Toward free and fair trade: a global public good perspective - Reforming Globalization - Statistical Data Included

Challenge, Sept-Oct, 2002 by Ronald Mendoza, Chandrika Bahadur

To illustrate, Ralph Gomory and William Baumol (2000) use the conditions of economies of scale and productivity growth in their economic models to demonstrate that comparative advantage can, in fact, be developed and retained. (7) For instance, one perhaps cannot acquire the capacity to produce wine in the Philippines, but one can arguably develop the capacity to produce computers and software in that country--or any other developed or developing country, for that matter. Edward Wolff (2000) provides empirical support for these models using data from the Organization for Economic Cooperation and Development (OECD) countries. While this particular empirical study focuses primarily on the developed world, these arguments can just as easily be applied in the developing countries, as evidenced by the successful industrializers in East Asia. These studies have revealed that the indeterminacy of comparative advantage over time--a condition that now arguably characterizes much of skill-intensive manufactures--has we akened the emphasis on current comparative advantage in favor of potential comparative advantage, particularly those in high(er) value-added sectors. It follows that in order to evaluate the overall benefit derived from the trade regime, both static arid dynamic gains need to be considered.

Fair Trade

That last point now brings us to the conceptual notion of fair trade, particularly from a developing-country perspective. Despite the unquestioned positive static gains from trade, one has to consider how the gains from trade are shared and how this partitioning evolves over time. Central to this examination is the fact that building dynamic comparative advantage often requires some degree of protection in order to develop competitiveness in certain sectors, thus going against the process (at least temporarily) of "leveling the playing field" and freer trade. In fact, it may be the case that improvement in the productive capacity of one country can only be attained at the expense of another country's general welfare (Gomory and Baumol 2000). (8)

This leads to a dilemma. In the Ricardian world, all countries will find it in their interest to pursue more trade. Yet we know that pursuing more trade without considering the development of comparative advantage could erode the gains from trade over time, particularly for the developing countries that often suffer from more volatility and adverse movements in their terms of trade (see Cashin and Patillo 2000; Maizels 2000). (9) In addition, trade among nonequals (i.e., producers in developed vs. developing countries) can lead to such adverse outcomes as the decimation of entire industries in some developing countries. Likewise, simply expanding the realm of free trade has, in many cases, resulted in an actual increase in poverty and environmental degradation, and in an adverse impact on women and food security across the developing world, undermining efforts to achieve sustainable human development (McCulloch et al. 2001; Panos Institute 2001; Third World Network 2001).