor one-off or transitional. They are long-term, structural and major.
In theory, policies to redress and compensate this ought to be financed out of the benefits resulting from reform. However, not all costs are of an economic character, lending themselves to compensation. Moreover, the losses in jobs and asset values are often concentrated, for instance in declining industries, whereas the gains in terms of new jobs and investment opportunities are thinly spread, taken up by people other than those losing from the reform. This holds true for Western as well as for developing countries such as India, where the middle class is benefiting from new opportunities due to the opening of markets such as in information services. In agriculture in less advanced Northern economies and in the Third World, it is the other way around: the losses are widely spread and cut deeply into the existence of people while the initial concrete benefits are concentrated in the hands of a new class. In both cases those who loose will be politically more vocal than those who gain. The latter often do not realize that their progress is attributable to trade reform. Governments will remain reluctant to engage themselves in opening up their economies. Moreover, potential losers are always more easily identified than potential winners. And the benefits often accrue to population strata that cannot easily be taxed by the government, in particular because the reforms take place in the framework of an economic philosophy that emphasizes the market and demands a retreat of the public sector. The economic costs last longer than a transition period of five years, but whether there will be long-term benefits in the form of structural employment opportunities for many people is unclear. New industries, often financed with foreign capital, are inclined to choose capital-intensive production technologies. In a more and more globalized economy, the ample availability of labor becomes a relatively less important factor in decisions to invest and to choose a particular location. This is, for governments, an additional reason to go slow with reforms.
I am also less positive than Anderson about the relation between trade reform and poverty alleviation. Trade reform can reduce the income gap between developed and developing countries, provided that it takes place within a comprehensive approach. In doing so, trade reform will enhance the capacity and help increase the resources necessary to implement pro-poor policies within poorer countries. It will also contribute to higher economic growth within developing countries. Whether the increased capacity will be used for that purpose, however, remains to be seen. In the past that was not the case. The 1990s witnessed much economic liberalization and market reform, resulting in substantial growth rates of world trade and income. However, despite official commitments to use the additional resources set free by reforms and growth to finance anti-poverty programs in the fields of water, health, education and food and agriculture, world economic inequality and poverty increased. The promises have not been kept.. No wonder that poor countries are suspicious with regard to the promise that new trade negotiations will lead to less poverty.
They may even lead to more poverty. Market reforms can lead to new distortions and new inequalities, to the detriment of the poor people. Some market liberalization in the field of agriculture, for instance, will lead to increased consumer prices in food-importing developing countries. Other reforms will result in upsetting traditional agrarian systems and land use patterns, depriving the poor of the use of essential resources. Market reforms aiming at price liberalization, a retreat of the public sector and more incentives for private enterprise in essential sectors such as health and education have similar consequences. Criteria of good governance accompanying market reform and applied in international policies concerning trade, finance, aid and debt have often produced counterproductive effects. Governments were more or less forced to diminish public efforts to decrease poverty. Expectations concerning the number of poor people in rural areas who could find a better living after reforms, because there would be an increased demand for both farm products and their off-farm labor have not been fulfilled. China was an exception, but in Africa and in South Asia urban and rural poverty increased, despite a certain degree of liberalization. One could argue that these reforms did not go far enough, However, those who realize how much policy change has been implemented since 1980 – first as a necessity due to adjustment policies, later on the basis of the universally applied ‘Washington Consensus’ – will understand the scepticism regarding the acclaimed future speed, depth and benefits of further reforms.
A similar line of reasoning applies to the relation between trade reform and the environment. Rather than assuming that trade does have a direct impact on the environment, be it positive or negative, I prefer to discuss environmental effects as resulting from economic activities in the real sphere, such as investment, production and income growth, transportation, consumption and exploitation of natural resources, including energy. All such economic activities in the real sphere are linked through trade. It is trade that facilitates their combination and provides them with more opportunities to create value added. So, environmental consequences result not from trade in isolation, but from trade in combination with one or more of the other economic categories.
Not all expanded trade in combination with increased investment and production results has negative consequences for the environment. Trade, in so far as this does lead to poverty alleviation, can result in less harmful land use patterns (less slash-and-burn agriculture). It may also result in a substitution of non-renewable sources of energy (wood-cutting, for instance) by other sources. The same is true for a substitution of coal by environmentally less harmful sources of energy that could result from the removal of coal subsidies. However, trade in combination with activities in the real sphere of the economy has other environmental effects as well: increased energy use, increased use of other scarce natural resources, risking depletion, loss in animal welfare, spread of animal diseases, loss of landscape and biodiversity, climate change, depletion of fish resources, over-utilization of water resources, land degradation due to overgrazing and so on. Trade reform and modernization of the economy may also result in a loss of traditional production techniques in harmony with the natural environment and with scarce natural resources. All this may easily translate into political costs: more poverty, less cohesion, more turmoil. Trade itself is not the culprit, production and consumption are. But specific trade policies, including trade liberalization, have consequences for investment, production and consumption patterns, for land use systems and transportation systems. Trade policy rules to a great extent determine the use of the world’s resources. It is also the other way around: trade and the opportunities for trade policy-making are influenced by developments and decisions in other areas and by technological change. The combined effects for the environment cannot be neglected when choices in the field of trade itself are on the agenda.