Category: Trade

Alicia Nicholls

Trade, it seems, is a dirty word these days. It does not take much more than a cursory scan of newspaper headlines to observe the growing prevalence of anti-trade, anti-immigration, anti-globalisation rhetoric which has infused the US Presidential Campaign and which was one of the factors which led 52% of Britons to vote for the UK to withdraw from the European Union.  Coupled with a continued slowdown in global trade growth, the World Trade Organisation (WTO) has recently warned about the “worrying rise in the rate of new trade-restrictive measures” initiated by its members in the review period compared to the previous period. These developments beg the question – what does this growing anti-trade, anti-globalisation populism mean for developing countries, particularly small states in the Caribbean which rely so heavily on trade with major countries to sustain their small open economies?

Why the Anti-trade/Anti-globalisation turn?

Neoliberalism, the philosophic orientation of developed countries which extolled the orthodoxy of the free market and free trade, has dominated mainstream development discourse since the 1980s. During the early 1990s developing countries which underwent structural adjustment programmes under the International Monetary Fund (IMF)  and the World Bank (WB) were forced to adopt market reforms, including trade liberalisation, privatisation and deregulation which were seen as the necessary medicine for an ailing economy. These policy prescriptions came to be known as the “Washington Consensus”.

Neoliberal ideology pushed for the removal of restrictions on not just the flow of goods and services, but also on the flow of people and capital across borders, facilitating greater integration and interdependence among states. Not everyone bought into the ideology. Most Latin American countries resisted for as long as they could. But by the time of the fall of Soviet Union and of the competing communist ideology, it seemed that in the words of Margaret Thatcher “There is no Alternative” to the free market.

To be sure, populist hostility to trade and globalisation in some segments of the developed world is not a novelty. The reader may recall the 1999 anti-globalisation protests at a WTO meeting in Seattle, Washington (US) as an example. However, anti-trade and anti-globalisation populism has attracted support in policy circles in the post-2008 era for several reasons. Some of it is linked, of course, to the usual suspects of xenophobia, nativism and other phobia – the fear that the homeland is being taken over and ruined by foreign products and foreign people, as well as concerns over terrorism. But this only tells part of the story.

The other part is disenchantment with the premise of neoclassical economics that removing the hand of the state in the economy will improve the welfare of consumers, promote efficient allocation of resources and create economic growth. Many no longer view this to be true. First, there is greater public concern in OECD countries over levels of income inequality, wage stagnation and unemployment in spite of liberal economic policies. There is the increasing opinion that the free market and free trade are not working for everyone, with gains being confined to the wealthy and multinational companies.

There is the belief, not entirely justified, that free trade is costing domestic jobs and industry. Across the pond in the UK for instance, a major plank of the Leave platform was based on stopping immigration from poorer European countries which has been blamed for taking UK jobs and threatening the traditional British way of life. In regards to free trade agreements, much of the concern is over what is seen as provisions which restrict governments’ regulatory space in areas such as public health and the environment.  The net result is a strong populist backlash which has reinvigorated the rise of right wing, nationalist parties which advocate closing off borders and erecting barriers and renegotiating free trade agreements, while mainstream parties have also sought to pander to this populist fervour.

To varying extents both major candidates in the US presidential campaign have sought to piggy back on this anti-trade populism by making trade a central part of their campaigns in a way that has not been seen in a US presidential election for a long time. Both candidates have aimed their darts directly at free trade agreements such as the North American Free Trade Agreement (NAFTA) and mega-regional trade agreements (MRTAs) like the Trans-Pacific Partnership Agreement. Both candidates have voiced their desire to renegotiate these agreements. Mr Trump has gone further by promising to impose tariffs on Chinese goods and taxes on American companies which relocate to lower cost jurisdictions, to ban the immigration of Muslims and build a purported Mexico-funded wall along the entire border between the US and Mexico. True to his “Make America Great Again” slogan, Mr. Trump has not only hailed the Brexit vote in the UK as the British people taking back their economy but has noted that it is time for America to do the same.

Implications for Developing Countries

So what does this growing anti-trade/anti-globalisation populism have to do with developing countries like those of the Caribbean? After all, Caribbean countries remain on the periphery of global trade and trade policy discourse. Perhaps, thankfully, the Caribbean has not been mentioned in any of the primary debates or on any of the party platforms.  But while Caribbean countries have not been the centre of the trade world since the days of the slave trade, foreign trade remains central to Caribbean countries’ economic livelihood.

