Beggaring Thy Neighbors

Poorer countries no longer have rich ones to blame for inequalities in trade. Now they’re the ones pulling the strings.

BY GREG RUSHFORD | MARCH 25, 2013

 

The miseries inflicted by colonial powers on Africa, Asia, and Latin America are undeniable to economic historians. Borders were drawn that made no economic or ethnic sense; little was invested in the human capital or the institutional structure needed for growth and stability. And while the sun set on the western colonial empires more than a half century ago, the leaders of what are today called developing countries all have reason to appreciate William Faulkner’s line: “The past is never dead. It’s not even past.”

One living legacy is a crazy quilt of trade preferences and protection buttressed by a mix of geopolitics, nostalgia, and rich-country interest group protectionism — distortions that undermine growth in export-oriented agriculture and make it tough for women in some of the poorest countries in the world to sew their way out of poverty. Indeed, most developing country leaders view rich-country protectionism as the cause of the deadlock in the World Trade Organization’s so-called Doha Round of negotiations aimed at sweeping trade liberalization.

The advanced economies do indeed deserve a disproportionate share of the blame. But as economist Simon Evenett of Switzerland’s University of St. Gallen has observed, “the beggar thy neighbor game is not confined to North-South trade.” The African Development Bank recently reported that only about one-tenth of the continent’s total trade is neighbor-to-neighbor. The numbers for Latin America and Asia are higher (22 percent and 50 percent respectively). Poor countries complaining about commerce-impeding barriers would be well advised to check the mirror to see where their troubles lay.

Most levies imposed by America and Europe have fallen to just 2 to3 percent, while a handful of newly rich countries led by Hong Kong and Singapore have dispensed with tariffs on virtually everything.

Now consider West Africa’s Benin, one of the poorest countries in the world (GDP per person in terms of purchasing power: $1,700). Benin’s meager trade and living standards are held back by agricultural and industrial tariffs averaging 14 and 12 percent respectively. And it’s pretty much the same throughout the poorer corners of the world. In Cameroon (GDP per capita: $2,300), farmers hide behind agriculture tariffs averaging 22 percent, while manufactured goods are hit with 12 percent import levies. The parallel figures for Burundi (GDP per capita: $600) are 20 percent and 11 percent; for Gambia (GDP per capita: $1,900) 17 percent and 16 percent.

India’s economic reforms, which included sharp reductions in industrial tariffs (to 10 percent) are widely credited for the quadrupling of average living standards over the last two decades. But India still protects food imports with 31 percent average tariffs, with peaks up to 56 percent (for coffee and tea).

In the Doha negotiations, the rich countries have agreed to allow Benin, Burundi, and the rest of the world’s poorest countries to maintain their tariffs. (Perhaps not surprisingly: They collectively represent a very modest market for western exports.) But more muscular emerging market economies — notably India and South Africa — have threatened to make further tariff reform a deal-breaker. In fact, they are demanding the right to raise tariffs sharply under some circumstances.

Arguably, the greater barriers to intra-continental trade (especially in Africa) are bureaucratic and logistical. To carry goods from Kigali, Rwanda to Mombasa, Kenya, trucks “have to negotiate 47 roadblocks and weigh stations,” the African Development Bank reported in 2012. At the time, the Bank also noted, there was usually a 36-hour wait at the South African border for trucks to cross the Limpopo River into Zimbabwe. It was much the same story getting through customs from Burkina Faso into Ghana, from Mali into Senegal — actually, from just about anywhere to anywhere in Africa.

Take your pick as to which misery is worst: The mud-plagued, potholed roads that drive up the costs of doing business, or the border checks with corrupt customs officials seeking alms.  Paying bribes is so common that the African Development Bank report published a table listing the borders where officials are the most corrupt (Ivory Coast-Mali seems to be the prizewinner).

African reformers freely acknowledge such problems. Nigeria’s trade minister, Olusegun Aganga, has publicly lamented that “billions of dollars” and “millions of jobs” have been lost due to the “the fragmentation of Africa in terms of trade.” And some progress is being made. The World Bank noted that Ghana and Nigeria are discussing cuts in bilateral tariffs and otherwise making their cross-border trade flows more efficient. The New Times, a Rwanda newspaper, recently celebrated the fact that roadblocks between Kenya, Rwanda, Uganda, and Burundi had been pared from 30 to 15 (which are still way too many).

Meanwhile, there is still a Sisyphusian quality to poor-on-poor trade disputes, with modest advances matched by threats of retrenchment. South Africa, which by virtue of its relative affluence and stability is the economic leader of southern Africa, has been railing against cheap chickens from Brazil, metal screws from China, and even artificial turf from rival soccer competitors India, Thailand, and Malaysia. When we do these things, we are only following “common sense,” and not indulging in “protectionism,” Pretoria officials insist.

