ECONOMIC LIBERALISATION actively promotes the flawed premise that free trade, generally, and membership of the World Trade Organisation (WTO), specifically, constitute the Holy Grail of sustained economic growth for all countries. Of course, for developed countries, with large and diversified economies, mature industries, large and diverse enterprise stocks, mature firms and established products, the many benefits of free trade and WTO membership are readily and immediately accessible, so are rarely in doubt.
However, the frustration of unrealised benefits arises when newly industrialised economies (NIEs), developing countries, particularly small island developing states (SIDS) like The Bahamas, and least developed countries (LDCs), think that they, too, can access the same benefits or that benefits arise automatically as an outcome of membership. Without the scale and scope of industrial infrastructure, such windfall would be difficult, if not impossible. One way to assess the merits of WTO Membership in relation to The Bahamas’ planned accession, would be by examining its conceptual basis, Free Trade, against alternatives such as Managed and Fair Trade.
FREE TRADERS like the Heritage Foundation cite a litany of advantages: "Free trade policies have created a level of competition in today's open market that engenders continual innovation and leads to better products, better-paying jobs, new markets, and increased savings and investment. Free Trade enables more goods and services to reach consumers at lower prices, thereby substantially increasing their standard of living". They also argue free trade:
- promotes innovation and competition;
- generates economic growth;
- disseminates democratic values; and
- fosters economic freedom. [1]
Additionally, a litany of advantages has been associated with WTO MEMBERSHIP and adherents argue that the disbenefits far outweigh the benefits, of which the WTO effortlessly lists ten:
- The system helps promote peace
2. Disputes are handled constructively
3. Rules make life easier for all
4. Freer trade cuts the costs of living
5. It provides more choice of products and qualities
6. Trade raises incomes
7. Trade stimulates economic growth
8. The basic principles make life more efficient
9. Governments are shielded from lobbying
10. The system encourages good government [2]
These arguments are usually subtended with the proviso ‘we are better with it than without’. Admittedly, most arguments have more than a modicum of truth, but two questions rarely visited are whether stage of development of an economy is any way correlated with the benefits enjoyed from WTO membership or whether benefits are shared equally with all members, including the 75% who are developing countries? Whilst most of the above are true, the fact is benefits accrue at a cost!
MANAGED TRADE, on the other hand, argues in favour of ‘low levels of protectionism during periods of ‘normal’ trade volumes (are) coupled with episodes of ‘special’ protection when trade volumes surge’ because ‘a high natural trade volume increases the incentive (for a country) to defect’ [3]. When governments intervene in markets with policies that restrict trade, such intervention might be wrongly construed as protectionism. However, managed trade is much more subjective and tends to be practised as "strategic trade" and/or "industrial policy" because intervention is sought only when it is beneficial to the economy [4]. Managed trade also focuses on "key sectors", a.k.a. ‘picking winners’, the thinking being that key sectors must be nurtured and supported, particularly in critical times, to create lasting benefits in the economy. If lost, negative knock-on effects will cause decline in related sectors. Managed traders promote three main but powerful benefits:
- Managed trade is situational but strategic;
- Managed trade is practised only when beneficial to the economy;
- Managed trade targets ‘key sectors’ which produce positive externalities.
FAIR TRADE advocates cite numerous advantages, including 'poverty alleviation', 'community development', 'environmental health', 'consumer awareness'. Fair trade activists ground their arguments in the perspective of fairness in '(the) trading partnership, based on dialogue, transparency and respect that seeks greater equity in international trade, by offering better trading conditions to, and securing the rights of, marginalized producers and workers'.
They claim also that these sometimes brazenly protectionist initiatives are bottom-up and 'backed by consumers, (who) are engaged actively in supporting producers, awareness raising and in campaigning for changes in the rules and practice of international trade'[5]. Fair traders point specifically to benefits they say can be 'easily seen' (and which might be viewed as the converse of ‘free trade’):
- Increases the income of the producers by involving them in negotiations
- Producers and workers have extra income which improves their lives
- Provides greater environmental awareness and protection because the provenance of all goods and beneficiaries of sales is transparent
- Producers can obtain a better and stronger foothold in the world market because of more direct relationships with buyers; and
- Provides a closer and more transparent link between producers and consumers, who crave environmental information about products [6]
The specific question we face is whether The Bahamas should continue its chosen route to WTO accession or consider alternatives that might serve us better in the long run?
WHY FREE TRADE MAY NOT BE AN OPTION FOR THE BAHAMAS
The free trade benefits of the General Agreement on Trade and Tariffs (GATT, 1948 - 1994) and its successor, the World Trade Organisation, WTO (since 1995) have always been skewed toward large, established economies to enable their companies free and unfettered access to the world's markets to drive growth and profits.
Put simply, we are patently not a developed economy (by any standard); we do not possess a large and diversified economy (we are umbilically tied to a handful of downstream hotel, leisure and tourism (HLT) sectors and financial services). Consequently, we have not built up a large and diversified enterprise stock (it is small, old and stagnant, with an average age of 20+ years). In addition, we do not have a large and attractive internal marketplace (in contrast, ours is small and fragmented, with less than 400,000 people, distributed over 27 mostly hard to reach islands, which makes them costly to serve). This means that only the best resourced local companies can take advantage of the internal marketplace; large foreign firms would have less of a problem if this was the ‘prize’, but sadly it’s not.
