Trade-Not-Aid
Trade-Not-Aid

The trade-not-aid strategy is based on the idea that if developing countries were able to trade more freely with wealthy countries, they would have more reliable incomes and they would be much less dependent on external aid to carry out development projects. International trade would raise incomes and living standards as poor countries would be able to export their way to economic development by selling their products to rich countries eager to buy their goods. In this sense, the “trade-not-aid” theory aligns with the poverty reduction theory, in that both perspectives emphasize the importance of creating export sectors to increase development.

Unfortunately, most wealthy countries have higher tariffs on goods that developing countries export, such as clothes, than on manufactured goods that other developed countries produce.  This means that in order to sell their goods in developed countries, exporters in developing countries must pay high taxes, which are ultimately reflected in higher prices of their products once they hit the market. Developed countries also subsidize their own industries to keep prices of domestically produced goods low, thereby keeping out competition from poorer countries.

For example, Middle Eastern countries face average clothing tariffs of 15 percent on the $4.2 billion worth of goods they export to the United States each year (Reuters, 2009; Office of the United States Trade Representative, 2009).  Meanwhile, France encounters tariffs of only two percent on manufactured goods, which account for $34 billion in annual exports to the United States (Reuters, 2009; Central Intelligence Agency).  According to Progressive Public Policy Institute, although Middle Eastern countries export less merchandise to the United States than France, they pay just as much in taxes.  This is because the United States charges higher taxes on clothes than on manufactured goods, creating a disadvantage for developing countries, where apparel is often a primary export industry (Reuters, 2009).

Likewise, subsidies to European farmers have played a role in the decline of the Brazilian and Jamaican dairy industries and the South African sugar industry. Wealthy countries grant subsidies of $265 billion per year to their domestic farming industries, 3.3 times more than the aid given to developing countries by OECD member states (Organization for Economic Cooperation and Development, 2005; Office of the U.S. Trade Representative, 2006).  In fact, every cow in Europe gets more money in EU subsidies per day (an average of $2.20) than 20 percent of the world’s population earns in daily income (Kaplan & Calzonetti, 2005).  Eliminating those subsidies, many analysts say, would make development aid much less necessary and allow poor countries to develop their own economies while competing in the global economy.

The Uruguay Round trade negotiations, completed in 1994, established the World Trade Organization and were intended to open developed countries’ agriculture and textile markets to trade with the developing world. Poor countries were disappointed, therefore, when the negotiations did not result in as much access to global markets as they had hoped for. They agreed to another round of negotiations at Doha, Qatar, in November 2001 only if their needs were specifically addressed. The round was therefore dubbed the “Doha Development Round” and was intended to focus on the needs of developing countries for access to the import markets of developed countries. Particularly important was the end of agricultural subsidies, which were supposed to be gradually lowered and eventually eliminated.

But in the ten plus years since the Doha meeting, negotiations on agricultural trade have progressed slowly. In the summer of 2003 the United States and Europe finally promised a reduction in subsidies, but it was not enough for the developing countries. The whole round of negotiations stalled in September 2003 when the developing countries refused to go forward with discussions on other areas of trade, such as rules for foreign investment. Since then, little has changed and few negotiations have been determined from Doha.

In 2006, because of continued disagreement and stalled negotiations, the General Council for the Doha Rounds agreed to suspend the talks, and the meeting in 2008 signaled the conclusion of the Doha Round (World Trade Organization).  The general consensus remains that the Doha Rounds ultimately did very little to significantly implement the Trade-For-Aid strategy or decrease agricultural subsidies in OECD countries.

 

 

Next: Good Governance