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Friedrich Ebert Stiftung

Rethinking the Trading System

Dialogue on Globalization, No. 32

Aileen Kwa

Friedrich Ebert Stiftung

June 2007

SARPN acknowledges the Friedrich Ebert Stiftung as the source of this document:
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Executive summary

Neo-liberal trade liberalization experiments have failed in developing countries. Even when exports or growth rates have increased in low-income countries, in many developing countries, poverty has not been reduced, giving rise to immiserising growth.

With the exception of some Asian countries which had a head-start, openness and the alignment of economies to exports have led to stagnation or decline in countries’ level of industrialization. The successful economies have not in fact followed a linear neo-liberal path, but have instead used many trade policies which are no longer sanctioned in the WTO and other free trade agreements. In addition, the current trend of consolidation of powerful corporations at the top of the production chain has also seen a corresponding weakening of the power of small producers at the bottom of the chain.

Neo-liberalism has been unsuccessful in bringing about broad-based development because it has ignored the power imbalances along the value chain. The overenthusiasm regarding exports is also logically fl awed. Not all countries can attain export surpluses. Others will end up with an import surplus and the contraction of their internal markets. The pressure to be competitive also pushes wages down, often shrinking rather than expanding people’s purchasing power and standard of living.

The multilateral institutions have been the primary agents advocating liberalization to the developing world, and their agenda has penalized rather than supported the poor. The current Doha Round is an example of an anti-development package that experts have already shown will cause further harm to low-income developing countries.

The trading system needs an overhaul. The paper provides some pointers towards reorienting the system with development as a central objective. It fi rst highlights some principles that can guide the system in this endeavor - prioritizing human development and human rights; respecting countries’ sovereignty but also enforcing extra-territorial responsibilities; prioritizing environmental sustainability; and lastly valuing solidarity and cooperation, rather than a system based on competition. The paper covers national, regional and multilateral development strategies, and how trade can be embedded within these strategies.

At the national level, we need to reclaim resources, relocalize and reinvigorate domestic markets – these are more accessible to the multitude of poor producers in low-income countries, than external markets. Regionalism should be a strategy for strengthening domestic production capacities, rather than another avenue through which local markets are pried open.

The multilateral trading system would serve developing countries better if it unhinged itself from the trade liberalization treadmill, since this cannot be imposed on countries top-down, and instead, takes on a regulatory function. The multilateral system can consist of one or several agencies. Its primary aim would be to ensure that countries observe their extra-territorial responsibilities and do no harm to others. Its duties would include the following:

  • Be a whistle blower, disciplining countries that dump on others, and warning affected countries when dumping occurs;
  • Regulate corporate behavior and the implementation of multilateral competition policy which includes downsizing corporations so that production chains are less concentrated, and producers at the bottom end of the chain have more control and are able to obtain fair prices;
  • Implement supply management agreements at the international level for cereals, diary and other products staples which currently suffer from oversupply, leading to dumping on the world market
  • Implement international commodity agreements (ICAs) for tropical products – these could be producer-only agreements, avoiding the diffi culties encountered in the previous generation of ICAs;
  • Play a regulatory function in countries’ access to knowledge and innovation so that as a global community, we are moving towards open source information and knowledge sharing, as well as the pooling of research. Just as the developed countries did not have strict intellectual property (IP) rules when they were developing, strict IP rules for low-income developing countries will not help in their development.

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