International Inequality is Caused by a Lack of Free Trade, Not an Abundance of It

The idea of the global trade system being unequal is in my opinion the wrong view to take. The global system of trade is based upon liberalised free trade where nations and businesses can exchange goods without the issues of tariffs, quotas or heavy regulation. However the issue is that certain blocs of nations or individual nations have set up quotas which favour certain nations or regions against others, thus skewing a true free trade system and creating economic inequality. This is seen in instances such as the Banana Trade War and the lack of power of organisations like the International Monetary Fund to actually enforce free trade rules and stop unfair trade regulations that favour one region over another. Thus the question should not be whether the global trade system perpetuates inequality but rather that powerful nations or blocs have policies that favour one area and organisations that are meant to facilitate free trade don’t have the power or ability to do so. As has been seen with the rise of agricultural subsidies in many develops nations and regions, the idea of free trade becomes squeezed and many genuine competitors, such as those in the agricultural sector, are priced out of the global market as they cannot compete with these tariffs and subsidies. This regulation from nation to nation hampers free trade and doesn’t allow for genuine competition in a global marketplace, thus creating economic inequality as it hampers the growth and stops companies or businessmen from poorer economies invest in regions that have these regulations in place. To return to the original question I would address the idea of global free trade in relation to inequality. As has been noted by many organisations, the allowance of free trade in all national and regional markets would allow for mass investment into both developed and developing economies, bringing millions out of poverty in poorer economies in particular. This would then raise overall social mobility significantly, actually facilitating a lessening of inequality rather than exasperation of it.

As explained in the introduction, I believe the wording of this question is wrong in determining the true causes of inequality as it assumes that the global free trade system is itself solely responsible. Instead I think that it is the perpetuation of quotas and tariffs in the international market which facilitates inequality between developed and developing nations. It is well known that these trade barriers favour the few, in many cases richer farmers or producers, over the many, in this case the consumer. As is noted in the Library of Economics and Liberty, “Trade barriers benefit some people—usually the producers of the protected good—but only at even greater expense of others—the consumers”[1]. This issue is further seen in the context of the Banana Trade War, where Ecuador brought forth a genuine case of its bananas being priced out of European markets, as the EU had quotas on bananas produced in the Caribbean. This meant farmers and producers in Ecuador in affect lost money as their bananas are priced out, showing not only a lack of competition but a lack of free trade also, as was noted in the Financial Times, where it was “projected that banana exports to the EU from Latin American and other previously penalised producer nations would increase by 17 per cent in the wake of the settlement”[2] which shows that global competition would allow for more production and more benefits for the Ecuadorian economy. This isn’t the only case of the EU using subsidies to benefit one region over another. As of 2010, “One of the biggest subsidies was $223 million, given to the French sugar conglomerate Tereos, one of whose subsidiaries produces rum on France’s Indian Ocean territory of Réunion. France’s Saint Louis Sucre also received multimillion-dollar subsidies and the British sugar giant Tate & Lyle received hundreds of thousands of dollars”[3] showing the extent to which these massive EU subsidies that are regularly found in the agricultural sector are skewed in favour of large conglomerates, pricing out smaller farms and/or businesses in the sugar industry. Even large agricultural companies who operate outside of the EU have complained about the EU’s subsidisation of their agricultural market, with them noting “that they unfairly skew world markets and squeeze out producers who do not pay their local companies to grow crops”[4]. This protectionism thus doesn’t create a free marketplace or free trade, as it prices out smaller companies or even large non-European companies in relation to EU tariffs and quotas. Of course, this doesn’t just affect poorer, developing nations but also the consumers of many Western nations, where prices are higher because goods are subsidised, which facilitates inequality in developed nations as well. This was noted in the Banana Trade War where the United States argued that EU quotas on bananas from the Caribbean didn’t allow for consumer pricing to fall, as there was a controlled marketplace that stopped bananas from Ecuador and Hawaii from entering the EU market, which subsequently would’ve lowered prices of bananas for American consumers. This then is an example of not only economic inequality but also consumer inequality, as only richer European consumers can reap the benefits of these regulations. Overall, I would argue that it is not the global trade system that creates global inequality, but rather the barriers that impede true global free trade that create inequality. As the case studies have shown, barriers to free trade and competition only benefit richer consumers and producers, and facilitate inequality in the populations of both developing and developed nations. However, while this is a major reason for economic inequality, it is also the lack of representation of developing economies in international organisations such as the WTO and the weakness of these organisations to allow for free trade and remove barriers that further hampers free trade and creates inequality.

