International Trade

International Trade
In low-income countries, openness to international trade is indispensable for rapid economic growth. Indeed, few developing nations have grown rapidly over time without simultaneous increases in both exports and imports, and virtually all developing countries that have grown rapidly have done so under open trade policies or declining trade protection. India and China are the best recent examples of countries that started with relatively closed trade policy regimes in the 1980s but subsequently achieved accelerating growth while opening up their economies. From the mid-1950s through the mid-1970s, industrial countries also enjoyed rapid growth while dismantling their high post-World War II trade barriers and embracing new technologies.

Japan offers the most dramatic example, but countries such as Denmark, France, Greece, Italy, the Netherlands, Norway, and Portugal exhibited similar patterns. Openness to trade promotes growth in a variety of ways. Entrepreneurs are forced to become increasingly efficient since they must compete against the best in the world to survive. Openness also affords access to the best technology and allows countries to specialize in what they do best rather than produce everything on their own.

The fall of the Soviet Union was in no small measure due to its failure to access cutting-edge technologies, compete against world-class producers, and specialize in production. Even as large an economy as the United States today specializes heavily in services, which account for 80 percent of total U.S. output. Of course, openness to trade is not by itself sufficient to promote growth—macroeconomic and political stability and other policies are needed as well—so some countries have opened up their markets and still not seen commensurate increases in economic growth. That has been particularly true of African countries such as the Ivory Coast during the 1980s and 1990s. But such instances hardly disprove the benefits of openness.

Economists do not understand the process of growth well enough to predict precisely when the opportunity will knock on a country’s door. But when it does knock, an open economy is more likely to seize it, whereas a closed one will miss it. Even globalization skeptics such as economists Dani Rodrik and Joseph Stiglitz recognize this point; neither chooses trade protection over freer trade. “Rich Countries Are More Protectionist Than Poor Ones” Not even close. On average, poor countries have higher tariff barriers than high-income countries. For instance, rich nations’ tariffs on industrial products average about 3 percent, compared to 13 percent for poor countries. Even in the textiles and clothing sectors, tariffs in developing nations (21 percent) are more than double those in rich countries (8 percent, on average). And while textiles and clothing are subject to import quotas in rich economies, such restrictions are due to be dismantled entirely by January 1, 2005, under existing World Trade Organization (WTO) agreements. Of course, not all poor countries are equally protectionist; some are even more open to trade than rich nations. For many years now, Singapore and Hong Kong have been textbook cases of free-trading nations.

Likewise, middle-income economies such as South Korea and Taiwan are not significantly more protectionist than developed countries. But overall, the countries that stand to benefit most from greater competition and openness are those nations that display the highest protection, including most countries in South Asia and some in Africa. The highest tariffs—or “tariff peaks”—in rich countries apply with particular strength to labor-intensive products exported by developing countries. In Canada, the United States, the European Union (EU), and Japan, product categories with especially high tariff rates include textiles and clothing as well as leather, rubber, footwear, and travel goods. But developing countries themselves are often quite zealous in protecting their markets from goods exported by other poor nations. Labor-intensive products such as textiles, clothing, leather, and footwear, which developing countries also export to each other, attract high duties in countries such as Brazil, Mexico, China, India, Malaysia, and

Thailand.

Traditionally, rich economies such as the United States and the EU have been quick to engage in antidumping initiatives—erecting trade barriers against countries that allegedly export goods (or “dump” them) at a price below their own cost of production, however difficult it may be to quantify such a charge. But developing countries have been learning the same tricks and initiating antidumping measures of their own, and now the number of such actions has converged between advanced and poor economies.

For example, according to the “WTO Annual Report 2003,” India now ranks first in the world in initiating new antidumping actions, and third (behind the United States and the EU) in the number of such actions currently in force. Freer Trade Increases Poverty in the Third World Historically, countries that have achieved large reductions in poverty are generally those that have experienced rapid economic growth spurred in significant measure by openness to international trade. Newly industrialized economies such as Hong Kong, Singapore, South Korea, and Taiwan have all been open to trade during the past four decades and have been entirely free of poverty, according to the dollar-a-day poverty line, for more than a decade.

By contrast, during the 1960s and 1970s, India remained closed to trade, grew approximately 1 percent annually (in per capita terms), and experienced no reduction in poverty during that period. Trade helps produce rapid growth, and rapid growth helps the poor through three channels. First, it leads to what Columbia University economist Jagdish Bhagwati calls the active “pull-up” rather than the passive “trickle-down” effect—sustained growth rapidly absorbs the poor into gainful employment. Second, rapidly growing economies can generate vast fiscal resources that can be used for targeted anti-poverty programs.

And finally, growth that helps raise incomes of poor families improves their ability to access public services such as education and health. The current impression that the freeing of trade has failed the world’s poor is partially rooted in disputable “official” World Bank poverty figures. The bank reports that though the proportion of the poor in developing countries declined from 28.3 percent in 1987 to 23.2 percent in 1999, increased population has left the absolute number of poor unchanged at 1.2 billion. And since that period also witnessed further freeing of trade, some conclude that trade has failed the poor. Yet, independent research by economists Surjit Bhalla in New Delhi and Xavier Sala-i-Martin at Columbia University has persuasively shown that the absolute number of poor declined during 1987–99 by at least 50 million and possibly by much more