Trade and Poverty guide 

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Trade and Poverty guide

© Television Trust for the Environment

The unprecedented rate of growth in international trade since the establishment of the World Trade Organization in 1995 has not been accompanied by a commensurate fall in global poverty. Revision of the rules, especially for agriculture, has the potential to align the goals of global trade with poverty reduction, food security and environmental stability. However, the refusal of the US and EU to contemplate unconditional removal of their farm subsidies has caused the collapse of the so-called Doha Development Agenda.

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updated July 2011

Liberalization Trade Justice Development Food Security

Climate Change Trade Rules Doha Development Round Fairtrade

Trade Liberalization

Free trade economists argue that lower barriers to global trade result in higher trade volumes, prosperous national economies and poverty reduction. They point to the important role of trade in development success stories such as China and Brazil.

Nike worker in Asia © Corporate Watch

Since the current trade regime came into force under the World Trade Organization (WTO) in 1995, global import duties ("tariffs") and other protectionist measures have fallen to all-time lows. Aided by modern transport and communications technologies, world trade has grown handsomely at almost 10% per annum, pausing only during the depth of recession in 2008.

Despite almost doubling their share over this period, the Least Developed Countries (LDCs) benefit from less than 1% of total global trade, of which more than half is primary commodities. Almost all of these countries run trade deficits, forcing them to depend on foreign aid, remittances and debt for foreign currency. There are 48 LDC countries, comprising 12% of the world’s population.

The correlation between trade liberalization and poverty reduction is further questioned in the disappointing progress of the Millennium Development Goals (MDGs). If China is excluded, the number of people living below the international poverty line has risen since the 1990 baseline year, as has the number of people classified as hungry.

It should be no surprise, therefore, that trade justice campaigners interpret these statistics as an indictment of the world trade bonanza for selectivity in its wealth creation and failure in agriculture - the sector in which most of the world's poor households are engaged.

They perceive trade liberalization as the agenda of private capital, having no goal other than to multiply itself, widening inequality between and within rich and poor countries. This trade justice perspective sees a contradiction between membership of the WTO and commitment to the Millennium Declaration, from which the MDGs are derived.


John Hilary, Executive Director of War on Want, explains how the WTO-supported drive for developing countries to open their economies to ever-expanding trade volumes is motivated more by interests of large corporations than poverty reduction, from Poverty is Political.

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Trade Justice

The roots of the injustice that plagues world trade in agriculture lie in the aftermath of the Second World War. Self-sufficiency in food production and the survival of traditional rural communities were high on the agenda of European governments.

The 1962 Common Agricultural Policy was a central plank of the European Economic Community (EEC), the predecessor of the European Union (EU). The CAP offers subsidies to farmers and guarantees prices against the risk of volatile markets. Motives underlying the US Farm Bill, first introduced in 1949, were identical and the methods very similar.

Although agriculture was included in the "Uruguay Round" of world trade negotiations (1986-1994), these farm support programmes survived in the eventual 1995 rules. Developing countries were at that time poorly equipped to punch their weight in highlighting the unfair competition inflicted on their own farmers.

According to a report by the group of richer OECD countries, the total support paid to their agriculture producers in 2009 totalled $253 billion. This is more than six times the UN’s estimate of the cost of eradicating hunger by 2025.

Sorting cotton in Mali © Betty Press/Panos

Efforts are under way to reform both the EU CAP and US Farm Bill but, as on previous occasions, the strength of the agriculture lobby is likely to remain decisive. The insidious effect of these farm subsidies is felt across the developing world, from sugar producers in Uganda to chicken farmers in Ghana. These livelihoods have been cut away by cheap produce available from rich countries.

The cotton-producing countries of West Africa - Benin, Burkina Faso, Chad and Mali - are the cause célèbre of the hypocrisy of trade liberalization. American and European cotton farmers receive generous subsidies, forcing down the world price. Despite having the most fertile land for the crop and the lowest cost of production, the “C-4” countries have reduced output by half since 2005, a crippling blow for over 10 million people.

The roots of injustice for non-farm sectors are found in the imposition of structural adjustment policies by international financial institutions during the 1980s and 1990s. As conditions for loans and grants, poor countries were obliged to liberalize their trade policies in line with prevailing western ideology. Embryonic industries were nipped in the bud as protective tariffs were forced down.


Development economist Joseph Stiglitz explains why advocates of free trade cannot be taken seriously as long as US and EU subsidies distort the market, impeding the trading prospects of poor countries, from Carnegie Council.

