The impact of trade on development

Opinion article by: Manuela Ramírez Cárdenas (mramir67@eafit.edu.co) *
International Business and Political Science Student at Universidad EAFIT, Colombia

After the Director-General of the WTO, Pascal Lamy, suggested at the organization’s 8th Ministerial Conference in 2011 the importance of the discussion of the world economy and trade related issues by the WTO and members of the multilateral trade system, the Panel on Defining the Future of Trade was created in 2012.

The panel met officially three times and held several meeting with different stakeholders to discuss issues such as the transformations of the world economy, the challenges of global trade opening during the 21st century, trade patterns, the current and future drivers of trade, and how trade can contribute to economic growth, sustainable development, poverty relief and job creation. The report of the panel titled The Future of Trade: The Challenges of Convergence was published earlier in 2013..

There are several aspects that are important to highlight about this report. The first one is that trade is without a doubt a positive practice that if implemented well can lead to growth, sustainable development, cooperation among states, and can have a direct positive impact on civil society. However, there is also the indisputable fact that some developing countries, since the opening of trade, have been negatively impacted and the gap of inequality between the rich and the poor grows wider every day.

The root of that problem is not trade itself; it is the fact that some developing countries lack certain conditions that are fundamental if a country wants to take advantage of the benefits of trade, among them: infrastructure, an educated population that can adapt to the changes and needs of the labor market, access to electricity, etc. Also, these countries face several local challenges, the first being that in most cases the local economy and industry is often precarious, and when faced with competitors that have a strong economic and productive system, then the outcome will unsurprisingly be negative. Additionally, some of these countries are plagued by corruption and governments that apply short-term policies that won´t be efficient in the long-term.

In the global scenario of open trade, the actions of governments become fundamental for a country that seeks to take advantage of the benefits offered by the multilateral trade system. Governments must create long term policies (perhaps adapt strategies that have been successful for other countries) that will allow them to create capacity building, educational opportunities, job creation, infrastructure, but most importantly they must implement policies that will allow them to develop locally first, so they can eventually become competitive in the global market and hopefully alleviate poverty and improve the living standards of the civil society.

Reference:

World Trade Organization. (2013). The Future of Trade: The Challenges of Convergence. Report of the Panel on Defining the Future of Trade.

Preferential Trade Agreements: Benefits and Risks

Opinion article by: Manuela Ramírez Cardenas* (mramir67@eafit.edu.co)
International Business and Political Sciences student at Universidad EAFIT, Colombia

The World Trade Organization’s report on the Future ofTrade (2013)  states that one of the dominant policy trends regarding that issue is the rising number of preferential trade agreements (PTAs). A PTA is an agreement between two or more countries, where they pact to reduce tariffs on specific goods during trade with one another. As stated in the report, there are currently an estimated 300 PTAs in operation, while several others are in negotiation; almost half of them are cross regional, two thirds are between developing and developed countries, and half of them are bilateral.

According to the WTO, preferential trade agreements offer several advantages that benefit not only their signatories but also other countries by the promotion of growth. PTA’s also facilitate a deeper integration at a multilateral level, are often more time efficient, and can reach consensus more easily between countries, a process that is otherwise difficult and time consuming at the WTO.

Not only that, but PTAs can have a positive impact in a country not purely in an economic sense. Other aspects of civil life can also benefit from them, ranging from issues such as the regulation of the environment to the protection of the labor force, for example: Professor Emilie M. Hafner-Burton, PhD, found that the commitment to PTA’s with hard human rights standards could effectively help reduce government repression and lead to better practices, as a state that participates in this type of agreement must comply with some basic international human rights principles.

Although the increasing number of PTAs is a trend that probably won’t slow down in the upcoming years, and that the benefits of this type of agreements cannot be denied, it is important to understand that there are risks inherent to them. According to the report, PTAs can have a negative impact as they might increase trade costs, lead to the segmentation of the economy due to regulatory divergence, they can be exclusionary as they might ignore smaller countries in a discriminatory way, they could fracture trade relations and ultimately they could corrupt the non-discriminating principle that is a core principle of the WTO.

