|International Trade in Agricultural Commodities: Some Implications for Environment and Sustainable Development (Research Paper 13) (IRMA, 1994)|
According to conventional economic wisdom, free and voluntary trade promotes development because it is mutually beneficial to all the parties involved. In other words, the conventional economic argument for free trade is the assumption of free (perfectly competitive) markets and voluntary exchange. Under this assumption, laissez faire in general and free trade in particular would be Pareto optimal (Krugman, 1993: 364). There is no disagreement among economists, who are notorious for disagreeing about almost every thing, about the veracity of this general statement. My objection to the professional conventional wisdom about trade is because markets are imperfect and international trade is not free, voluntary, and fair.
The Heckscher-Ohlin factor proportions model is still the core of the neoclassical theory of international trade. The model has five assumptions, namely, (i) there are differences in factor endowments among the countries which bestow on each of them a comparative advantage vis-a-vis others; (ii) all buyers and sellers are price takers without monopoly power; (iii) production functions exhibit constant returns to scale; (iv) factors are fully mobile across sectors within a country but completely immobile between countries; and (v) all firms have free access to the same technology.
Obviously, these assumptions do not hold everywhere and always. For example, the very notion of comparative advantage has been rendered inoperative by free transnational movement of capital and to some extent skilled labour. Daly (1992) argues that the principle of comparative advantage is irrelevant in an environment in which capital is highly mobile internationally. In such an environment "the confident assertion that an open trading system will benefit all trading partners is utterly unfounded", he further adds. This view has also been supported by many other economists (eg. Daly and Cobb, 1990; Singer, 1992; Ekins, 1991).
Secondly, the conventional theory of international trade
underestimated the role of state policy and political, economic and military
factors in setting prices and imposing tariff and non-tariff barriers to trade.
Huge subsidies on agricultural commodities in developed countries have led to
surpluses which have been dumped in world markets. This has led to the
depression of world food prices while the prices in the developed countries have
been kept high by various kinds of barriers to imports. A recent study of the
IMF and the World Bank indicated that protectionism in the industrialized
countries costs the Third World twice as much in lost export earnings as they
receive in development assistance (Stoltenberg, 1989: 22).
Third, it is no longer true that buyers and sellers in international markets are price takers. Transnational corporations are increasingly taking control of world trade and eliminating the ability of national governments to regulate their imports and exports. For example, Cargill - the Canadian grain giant - alone controls 60 percent of the total world trade in cereals. Its annual turnover in 1970 was the same as Pakistan's gross domestic product (PIRG, 1993: 11). It is no surprise that world cereal prices are determined by Cargill, not by free interplay of world demand and supply. Measures taken by developing countries to promote their exports have brought about increases in the supply of agricultural commodities. The export demand for many of those commodities is inelastic and hence their prices have fallen relative to the prices of the commodities that developed countries export to developing countries. Thus, the international trade has benefited developed countries at the cost of developing countries (Ekins, 1991: 66).
In addition, the price mechanism is increasingly being by-passed
both by the phenomenon of counter-trade and intra-corporate trade. In the
former, goods are exchanged directly at implicit prices rather than sold on
world markets and the latter which now accounts for 30 percent of all trade is
not trade at all as it does not involve any exchange of goods; it is in the
nature of book-keeping operation within a single organisation. All these factors
have made the global trading a means of exploitation of developing countries by
developed countries and their transnational corporations. Needless to say, this
process also undermines traditional culture and social structures conductive to
self-reliance and thereby enhances the dependency of developing countries on
developed countries and imposes the western life styles on poor countries which
cannot afford those styles (Ekins, 1991: 66).3 According to Ekins
(1991: 66-68), global trade, aid and debt are all inimical to the interests of
the poor in the Third World countries. It is only the rich in the North and the
rich in the South who benefit from all these three power instruments of the
North.4 Obviously, then, economic development induced by foreign
trade under the present conditions cannot be and is not sustainable.
Four, constant returns to scale or constant unit costs are now the exception and increasing returns or decreasing unit costs the rule in most industries. Increasing returns to scale are, however, are not commensurate with either perfect competition or competitive equilibrium and hence with free trade (Streeten, 1990: 37).
Finally, it is not true that all agents/firms have free access to the same technology; in real world there are wide disparities in access to modern technology between developing and developed countries and within developing countries.
In view of all this, the Heckscher-Ohlin model is partially valid and partially invalid. It can explain to a great extent the net trade in raw materials, agricultural products and labour-intensive manufactures but not in complex, more disaggregated manufactures and intraindustry trade (Leamer, 1993: 438).
To sum up, international trade cannot be explained simply by an appeal to comparative advantage; the role of increasing returns has now become a more plausible explanation of international trade. The "new trade theory" has wished away the assumptions of constant returns and perfect competition that underpin the conventional (neoclassical) theory of international trade. It has also discarded the Arrow-Debreu world in which markets necessarily produce a Pareto-optimum and has thus refuted the position that free trade is optimal (Krugman 1993: 363). The new theory legitimizes imperfect competition and also government intervention in foreign trade. The proponents of new theory argue that governments could help domestic firms to snatch excess returns away from foreign rivals through "strategic" trade policies. But since the "strategic" policy is highly sensitive to details of world market structure which most governments are unlikely to get right, government intervention will do only a little better. But in any case, international trade as it is structured now is not going to promote sustainable development any where in the world, and particularly not in developing countries.