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Development

Countries must trade, especially small countries which cannot aspire to produce the full panoply of modern industrial goods. However, the dominant role of primary commodities in the exports of the world’s poorest countries is not conducive to long term development. Prices are too volatile and trading partners are limited to the major industrialised countries.

If trade is to lead development, it requires greater diversity in products for export, and more engagement with regional or “south-south” partners. Industries such as food processing which add value to agricultural commodities are obvious candidates.

Such embryonic export sectors require government support through subsidies and protective tariffs, exactly the historical development model for most of the world’s major industrialised countries. The grievance of today’s developing nations is that the global trade regime forbids sufficient “policy space” to reproduce this strategy.

Transport in Benin © Dan Gerber

A further explanation of Africa’s failure to capture its fair share of world trade lies in the immense logistical barriers typical across the continent. Antiquated port facilities, poor roads, tortuous customs bureaucracy and unreliable energy supplies combine to raise the costs of doing business. Small-scale farmers and fisherfolk cannot aspire to export their produce unless they restructure, for example in the formation of cooperatives.

This constraint has inspired the concept of “aid for trade” in which donor agencies give greater priority to funding infrastructure and support for participation in world trade. This supply-side aid coincides with other new priorities such as food security and now accounts for a major share of total foreign aid.


The Principal Economist of the Asian Development Bank, Ganeshan Wignaraja, explains the potential for aid for trade in Southeast Asia.

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Food Security

The food crisis of 2007/08 betrayed how the goals of the trade regime have been allowed to evolve with no consideration for global food security. Tolerance of farm subsidies in richer countries reduced incentives to plant in many poorer countries.

In consequence almost all LDCs have food deficits, their dependence on imports exposing them to rising world food prices. The panic reaction to shortages in 2008 was exacerbated by low levels of national food reserves, a situation arising from western ideology that reserves distort trade markets.

Guinea-Bissau depends on cashew nuts © IRIN News

It is widely recognised that immense pressures are building on global food security. An intuitive response would seek to optimise world food production through planting crops in their most suitable growing environment, regardless of national boundaries. A sensitive trade regime might offer support to poorer countries to purchase their minimum needs.

Given the political impossibility of such an approach, the reaction of many developing countries has been to restore the status of “food sovereignty” that many of them once enjoyed. These governments observe that their concerns for self-sufficiency in food and the protection of rural communities are precisely those that gave rise to the farm support policies in Europe and US.

The alarm over food insecurity has increasingly bracketed global trade rules with human rights perspectives. The UN Special Rapporteur on the right to food, Olivier De Schutter, has presented hard-hitting papers demanding that trade agreements be subjected to impact assessments by reference to the right to food.

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Climate Change

The general objective of multilateral environmental agreements is to drive up standards of production, with richer countries setting the pace by accepting "differentiated responsibilities."

Container shipping © AH Knight / Flickr

Free trade agreements have evolved in a separate and somewhat contradictory culture. They envisage a global regime where companies are free to seek out production locations where labour costs are low and, perhaps, where environmental protection is less stringent.

In the context of climate change, rich countries with commitments to reduce greenhouse gas emissions can outsource the manufacturing requirements of their consumers to developing countries which are less constrained by carbon mitigation targets. This is one reason why China accounted for 19.8% of global manufacturing in 2010.

Known as “carbon leakage”, this loophole has not yet been tackled in climate change negotiations, nor do labelling schemes exist to keep consumers fully informed of their carbon footprints.

This profile of long chains of production in which components of a single product are manufactured in different countries has also been encouraged by the availability of cheap container shipping. Thanks to the power of the corporate trade lobby, this sector has also escaped the attentions of both the Kyoto Protocol and its potential successor, currently the subject of international climate change negotiations.

Largely powered by filthy bunker fuel, shipping carries 90% of global trade, contributing over 3% of the world’s total carbon dioxide emissions. This is more than aviation and likely to increase at least as fast. The shipping industry’s own attempts to mitigate this trajectory are unlikely to take any effect before 2019.

As it has its most imminent and severe impact on the poorest countries, climate change adds a further dimension to the charge that current world trade rules aggravate global poverty.

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Trade Rules and Concessions

It is rarely straightforward to identify the trade regulations in force for a particular country due to the layers of regional and bilateral agreements which coexist with, and are allowed to override, WTO rules.

Nevertheless, the WTO lies at the heart of global trade. It is a legal entity with powers to rule on trade disputes and enforce the regulations, by financial sanction where necessary. Its rules must be agreed by consensus of more than 150 members which now include most of the world's poorest countries.