Caribbean countries are largely import-dependent, relying significantly on imported goods, services and capital (especially foreign direct investment). They are also reliant on a narrow range of exports and export markets, rendering them susceptible to any protectionist measures which affect the competitiveness or ease of access of their exports in their major markets. A prime example is the rum issue where US subsidising of rum producers in Puerto Rico and the US Virgin Islands has negatively affected the competitiveness of Caribbean rum in the US market. Many Caribbean countries also benefit from unilateral preferences to the US market under the Caribbean Basin Initiative and the more general, Generalised System of Preferences.  In light of the Republican candidate’s zero-sum approach to trade, buffeted by his assertion that America must win the global competition at all costs, what will be the future of these preferential arrangements, far less, any other trade initiatives which benefit developing countries? Furthermore, any adverse changes in the immigration policies of major western countries will have consequences for the Caribbean diaspora living in those countries.

In this recent television interview, the US Republican Presidential Candidate has also suggested that he might “renegotiate or pull out” the US from the WTO in the event that any WTO member brings a challenge against his trade policy plans. The prospect of the world’s third largest economy (after China and the EU) pulling out of the WTO has frightening implications not just for the future of global trade rule-making but also for the amicable settlement of trade disputes. There are concerns about the effectiveness of the WTO dispute settlement mechanism for safeguarding the rights of small states, particularly in light of the US-Antigua & Barbuda Gambling case where that small island developing states is still awaiting US compensation. Despite this flaw, the current WTO dispute settlement system facilitates predictability and security in the global trade system by allowing states to hold each other accountable for breaches of WTO rules in a manner that is peaceful and with limited disruption to global trade. If the US and other any other states follow suit by withdrawing from the WTO, this will make it even more difficult for developing countries and undermine the rules-based trading system.

On a more global level, countries tend to turn inward during periods of crisis, using a wide range of trade policy tools to protect their markets. In 1930 the US government passed 19 U.S.C. ch. 4, otherwise known as the Tariff Act of 1930 or the Smoot Hawley Tariff Act which imposed prohibitive tariffs which some economists blamed for exacerbating the severity of the Great Depression on the US. The global economy is already underperforming and trade growth remains sluggish, which are not welcomed prospects for countries in the Caribbean whose macroeconomic health depend on that of their major trading partners. Christine Lagarde, Managing Director of the IMF, has warned in an interview with the Financial Times that the imposition of new trade barriers could negatively affect the global economy, echoing the WTO’s position that “Members must individually and collectively resist protectionist pressures”.

Is there a silver lining?

There is another side to this coin. I believe trade, once well managed, is a powerful tool for development as it allows for cheaper sourcing of inputs, provides opportunities for the sharing of ideas, technology and best practices and promotes competition which benefits consumers. However, the free market orthodoxy, which postulated that open markets at all costs were good, and that the lesser regulation the better, is flawed. I am, therefore, heartened that these precepts are under scrutiny in the public discourse in a way that they have not been in a long time. The longstanding orthodoxy was that neoliberalism was the only way to promote development.

Many of the arguments now being made in policy circles are arguments which developing countries, in particular small states, have been making about the folly of unmitigated free trade and instead arguing for fair trade. For instance, developing countries have long argued that the comparative advantage argument has been used as justification to keep them as exporters of primary goods, while denying them the trade policy tools which wealthy industrialised countries used to protect their manufacturing industries in the early stages.

While developed countries were pushing bilateral investment treaties containing provisions which were extraordinarily generous to investors while ripping away governments’ regulatory rights to protect against abuses, developing countries were arguing for greater policy space. Developing countries have also long protested developed countries’ demands to open their markets while developed countries continue to heavily subsidise their own agricultural industries.

I read with much interest the article by former US Treasury Secretary, Lawrence Summers, in the Financial Times calling for a responsible nationalism. He poignantly argues that “international agreements would be judged not by how much is harmonised or by how many barriers are torn down but whether citizens are empowered”. Perhaps I am cynical but my main fear is that while this rhetoric may be music to our ears, it is not clear whether this new enlightenment has a development ethos or whether it is done mainly as a cloak for nationalist and protectionist purposes by developed countries to the prejudice of developing countries. Judging by the rhetoric on the US election trail, the latter sadly seems more to be the case.

However, I will try to end on a positive note as I recall again the immortalised words of Margaret Thatcher. It would appear the learned late Prime Minister was wrong and that there is indeed an alternative. In the post-Great Recession era the green shoots of a new theory of how the global economy should operate appears to be taking shape. This new thinking creates space for developing countries to further challenge the neoliberal orthodoxy which developed countries championed for so long in a way that has hitherto been taboo. Developing countries should resist any form of protectionism which seeks to undermine their development gains, while also continue to add their voices to the debate on how trade can be used not as an end in itself but as a conduit for sustainable development which benefits all countries and all peoples and not just a select few.

Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.