The continuing use of quotas and tariffs by powerful regional blocs such as the European Union and continued subsidisation of agricultural practices in most Western states shows the lack of power found in international bodies like the World Trade Organisation and the lack of representation of smaller, developing countries to push for true free trade on the international level. The continuation of regions and countries like the United States and the EU to subsidise to subsidise rich farmers shows the lack of power of international bodies to combat impediments to free trade and the global market. Aurelie Walker has stated in an article in the Guardian that “$47bn in subsidies paid to rich-country producers in the past 10 years has created barriers for the 15 million cotton farmers across west Africa trying to trade their way out of poverty” (Walker, A. 2011) which demonstrates the effect these subsidies have. The lack of power that the WTO has to combat these regulatory frameworks has also been noted by Walker, “the WTO failed to curb the speedy increase in the number of protectionist measures applied by G20 countries in response to the global economic crisis over the past two years”[5], thus further demonstrating that developing nations are losing out because of what are in effect protectionist policies being used by powerful Western countries to benefit rich producers. This then blunts the idea that the WTO actually enforces free trade, as it can’t even tackle anti-free trade laws and regulations. A particular case noted earlier that shows the WTO’s lack of power in these matters is the Banana Trade War. When Ecuador brought their case to the WTO, it wasn’t seen as particularly important issue. It was only when Ecuador gained the support of the US and American companies involved in banana production who helped bring sanctions on EU goods as a result of the EU’s quotas on bananas that the WTO took notice and negotiated something of a better deal for the American companies and Ecuadorian farmers. However the deal that was eventually brought about was hardly pro-free trade, as it only reduced the EU’s quotas on Caribbean bananas from 175 tonnes to 115 tonnes. This rather pathetic deal shows the lack of ability in enforcing free trade that the WTO has. Outside of this inability to enforce a reduction in Western tariffs, the WTO has a further problem in empowering developing nations to push for better trade deals that actually create a competitive free trade environment. The decision-making process of the WTO is seemingly favoured towards the developed nations. The processes involved are meant to be fair and give each nation equal say over trade decisions, however in reality when decisions are pushed through in general meetings that have opposition from developing nations, they are deliberated in smaller committees such as the Committee on Trade and Development or a working group. Within these committees the major Western nations and regions (US, Japan, Canada and EU) have full representation, while developing nations, as noted by Bhagirath Las Dal, “hardly five to ten get a place in these informal discussions and negotiations. Thus the scale is very much tilted against the developing countries, not only by way of economic and political weight, but also, quite ironically, by the weight of numbers”[6] entailing that the decision-making process of the WTO is heavily in favour of Western nations and is dominated by their decisions. To combat this I believe the WTO should have a weighted voting system as is seen in other organisations such as the IMF and it also needs to truly enforce the idea of free trade. Only free trade can actually empower developing nations and the continuing use of regulations that hamper free trade means that developing nations will never have a fair chance in the global market, which is against the true ideals of free trade and the free market. This then brings me round the original question of whether the global free trade system is perpetuating global economic inequality. It certainly isn’t, instead it is the dominance of Western power in decision-making of free trade deals and their continuing use of tariffs and quotas that punish poorer producers and developing countries thus causing the inequality we see in the international system.