To actually take advantage of the possible benefits of PTAs, the WTO recommends their members to engage in the exploration and ways of consolidation of PTAs within a multilateral trading system. By consolidating PTAS within the multilateral trading system, it is possible to regulate these types of agreements, mitigate the risks inherent to them and prevent the use of discriminatory practices regarding the exercise of trade.

References

World Trade Organization. (2013). The Future of Trade: The Challenges of Convergence. Report of the Panelon Defining the Future of Trade.

Hafner-Burton, Emilie M. (2005). Trading Human Rights: How Preferential Trade Agreements Influence Government Repression. Cambridge University Press on behalf of the International Organization Foundation, 59 (3), 593-629.

Global Value Chains: Governance and Interventions

Opinion article by: Manuela Ramírez Cardenas (mramir67@eafit.edu.co)*
International Business and Political Sciences student at Universidad EAFIT, Colombia.

UNCTAD’s World Investment Report for 2013 highlights the importance of Global Value Chains as contributors for development, stating that they “have a direct economic impact on value added, jobs and income” (UNCTAD, 2013) as well as providing opportunities to build the productive capability of a country that would give it the chance for long term industrial upgrading. The WIR 2013 also highlights the risk in participating in GVC because countries, specially poorer developing countries, capture only a small share of the value created in the chain as they only participate on the low value added activities, like the supply of natural resources, and they risk remaining locked on those low value added activities without actually upgrading in the long term.

To avoid the risk of remaining on the lower part of the value chain it is important to implement policies that would enable GVC to actually work for development and the improvement of a country’s productive capability, however this is difficult due to the governance of the chain. According to John Humphrey & Hubert Schmitz governance “refers to the inter-firm relationships and institutional mechanisms through which nonmarket coordination of activities in the chain is achieved” (Humphrey & Schmitz, 2001), usually done by firms in developed countries, who are the ones that have the intangible competences– i.e. marketing, R&D, etc.- that are characterized by high barriers of entry and high economic returns that allow them to be located on a higher part of the value chain. Access to those intangible competences is tough due to those high barriers of entry that require investment, so developing countries usually remained locked in tangible activities which must follow the requirements set by the governors of the chain, that is, the developed countries’ firms.

The governors of the chain impose requirements that those on the lower part of the chain must meet in order to participate in it, and often developing countries are expected to comply with requirements that do not apply yet to their own domestic market, and this highlights the competitive challenges these countries face, with the possibility of an eventual exclusion in the participation of those markets, and makes it nearly impossible for those countries to implement actual policies that would eventually give them access to a higher value gain in the chain.

In my opinion, if GVC are to be successful tools for development, the governors of the GVC must implement value chain interventions focused on the support for development, not from an economic perspective but instead from a holistic viewpoint, by taking decisions that target the improvement of the quality of the lives of the different actors involved in the value chain and the reduction of poverty.

One of those value chain interventions that could have a positive impact in the reduction of poverty is related to the agricultural sector. There are studies that show that the growth generated by agriculture is more effective in reducing poverty that the growth generated in other sectors (Seville, Buxton, & Vorley, 2011), so it is paramount that developing countries that have a precarious agricultural sector, characterized by the poverty of the small-scale farmers, implement strategies to allow those small-scale farmers and producers to connect to value chains in formal markets to give them opportunities to actually overcome poverty, as it has been theorized that “linking smallholders with well-functioning local or global markets – ranging from local ‘street markets’ to formal global value chains – plays a critical part in long-term strategies to reduce rural poverty and hunger” (Seville, Buxton, & Vorley, 2011). However for countries like Colombia, the process of linking the small-scale farmers to global value chains is complicated, as the agricultural sector in the country has several structural challenges, ranging from lack of adequate infrastructure to lack of skills and training.

References: 

Humphrey, J., & Schmitz, H. (2001). Governance in Global Value Chains . Retrieved August 27, 2013, from Institute of development Studies: http://www.ids.ac.uk/files/dmfile/humphreyschmitz32.3.pdf 

Seville, D., Buxton, A., & Vorley, B. (2011). Under what conditions are value chains effective tools for pro-poor development?. Sustainable Food Lab & The International Institute for Environment and Development . International Institute for Environment and Development/Sustainable Food Lab . 

UNCTAD. (2013). World Investment Report 2013. UNCTAD. United Nations.