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Free Trade Towards Eradicating Poverty? – Peter Mardon
“Disadvantages, including displaced workers, tend usually (but not always) to be relatively short term and can be mitigated by specific policies such as retraining, relocation and free trade zones to encourage economic development in disadvantaged areas.
So although I argue that free trade is a great overall good its overriding benefit is its contribution to the eradication of poverty. Even Oxfam, hardly a pro-capitalism movement, states: “Since the mid-1970s, rapid growth in exports has contributed to a wider process of economic growth which has lifted more than 400 million people out of poverty.”
How does free trade affect poverty worldwide?
Unfortunately, the global picture is somewhat mixed. For example, the EU with its Common Agricultural Policy (CAP) maintains high trade barriers for agricultural products from developing countries* while at the same time subsidising its own farmers. This has a hugely negative impact on developing countries because agriculture sectors in those developing economies often employ more than 50% of the workforce. As a result, we have impoverished African farmers producing food often with below average use of chemicals and at a fraction of the cost that the same food is produced in the EU (often with greater use of chemicals).
If true free trade was permitted the African farmers would be able to more easily export to the EU and earn a better living and so help eradicate poverty in their communities. Instead the EU imposes tariffs on such food while at the same time subsidising EU farmers, therefore making African food noncompetitive or at least less competitive. As a result, millions of African farmers continue to struggle in order to benefit a relatively few EU farmers. The EU farmers have little incentive to diversify into other food products which they can produce efficiently and all the time the EU consumer is paying higher prices for its food.
There are, however, limits to the capacity of free trade to improve the economic conditions of developing countries. Although trade tariffs do hurt developing countries there are also other, often greater, problems such as anti-business environments, poor infrastructure, conflict, corruption and high transport costs.
But here again free trade can help. For example, on the question of corruption, studies have found that the more open a country is to free trade the less it will suffer from corruption where protectionist policies go hand-in-hand with corruption, for example, government officials allocating import licences in exchange for bribes.
How does Brexit fit into this?
Depending upon your political stance, Brexit may or may not be seen as a positive development. However, as Brexit is happening there is an argument to embrace some of the potential positives arising from it.
One such positive would be for the United Kingdom (free from the constraints of CAP) to enter into free trade agreements with developing countries, especially in Africa. For UK consumers this will lead to cheaper food and greater choice and for African farmers greater volume of sales, better prices and an enhanced route out of poverty. The losers would be UK farming. However, incentives to diversify into alternative food production or indeed other products such as tourism would help mitigate some of these disadvantages.
Certainly the reduction in subsidies and increased competition from developing countries would give UK farming every incentive to improve its efficiency. I appreciate that some may say that UK farming is already relatively efficient but then I would pose the question: how can a leg of lamb transported halfway around the world from New Zealand be cheaper than Welsh lamb (and with a smaller “carbon footprint”?). In conclusion, free trade is, in the overwhelming majority of circumstances, beneficial for both producers and consumers.
On the other hand, protectionism in the form of subsidies and tariffs, does no favours in the long term and is inherently unsustainable but also means higher costs for consumers and, more importantly than any of these considerations, perpetuates developing countries being locked out of true free international trade and continues to hinder their route out of poverty.
*Although some developing countries do have limited free trade access to the EU these are often subject to quotas (exports above a quota are then subject to tariffs). Average EU import tariffs for sugar have been 80% and above and for corn about 30%.
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