So far I have diverted the original question because I believe its predication on the idea that the global free trade system is or isn’t creating economic inequality is the wrong premise to come from. However, now I will go back to this original question to argue that a global free trade system doesn’t facilitate inequality and that it instead allows for developing countries to become more equal with their developed counterparts. When true free trade can be brought about, it brings untold benefits to developing countries. A basic definition of what trade does is provided by the World Bank, “Trade allows people to buy goods and services that are not produced in their own countries. In addition, the money countries receive from exports helps determine how much they can afford to spend on imports and how much they can borrow from abroad”[7] meaning that a free trade system would benefit a developing nation, as it would have access to goods and services outside their national boundaries. This would then create a vibrant economic environment where goods and services from all over the world could go into these developing nations and that nation’s goods and services could be traded at an international level. The World Bank have also stated that “Liberalizing trade would remove all tariffs and quotas, and allow goods and services to sell only for what they are really worth. This would help poor countries enter new markets and sell their goods. If WTO ministers could agree to slash tariffs in agriculture and manufacturing, the resulting changes in trade could lift more than 140 million people out of poverty”[8] which further illustrates that in a true free trade system poverty can be effectively diminished and empower individual nations, removing them from the dependency on international aid and welfare. This freeing of trade not only helps end poverty, it actually helps end economic inequality and raise social mobility for poorer populations. In a document published by the UK government, evidenced is presented that shows the liberalising of trade is coupled with a raise in economic standards. One statement, “Evidence from a broad sample of OECD countries indicates that an increase of 10% in trade openness translates into an increase of around 4% in income per person”[9] shows that income in these areas goes up when trade liberalisation is done by 10%. This correlation is even more significant when known that developing countries significantly outweigh developed countries and that as a result if trade were liberalised even minimally global economic inequality would be reduced significantly, as more members of poorer populations would be earning better wages. Overall, the global trade system doesn’t in any way perpetuate inequality, rather it facilitates a huge amount of equality between developing and developed countries and allows for capital to flow from these developing nations and allow for cross-nation investment that benefits both developed and developing economies and populations.

The idea that a global free trade system causes inequality is fairly refuted. As many statistics and evidence has shown, the more trade is liberalised, the more developing economies benefit as they gain investment in their economies and individuals from developing nations can invest in developed economies. Rather the problem is that we don’t have a truly free trade system, as it is littered with huge quotas and tariffs that hinder the ability for businesses and entrepreneurs from developing economies to get their products and capital into developed nations markets. This is particularly seen in the agricultural sector, where the EU massively subsidises rich farmers and producers and in America where the regular Farm Bills usually benefit the richest corporate farmers. As a result of this government regulation, poorer farmers in regions such as Africa are unable to get their products into these marketplaces as they priced out, which further facilitates inequality. Thus, it is not free trade that creates economic inequality but rather government interference in trade and the marketplace. As Friedman says, “What we urgently need, for both economic stability and growth, is a reduction of government intervention, not an increase”.

[1] Library of Economics and Liberty. (). Barriers to Trade. Available: http://www.econlib.org/library/Topics/HighSchool/BarrierstoTrade.html. Last accessed 16th Feb 2014

 

[2] Chaffin, J. (2009). End of banana wars brings hope for Doha. Available: http://www.ft.com/cms/s/0/6a8e0ba4-e9e2-11de-ae43-00144feab49a.html. Last accessed 14th Feb 2010.

 

[3] Walt, V. (2010). Even in Hard Times, E.U. Farm Subsidies Roll On. Available: http://www.globalpolicy.org/social-and-economic-policy/international-trade-and-development-1-57/agricultural-subsidies/50555-even-in-hard-times-eu-farm-subsidies-roll-on.html?itemid=id#1057. Last accessed 14/01/14.

 

[4] Walt, V. (2010). Even in Hard Times, E.U. Farm Subsidies Roll On. Available: http://www.globalpolicy.org/social-and-economic-policy/international-trade-and-development-1-57/agricultural-subsidies/50555-even-in-hard-times-eu-farm-subsidies-roll-on.html?itemid=id#1057. Last accessed 14/01/14.

 

[5] Walker, A. (2011). The WTO has failed developing nations. Available: http://www.theguardian.com/global-development/poverty-matters/2011/nov/14/wto-fails-developing-countries. Last accessed 15th Feb 2010.

 

[6] Lal Das, B. (2010). Strengthening Developing Countries in the WTO. Available: http://www.twnside.org.sg/title/td8.htm. Last accessed 15th Feb 2010.

 

[7] World Bank. (). Trade. Available: http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,contentMDK:23262073~pagePK:51123644~piPK:329829~theSitePK:29708,00.html. Last accessed 16th Feb 2014.

 

[8] World Bank. (). Trade. Available: http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,contentMDK:23262073~pagePK:51123644~piPK:329829~theSitePK:29708,00.html. Last accessed 16th Feb 2014.

 

[9] BIS (2011). Trade and Investment for Growth. London: The Stationery Office Limited. p15.

 

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