“Common sense” is apparently infecting middle-income countries not above the impulse to close the door behind them. Argentina is now considering stiff tariffs on plywood from Brazil and China. Turkey is in the process of imposing tax hikes on terephthalic acid (useful stuff that goes into plastic bottles and clothing) from more than a dozen trading partners including Indonesia and Brazil. Malaysia has imposed “antidumping duties” on newsprint from the Philippines and Indonesia. For their part, the Indonesians are in the process of “safeguarding” their domestic sorbitol industry (a versatile sweetener) against competitors in Malaysia, India — and curiously, communist North Korea, which isn’t known for offering sweet deals to anyone.

The ongoing phenomenon of quasi-colonial economic ties has also been a major source of tension — and a major impediment to a Doha-enabling compromise. Countries that were previously extorted for their resources are now receiving preferential treatment from their former colonizers, much to the chagrin of others. Ecuador, a major banana producer, has complained about preferential trade deals France has given its former colonial banana suppliers, notably Cameroon. Mauritius has railed against European farm subsidies, even as it maneuvered to retain its preference to export sugar to the European Union.

Camps are also emerging as blocs of developing countries pit themselves against others. When the Doha talks last went into hibernation (2008), Uruguay and Paraguay were complaining that Indian-led demands, on behalf of 44 poor countries, for continued agricultural protectionism would cripple their exports to Latin neighbors. On the opposite end, Cambodia and Bangladesh’s efforts through Doha to curb the United States’ 15 and 17 percent respective tariff on their garment trade are facing stiff opposition from African countries that already enjoy duty-free access to U.S. apparel markets. 

Economists speak in unison on relatively few issues — one of them being the critical role open trade has played in bringing a billion people out of poverty in the last two decades. And it’s hard to imagine that, without more of the same, another billion will be given the means to live above subsistence in the next two. All the more ironic, then, that poor countries are way too often part of the problem in negotiating trade liberalization, rather than part of the solution. As Pogo, the once-celebrated bard of the newspaper comic strip world put it: “We have met the enemy, and he is us.”

Trade aficionados may be treated to some positive spin concerning the Trans-Pacific Partnership negotiations on the sidelines of the forthcoming G-20 Summit, which will be held in Los Cabos, Mexico on June 18-19. President Barack Obama and Mexico’s president, Felipe Calderon, seem to be ready to announce that Mexico will join the TPP talks. There is a possibility — not considered a probability, as this article went to press — that Canada and Japan would also be invited to join the negotiations. More likely, Obama will say that while both Tokyo and Ottawa are not quite ready to participate, they are making progress and he looks forward to welcoming them into the TPP talks as soon as they are ready, hopefully by the end of this year. The White House spinmeisters will portray whatever happens in Los Cabos as another illustration that the US continues to exercise leadership aimed at expanding trade flows in the fastest-growing part of the world. It is safe to predict that there will be repeated references to the exciting TPP success story from candidate Obama until the Nov. 6 presidential election.

[As this article went to press, all that seemed clear was that the White House was positioned to welcome the Mexicans into the TPP next week, or at least before Mexico’s presidential elections on July 1. Much thought in the administration seemed to be focused on how to explain the inevitable awkward questions as to why Canada, like Mexico a Nafta member, would be excluded. White House economic adviser Michael Froman was believed prepared to play a blame game, portraying the Canadians (and Japanese) as lacking the political will to negotiate a fast-moving, high-standard 21st century TPP deal. At a recent appearance before an audience of Washington insiders convened by the influential Center for Strategic and International Studies, Froman spoke of trade “tensions” with both Ottawa and Tokyo, but (unconvincingly) denied that any decision to keep them out had been made. A spokeswoman for U.S. Trade Representative Ron Kirk declined to comment. There there also seemed to be quite a bit of intense behind-the-scenes high-level jockeying going on this week, raising the possibility that Prime Minister Stephen Harper and Japanese PM Yoshihiko Noda were perhaps privately-but-firmly going to take Obama to the mat over their TPP accession — hoping to avoid their humiliation in Los Cabos. Of course, both the Canadians and Japanese have been widely criticized for foot-dragging on trade liberalization in recent years. Still, the buzz around town has focused on the question as to whether the Obama White House really has earned the right to decide whether other countries can be trusted to deliver on enhanced market-opening moves. Especially in the TPP context, a perceived American negotiating intransigence is widely believed to explain why the TPP negotiations are not on track to be concluded this year, as previously promised.]

Regardless of how the issue of possible TPP participation involving the Mexicans, Canadians and Japanese plays out at the G-20 Summit, or perhaps soon thereafter, there are some fundamental concerns about where the TPP process is heading that haven’t received the public attention they seem to deserve. Serious diplomatic observers say privately that while the U.S. is moving to strengthen its military and security ties throughout Asia, they worry that America’s economic influence in the region could be on the decline.

Let’s take a closer look at why the worries about the U.S. approach to the TPP is raising such geo-political concerns.

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