These rules do include preferential agreements designed to help developing countries, especially the LDCs, as do many regional and bilateral trade agreements. For example, the European Union’s Everything But Arms (EBA) initiative and the US African Growth and Opportunities Act (AGOA) both offer duty free and quota free access to a very wide range of LDC produce.

However, strategically critical duties, including those protected by the influential US clothing lobby, tend to remain firmly in place. Non-tariff barriers also impede progress, especially rules of origin which can block concessions for products which include components sourced from outside the exporting country.

In 2009 about 80% of LDC exports (excluding arms and oil) entered developed countries duty free and quota free. However, this percentage has barely changed since 1996, despite the MDG target to increase it to 97% by 2015.

An opportunity exists for the 79 African, Caribbean and Pacific (ACP) countries which, as former colonies, enjoyed concessionary trading terms with the EU. These ACP terms were ruled as discriminatory by the WTO in 2002 and the EU is striving to replace them with economic partnership agreements (EPAs).

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Doha Development Round

In 2001 it seemed as though the poorest countries might find an unlikely champion in the shape of the WTO.

Startled by the vehement protests of the anti-globalisation movement at the 1999 Seattle ministerial, the WTO decided to name a new of round of negotiations as the "Doha Development Agenda." It proclaimed that a new regime of lower trade barriers would be guided by priority for poverty reduction.

The political dynamic has never reflected this vision. The richer countries are now focused on gaining access to markets in the successful developing countries such as Brazil and Malaysia – who in turn seek the northern markets in agriculture.

In 2006 the Carnegie Endowment for International Peace published a damning report, Winners and Losers, which projected that the Doha proposals would generate a net loss for the poorest countries. Similar conclusions have since been published by the EU and World Bank.

The Doha talks were duly suspended in 2006, strengthening the longstanding demands of trade campaigners for the WTO to be downgraded or abolished. Its authority has been further diminished by the refusal of the US to respect a 2005 WTO ruling that its cotton subsidies are illegal.

World leaders continue to pay lip service to the Doha round, describing 2011 as a “critical window of opportunity” for concluding negotiations. However, a proposal for an “early harvest” deal focused on 100% duty free quota free access for LDCs appears unlikely to overcome US reluctance to make concessions.

Motives of the richer countries appear to be driven more by the prospect of global economic stimulus than development. Instead of offering unconditional phased removal of farm subsidies, the US and EU are only prepared to contemplate capping the subsidies and then only as bargaining chips.

The richer countries seek greater access, not just in manufacturing but also to internal services such as utilities, health and education. Reservations about such motives in the Doha round have influenced the majority of ACP countries to reject the EPAs.


Trade experts give their views on the current politics of the negotiations on the Doha Development Agenda, from World Trade Organization.

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Fairtrade

As a healthy example of pro-poor trade, the Fairtrade label protects the interests of the farmer producers.

Co-operative coffee in Haiti © Cooperativa cafetera en Haití / Intermón Oxfam

It guarantees that the farmer has been paid a price influenced by the cost of production rather than volatile global commodity markets. Furthermore, the label ensures that farm workers are protected by appropriate labour standards and that a premium has been paid to contribute to community projects.

The Fairtrade mark is coordinated in Germany by Fairtrade Labelling Organizations International, a network of member groups in 24 countries, including Fairtrade Foundation in the UK. With sales of over $4 billion in 2009, Fairtrade benefited about 6 million poor people in 58 developing countries.

Although Fairtrade is booming amongst consumers in 70 countries, it represents only a tiny proportion of world trade. For example, only 1% of global coffee sales carried the label in 2009. Fairtrade is not a substitute for “fair trade” – the concessionary terms of trade that the poorest countries need to stimulate their development.

Fairtrade is largely restricted to agricultural products such as coffee and bananas. It faces a range of criticisms, for example that it is a selective subsidy which encourages production rather than efficiency. And the poorest farmers struggle to organise themselves to pay the certification fees. Like conventional trade, the logistics are more straightforward in the relatively prosperous developing countries of Latin America and Southeast Asia than the African LDCs.

However, such views miss the point that the buyer has started out with a vision of dignity and rights for the seller. Fairtrade creates an inspiring linkage between everyday consumers in wealthy countries, global trade and the challenge of world poverty.


Swap Your Choc – Meet some of the cocoa farmers from Ghana whose lives are benefiting from Fairtrade, from Fairtrade Foundation.

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