We are severely limited in the types of companies we have; few agricultural, construction companies and technology companies, for example, but we do have our fair share of professional services companies (financial, legal, accounting), which we hope will be strong enough to compete against incoming firms, though this is not assured. We also have our ‘crown jewels’, our overriding comparative advantage, in the form of close proximity to the USA, which only three other countries have.
Many WTO critics point out that the institution's promises routinely remain unfulfilled. They argue that the WTO is undemocratic, 'dominated by the leading industrialised countries and their corporations’; that the original development goals of GATT 'have been put aside or are wrongly assumed to be the natural consequence of increased trade' and crucially, that developing countries have little power within the WTO.
As a developing country, The Bahamas should be aware of the following four persistent claims and criticisms:
- Most developing countries are in some way indebted to 'the Triad’ (either the USA, EU or Japan), so are reluctant to challenge or make their 75% majority work in their favour;
- Trade negotiations are based on the principle of reciprocity or ‘trade-offs’ which ‘benefits the large and diversified economies, because they can get more by giving more’;
- Developing countries have the least amount of human and technical resources, so are less prepared than their developed counterparts to cope with the demanding schedule of meetings during each WTO conference;
- The WTO dispute resolution system is costly, time-consuming and requires a high level of legal expertise that is generally beyond most developing countries (whilst we have no shortage of lawyers, how many possess specialist skills such as Intellectual Property or International Trade and how many have been tested in regional or international disputes?)
SHOULD WE PURSUE MANAGED OR FAIR FREE?
Bahamian administrations have intervened selectively in the market from colonial times in trying to focus on key sectors, so it could be argued that we have tinkered with managed trade. However, there has been no expression of a coherent trade or industrial policy, so it is not clear whether managed trade or good-old-fashioned flirtations with protectionism are being practised. If indeed, it is more inclined to protectionism (fair trade), then we should see a more concerted effort to involve producers in negotiations and a greater voice given to fairness in trade involving The Bahamas. For example, why should foreign firms be able to exploit our prime strategic location, without giving anything in return?
Turning to a specific question as to whether and how WTO membership will affect us regarding our particular circumstances and industries, undoubtedly, we will be exposed in the short to medium term because none of our industries are regionally or much less internationally competitive, so foreign companies operating in any sector will enjoy the same opportunities as local companies but with inherent competitive advantages. Very few of our companies are large enough, or sufficiently resource-intensive to compete (barring the few multinationals that are already here). This means that in the short to medium term, not less than 7 – 10+ years and probably longer, our fledgling industries will be under severe pressure as they try to compete with a much-weakened resource base to take on the major projects.
IS MANAGED TRADE THE WAY FORWARD?
This not so attractive state of affairs brings me to my growing belief that it would be better for The Bahamas to follow a managed/fair trade course, with the emphasis on the former, to allow subjective levels of protection for those industries that we deem critical to future growth and development. For managed trade to take hold, however, we would need to prepare more thoroughly, and a proper industrial policy to spell out clearly economic development aims. An industrial policy will stipulate the measures to be employed to ensure our industrial base is not compromised needlessly, and national interests (all) are served. For example, to ensure that the economic benefits of incoming firms are not simply repatriated to home country but shared within host country, The Bahamas.
An example of how policy-driven membership could work is the Kingdom of Saudi Arabia (KSA), which has been a WTO member since Dec. 2005. Any foreign company looking to invest in KSA must follow its foreign investment rules, including “the requirement that companies seek to establish themselves in the KSA and provide goods and services through a local establishment”[1]. This means in practise that foreign companies must partner with local companies or be restricted from operating freely and effectively, e.g. not allowed to meet directly with clients and customers or receive payments directly.
Of course, free trade advocates see things differently, less intervention, the better; new incoming firms would bring new skills, technologies, resources, expertise and most importantly, jobs for our annual output of graduates and would stabilise the economy.
But what would happen to our industrial base and aspirations of being a truly independent country? Even Nelson Mandela reluctantly concluded after the Uruguay Round (1993): "… developing countries were not able to ensure that the rules accommodated their realities" and that ‘rules applied uniformly are not necessarily fair because of the different circumstances of members’ [7].
As we walk seemingly blindly toward WTO accession, these issues must be reconsidered. Blind accession to the club (and it does appear to be so, if social media reports are true that our Chief Negotiator has not taken the time to read the documents that are central to negotiations) would be irresponsible and politically naïve at best and potentially seriously damaging to the country’s future at worst, given the overwhelming evidence that stage of development of an economy and the extent to which internal preparations have been made strongly correlate to the quantity and range of benefits enjoyed by that economy.
© Dr. S3Seymour
London, England
[1] http://www.heritage.org/research/reports/2000/08/the-benefits-of-free-trade-a-guide-for-policymakers
[2] Bagwell and Staiger 1988, p.22
[3] Liebeler and Knoll, 1990
[4] http://www.fair-trade-hub.com/definition-of-fair-trade.html
[5] http://www.fairtradeshoes.org/the-five-benefits-of-fair-trade/
[6] http://www.wto.org/english/thewto_e/coher_e/mdg_e/mdg_e.pdf
[7] Adapted from http://www.fpif.org/reports/wto_and_developing_countries
[1] http://saudiarabia.doingbusinessguide.co.uk/the-guide/legal/ 010219
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