Justice among Nations: Developing Countries and International Trade

If justice in trade implies a regime in which all countries can profit from the exercise of their comparative advantage, then the position of the least developed countries deserves our special attention. From an economic perspective, however, the role of these countries in international trade is trivial. In 1994 the least developed countries exported goods and services worth only $16 billion, less than 0. 5 percent of world exports, and–even more importantly–the share of these countries in world trade has been declining since the 1980s due to the fall in commodity prices.

(Drell, 10-26) The principal market for developing world exports is found in the advanced industrial economies. This raises the question of whether tariff barriers in industrial countries have conspired against commodity exports. This does not seem to be the case, as the average tariff is low. However, several commodities that could be profitably refined into value-added products within developing countries do face the more insidious problem of tariff escalation-in other words, the more value added to the commodity, the higher the tariff it faces.

As a result, the Paris-based Organisation for Economic Co-operation and Development has called upon its member states to "look into tariff escalation issues and try to reduce such practices. "(Drell, 10-26) The possibility that the least developed countries face a discriminatory regime is naturally troubling from a justice perspective. This theme is hardly new in North-South relations. Although several developing countries participated in the initial postwar negotiations that led to the GATT, they were not happy with the results.

American delegate Clair Wilcox wrote in 1949 that the developing countries tended to view the draft proposals for a world trade organization with suspicion. He claimed that these countries had an agenda advancing the idea that: “… wealth and income… should be redistributed between the richer and the poor states. Upon the rich obligations should be imposed; upon the poor, privileges should be conferred… The voluntary acceptance by all states of equal obligations with respect to commercial policy must be rejected as… a means by which the strong would dominate the weak”. (Drell, 10-26)

It did not occur to him that the developing countries may have had legitimate grievances with respect to the trade regime's structure. Postwar trade politics hardly provided the developing countries with the opportunity for much systemic influence. Moreover, trade theory taught them to be downright skeptical of the benefits associated with open markets. Raul Prebisch, Hans Singer and Gunnar Myrdal of the United Nations were among the most influential thinkers in this vein. They viewed free trade as detrimental to developing countries based on their structural analysis of the terms of trade.

According to this line of reasoning, developing countries faced declining terms of trade for commodity exports relative to imports of manufactured goods. The policy advice that followed was that developing countries should adopt protectionist trade policies in order to build infant industries. This analysis served as the basis for the developmental model known as import-substituting industrialization (ISI), which became especially popular in Latin America. (Aaronson, 30) “By the late 1950s two economic factors were beginning to raise questions about ISI.

First, many developing countries were beginning to suffer from a lack of foreign exchange, as a result of the inward orientation they had adopted. Second, it was becoming increasingly evident that import-substitution strategies had perverse political and economic effects. These strategies drew capital away from domestic agriculture, brought people from rural areas into cities that lacked adequate infrastructure, spurred the creation of a state apparatus that promoted rent-seeking behavior by entrepreneurs and helped to establish inefficient industrial monopolies.

Moreover, the validity of the model soon was thrown further into question by the emergence of a small group of countries, mainly in East Asia, that were achieving high rates of economic growth by adopting outward-looking strategies based on export-led growth”. (Aaronson, P, 30) In 1957, seeking a deeper understanding of the relationship between trade and development, the GATT appointed a committee led by Harvard economist Gottfried Haberler to examine the pattern of North-South trade. “The committee concluded that "barriers of all kinds in developed countries contributed significantly to the trade problems of developing countries”.

"(Hoekman, 241) Its report called on the GATT to promote more aggressively tariff reductions in the industrialized countries, especially in markets for tropical products. Further, the committee recognized that many nations in the North had used effective tariff escalation for refined agricultural products, discouraging developing countries from investing in value-added products and technologies and encouraging their dangerous reliance on commodity exports. Despite these findings, there was relatively little progress made in tariff reduction, particularly for agricultural products.