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Is Trade really an Engine for Growth and Development for Developing Country?

ARNAB GHOSH09/MBA/56

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Trade occurred since the time of the Stone Age when people exchanged goods and commodities by means of barter trade. However, no currency was involved until later time when it was used as media of transaction.

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Expanded at an accelerating rate since the end of World War II..

Over the past 55 years’ time between 1950 and 2004, global trade increased 145 times at a rate of 2.6% per year.

The trade has grown even faster over the recent 5-year period (2000-2004), increasing from US$13,069 billions to US$18,220 billions in 2004 at a rate of 9% p.a. (UNCTAD 2005).

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The global trade grew faster than the overall economy during the time, thus creating a huge amount of money flowing around the globe and generating a lot of employment.

Developing countries, open their economies more for international trade as evidenced from the increased contribution of trade to GDP from 23% to 38% during 1985-1997

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Main contributors to an upward trend of the global trade growth

Advances in transportation, communication and information technologies that helped facilitating trade, reducing transaction and transportation costs, and increasing economy of speed and efficiency which lead to an increase in trade.

Improvements in trading environment of negotiation and formation of multilateral, regional and bilateral trade agreements which reduced tariff, non-tariff barriers, and trading costs; increased competitiveness; and expanded trade.

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Disproportionate Gains from Trade

Trade has had a significant role in bringing about growth and development to the global economy.

It was the developed countries which occupied more than 65% of total world trade volumes in 2002 reaping benefits from international trade.

Developed countries obtained benefits and proportionate gains from trades mostly due to better terms of trade and efficiency gains.

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Disproportionate gains, and for some a welfare loss, were found to generally fall upon the developing countries as results of the combined effects of limited market access, domestic and export subsidies put in place by the developed countries, unfair competition and other trade/non-trade barriers.

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But today the scenario is something different...

In economics, BRIC (typically rendered as "the BRICs" or "the BRIC countries" or known as the "Big Four") is a grouping acronym that refers to the related countries of Brazil, Russia, India, and China.

The acronym was coined by Jim O'Neill in a 2001 paper entitle "The World Needs Better Economic BRICs" . The acronym has come into widespread use as a symbol of the shift in global economic power away from the developed G7 economies toward the developing world..

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From the research study of Goldman Sachs…

Since BRIC countries are developing rapidly, by 2050 the combined economies of the BRICs could eclipse the combined economies of the current richest countries of the world. The four countries, combined, currently account for more than a quarter of the world's land area and more than 40% of the world's population.

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There are some indications that the "four BRIC countries have been seeking to form a 'political club' or 'alliance'", and thereby converting "their growing economic power into greater geopolitical clout". On June 16, 2009, the leaders of the BRIC countries held their first summit in Yekaterinburg, and issued a declaration calling for the establishment of a multipolar world order..

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MULTIPOLAR WORLD ORDER

Polarity in international relations is any of the various ways in which power is distributed within the international system.

It describes the nature of the international system at any given period of time.

One generally distinguishes four types of systems: unipolarity (Unipolarity in international politics is a distribution of

power in which there is one state with most of the cultural, economic, and military influence.)

bipolarity (Bipolarity is a distribution of power in which two states have the majority of economic, military, and cultural influence internationally or regionally),

tripolarity, and multipolarity, for four or more centers of power (Multipolarity is a

distribution of power in which more than two nation-states have nearly equal amounts of military, cultural, and economic influence).

The type of system is completely dependent on the distribution of power and influence of states in a region or internationally.

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BALANCE OF POWER

In international relations, a balance of power exists when there is parity or stability between competing forces. As a term in international law for a 'just equilibrium' between the members of the family of nations, it expresses the doctrine intended to prevent any one nation from becoming sufficiently strong so as to enable it to enforce its will upon the rest.

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"BoP" is a central concept in neorealist theory. Within a balance of power system, a state may choose to engage in either balancing or bandwagoning behavior. In a time of war, the decision to balance or to bandwagon may well determine the survival of the state..

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Measuring the Power Concentration..

The formula was developed by J. David Singer et al. in 1972.

Nt = the number of states in the great power system at time t Sit = the proportion of power possessed by state i at time t (must be

a decimal figure) S = the proportion of power possessed i = the state of which the proportion of control over the system's

power is being measured t = the time at which the concentration of resources (i.e. power) is

being calculated

= the sum of the proportion of power possessed by all states in the great power system

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The closer the resulting concentration is to zero, the more evenly divided power is. The closer to 1, the more concentrated power is..

A result between 0.4 and 0.5 usually indicates a unipolar system, while a result between 0.2 and 0.4 usually indicated a bipolar or multipolar system. Concentration can be plotted over time, so that the fluctuations and trends in concentration can be observed.

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Examples ..

The most recent example of a unipolar world has been one dominated by the United States since 1991, in the aftermath of the collapse of the Soviet Union

In the Cold War, most Western and democratic states would fall under the influence of the USA, while most Communist states would fall under the influence of the USSR. After this, the two powers will normally maneuver for the support of the unclaimed areas.

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Nonpolarity.. Nonpolarity is an international system

with numerous centers of power but no center dominates any other centre. Centers of power can be Nation-states,corporations, non-governmental organizations, terrorist groups, and such. Power is found in many hands and many places

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The term “New World Order" has been used to refer to any new period of history evidencing a dramatic change in world political thought and the balance of power. Despite various interpretations of this term, it is primarily associated with the ideological notion of global governance only in the sense of new collective efforts to identify, understand, or address worldwide problems that go beyond the capacity of individual nation-states to solve.

