All Talks, No Action

Forget about the stalled Doha round negotiations -- developing countries can do plenty to fix their trade restrictions without the World Trade Organization's help.

BY CHARLES KENNY | APRIL 18, 2011

The Doha round of World Trade Organization talks is teetering once again on the edge of total collapse, about to miss yet another absolute and final deadline for an agreement. Last month, Director-General Pascal Lamy beseeched members of the WTO's Trade Negotiations Committee to "reflect on the consequences of failure," especially for "the smaller and least-developed [member countries] which are more dependent on an improved set of global trade rules."

But, in fact, there are plenty of incredibly valuable trade reforms that poor countries can carry out without a global agreement. There are a range of trade barriers in place in developing countries that don't make sense even to those who like tariffs and quotas to support industrial development. With little local political opposition to overcome in these cases, there's no need for a WTO-style international grand bargain to push them through. And if they re-engineer their tariffs and quotas to ensure a maximum variety of goods at home, countries with small economies will do an immense service to their citizens.

Basic trade textbooks harp on about comparative advantage, the idea that countries are relatively more efficient at producing certain types of goods because of the comparative cost of things like labor and capital, and that this is what drives trade. It's the theory most commonly trotted out to justify trade agreements, among other things. But international trade is actually much more complicated than that. The nature and benefits of global trade flows are increasingly determined by maximizing the variety of goods, not the relative efficiency of their production.

In 2004, New York Federal Reserve economists Christian Broda and David Weinstein calculated that there had been a fourfold growth in the varieties of goods imported into the United States between 1972 and 2001. In 1971 the United States imported 7,731 different goods (cheese, sports footwear, cars), each from an average of about 10 countries. By 2001 it imported 16,390 different goods, each from an average of 16 countries. The United States also exported a lot of the types of goods it was importing, and many of the new trade relationships involved importing the same type of product from a second or third country -- yet consumers still benefited from more choice. Just the impact of all this extra variety raised real income in the United States by an equivalent of 3 percent.

But economies smaller than that of the United States -- that is, everyone else -- suffer from more limited import variety. They don't just import fewer goods -- they import fewer different kinds of goods. Each doubling of an economy's size involves roughly a 27 percent rise in the variety of its imported goods.

Stanford University economist Paul Romer provided an explanation for this phenomenon 17 years ago. There is a fixed cost to trade, he explained -- whether you're importing 1,000 pairs of running shoes or just one, you still have to find a supplier, figure out how to pay it, and navigate the complexities of shipping, customs, and, most importantly, local regulatory and tax rules. That makes it simply uneconomic to try to import many goods for which there aren't a lot of potential customers with a strong demand -- and ability to pay -- for the product. Romer pointed out that raising tariffs further increased the fixed costs of importing and would thus further limit the variety of goods imported. He suggested, as a result, that a broad-based 10 percent import tariff might have an impact on the purchasing power of consumers in a small country equivalent to a 20 percent reduction in national income.

FABRICE COFFRINI/AFP/Getty Images

 

Charles Kenny is a senior fellow at the Center for Global Development, a Schwartz fellow at the New America Foundation, and author, most recently, of Getting Better: Why Global Development Is Succeeding and How We Can Improve the World Even More. "The Optimist," his column for ForeignPolicy.com, runs weekly.

MARTY MARTEL

9:37 AM ET

April 19, 2011

Why developing countries can’t allow unfettered imports

Being a Westerner, obviously it is hard for Charles Kenny to understand why developing countries don’t allow unfettered imports.

Besides taking away the jobs of their domestic industries and labor intensive products, developing countries do NOT have unlimited foreign exchange reserves to sustain unfettered imports.

What happens if a developing country imports more than it exports? The value of its currency falls since no other country wants the worthless currency of that country. Then developing countries have to ask for foreign aid to support their currency. Such aid comes with strings attached and developing countries loose control over their economies to foreigners.

It is better not to support unfettered imports than to loose control over one’s economy, so ‘NO Thanks, Mr. Kenny’.

 

BIGRICH

1:15 AM ET

April 20, 2011

As a wealthy Zambian I see no

As a wealthy Zambian I see no problem with lowering trade barriers so that my new TV is cheaper. However, in a society where the men spend a disproportionate amount of the family income on their pursuits at the expense of the family's I foresee a problem with allowing greater access to luxury goods. People can be free to make their own choices but when it is between buying a TV and paying for digital television(widely available and used in Zambia) and sending your daughter to school I think there should be no choice, she must go to school.
Of course we could make education free but that would require funds for government and how do they raise those funds in economies that have very few exports and limited internal production of consumer goods? They tax imports (its known as a gatekeeper state) to raise revenue. This is normally stolen and mismanaged but public funds would be abused with or without tariffs and we would be a lot worse off without them.
Obviously taxing imports such as vaccines is a bad thing, but only when the biggest importers are not government agencies(government run healthcare sometimes means government procures the goods and doesn't charge itself) or aid outfits(normally given some form of exemption); the private sector is really a very small contributor to African healthcare.
As for how well thought out our tariffs are, I would guess that most Zambians, or fellow Africans, would not want to buy a solar powered lamp even after the benefits are explained-the men aren't responsible for gathering wood and it is a large proportion of their cash incomes even without tariffs. Lets say the light costs $30 and your yearly cash income is $150; why pay one fifth of your income when you never have to pay for wood? Let the rich people(like me) pay $20 extra dollars for a solar panel and hopefully $2 will be spent on ARVs by the government.
I am all for refining our tariffs and removing many unneccesary tariffs but we need to distance ourselves from unfettered trade as it lost us tens of thousands of jobs(and in this case it is no lie as we had no other industries or services to fall back on like the US after Nafta). So no, I reject your kind hearted advice.

 

ASJIBRASDA

2:56 AM ET

May 11, 2011

Obviously taxing imports such

Obviously taxing imports such as vaccines is a bad thing, but only when the biggest importers are not government agencies(government run healthcare sometimes means government procures the goods and doesn't charge itself) or aid outfits(normally given some form of exemption); the private sector is really a very small contributor to African healthcareonline live tv.we could make education free but that would require funds for government and how do they raise those funds in economies that have very few exports and limited internal production of consumer goods? They tax imports (its known as a gatekeeper state) to raise revenue. This is normally stolen and mismanaged but public funds would be abused with or without tariffs and we would be a lot worse off without them.