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The BRIC thesis.. “Dreaming with BRICs: The Path to 2050”

Paper published in 2003 by Goldman Sachs.. China's economy will surpass Germany in the next few years,

Japan by 2015, and the United States by 2041. India's growth rate will be the highest—not China's -- and it

will overtake Japan (today the world's second-largest economy) by 2032.

BRICs’ currencies could appreciate by 300% over the next 50 years, providing a big tailwind for investors in BRIC assets.

Taken together, the BRICs could be larger than the United States and the developed economies of Europe within 40 years.

By 2025, BRICs will bring another 200 million people with incomes above $15,000 into the world's economy. That's equal to the combined populations of Germany, France and the United Kingdom

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Net Welfare Gain and Loss of FTA

Many developing countries still have been eagerly pursuing to enter into trade blocs and other economic cooperation agreements, individually or collectively, with developed countries..

Under the negotiation process: ASEAN-India FTA, ASEAN-USA FTA, Japan-Thailand FTA (JTEPA), Thailand-USA FTA, Malaysia-USA FTA, Japan-Philippine FTA, Malaysia-Japan FTA, Korea-USA FTA, and Thailand-Pakistan FTA, etc.

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There is no definite answer as to why developing countries insist on entering into such trade agreements, notwithstanding possible negative consequences.

It can be argued that developing countries affirmingly believe in the laissez-fair economic philosophy that trade, eventually, is welfare-enhancing

It is also believed that they wish to substitute the bi-lateral or sub-regional FTAs for the seemingly unsatisfactory multilateral-trade negotiations under the auspice of WTO in expectation that they, individually, can gain better access to developed countries’ markets through a better terms of trade.

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It can also be said that these developing countries wish to be the first to reap the benefits from trades with a larger developed countries’ market in hoping that the advantage from trade will offset the disadvantage.

The reality is that the trend toward trade liberalization and economic integration between developed and developing countries are real and still continuing.

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The Need for Quantitative Evaluation of FTA

Trade liberalization could be either/both welfare-enhancing and/or welfare-reducing, i.e., FTA could generate either net welfare gain or loss to any individual country, particularly a developing country, when it enters into an agreement with a developed country..

Quantitative assessment of values ..

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As trade agreement also touches upon social and health aspects of the country, lacking a careful balance, it could provoke social disagreements and controversies within that society.

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Negative Effects…

Case of a negative impact of the trade practice by one country on economic welfare of another is the US cotton subsidy program which has caused world cotton prices to significantly decrease, harming cotton growers and other developing nations who have comparative advantage in exporting cotton..

The EU sugar production subsidy regime allows EU sugar producers to produce and export sugar at below total cost of production, an actionable form of export subsidization allowed under the WTO Subsidies Agreement.

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Consequently both cases were brought up to WTO Dispute Settlement Body by Brazil in 2005 (United States Subsidies on Upland Cotton, WT/DS 267/AB and European Communities Export Subsidies on Sugar, WT/DS 283/AB), which ruled against the practices. However, only EU has agreed to comply with the decision, whereas the US has, so far, refused to abolish this unfair trade practice yet.

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In particular, when a comprehensive FTA proposal involves more than liberalization of trade in goods and/or services sectors, i.e., if it includes measures and agreements involving e.g. investment, intellectual property rights, S&T and other aspects of economic cooperation, a greater care is even needed to study, assess and quantify not only the likely impacts of the proposed FTA on the country’s economics but also on the society, culture, environment, natural resources, biodiversity, food, health, and most importantly, the individuals as a whole.

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It should not be suggested that a developing country should seek to enter into the FTA if the study shows that the advantages from the FTA is less than the disadvantages..

In this regard, trade will not be an engine for growth and development of developing country.

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This necessary and helpful information could be obtained from a transparent and accountable research on quantitative economic analysis and assessment which transparency and accountability are derived from subjecting the research findings to public participation and recommendation

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Finally, it is vital that this information be taken into consideration before implementing the FTA.

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Here’s more….

India is taking proactive measures to conclude bilateral trade agreements with the European Union, Japan and Malaysia, as the future of the Doha round of multilateral trade talks look uncertain because of the protectionist stance of the developed countries. "We are making efforts to conclude the talks as soon as possible. I will meet my counterparts from the EU, Asean countries, Japan and Malaysia to speed up the process," Commerce and Industry Minister Anand Sharma has said.

Sharma is scheduled to meet key ministers of Asean countries in Vietnam on Aug 26 and 27.

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India signed trade in goods agreement with the Association of South-East Asian Nations (Asean) last year. The agreement that came into force from the January 1, 2010, covers tariff liberalization between the sides.

However, out of 10 nations that form Asean, only four - Vietnam, Singapore, Thailand and Malaysia - have operationalised the agreement so far.

India targets to increase its trade with Asean countries to $70 billion by 2012 from $43.5 billion in 2009-10.

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Sharma said India would continue to look for new trading partners in a bid to reduce dependence on the conventional partners like the US and European countries.

"Diversification of trade is essential. This has drawn more attention because of the developed countries," he added.

Sharma will be heading an official delegation to Vietnam to review progress on India-Asean Services and Investment negotiations. During his Vietnam visit, Sharma is also scheduled to meet Japanese trade minister Masayuki Naoshima, EU Trade Commissioner Karel De Gutch and Malaysian Minister for International Trade and Investment Mustapa Mohamed to review the progress made towards India-Japan Comprehensive Economic Partnership Agreement (CEPA), India-EU Trade and Investment Agreement and India-Malaysia Comprehensive Economic Cooperation Agreement (CECA) negotiations respectively.

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THANK YOU