Thursday, 5 August 2004

On the shame of protectionism

In his book An Inquiry into the Nature and Causes of the Wealth of Nations Adam Smith, founder of economic liberalism, is focussing on the importance of free trade. The point is that, if every country concentrates on production of commodities and services in which it is specialised, everybody will benefit from it. In his masterpiece On the Principles of Political Economy and Taxation, the British economist David Ricardo supports this point of view and demonstrates that protectionism is not only hurting the other countries but also the economy and the citizens of the country that is imposing it. In the beginning of the nineteenth century Ricardo resisted against the ‘corn laws’ in England which protected the interests of the large landowners. The consequences were extreme high prices on bread, especially for workers.

Protectionism – a form of rich countries organised egoism misusing its power, rejecting poor countries commodities and favouring its own production via government support – is reprehensible, both economically and morally. It is mainly hurting people in less developed countries. They obstruct real free trade and condemn millions of farmers of the Third World to live in poverty. Each year they impose billions of dollars, euros and yens on imports. They massively subsidize their producers and disrupt markets through export subsidies. Import and tariff duties, price supports and subsidies disturb free trade, fair competition and correct price-fixing. Subsidies for agriculture, textile and steel obstruct the development of poor countries.

European Commissioner Franz Fischler announced on July 13, 2004 that the European Union would cut back sugar exports and export refunds for one third. These sugar export subsidies were heavily criticized by developing countries. The reform process should start next year and the new policy would be official in 2006. But this plan is not reassuring the Third World. Oxfam International announced that this proposal will not increase the developing countries’ access to the European market and will not stop the dumping of sugar which is destroying poor people’s livelihood. The right answer to the needs of the Third World is the immediate elimination of all EU export subsidies and the opening of the European market. This implies a reorientation of the EU agricultural policies, a substantial cut in EU production to eliminate overproduction and a substantial reorientation of EU agricultural policies in favour of small farmers. Only the abolition of subsidies provides fair competition, lower sugar prices for consumers and even a better environment by less sugar beet production.

Not only the European Union is to be blamed. Despite the fact that Georges W. Bush, during his presidential campaign, nevertheless committed himself to free trade, stating it is ‘not just monetary but morally’, the US – among others (e.g. Canada and Japan) – are using severe protection policies. “I’ll work to end tariffs and break down barriers everywhere, entirely, so the whole world trades in freedom”, Bush promised in his Candidacy Announcement speech on June 12, 1999. Unfortunately, he did not stick to his own promises and he signed the 2002 US Bill Form containing price supports, tariff rate quotas and storage facility loan programs. The result was a $ 190 billion farm subsidy, effectively undermining the livelihood of the world’s poorest nations. In March 2002 Bush also decided to impose tariff duties on most steel products from abroad. This caused problems in steel producing countries like China, Russia and Brazil. Only after trading partners threatened retaliation against US exports, he lifted the steel tariff duties. Nevertheless, the key components of the US foreign trade policy remain import quota provisions that protect US producers from low world prices.

Most American, European, Canadian and Japanese political leaders do not adhere to the full liberalization option because they hold to short-term domestic political pressures over job losses. Their attitude is short-sighted and overlooking the benefit of trade: long-term economic growth. The world’s trading system is actually one of the prime causes of poverty. The leaders of the rich countries have the obligation to tackle poverty worldwide. One of the measures is eliminating all sorts of protectionism. Tariff duties and subsidies have to be removed urgently to free hundreds of millions of people from hunger and destitution. As the Brazilian president Lula da Silva declared, “hunger cannot wait”. “It is urgently necessary to confront it with emergency and structural measures”, he said. Also the Peruvian president Alejandro Toledo asked the rich countries to be consequent. “Do what you are asking us to do: open up your markets.” Former South-African president Nelson Mandela welcomed the process of globalisation but added: “…if globalisation is to create real peace and stability across the world, it must be a process benefiting all. It must not allow the most economically and politically powerful countries to dominate and submerge the countries of the weaker and peripheral regions. It should not be allowed to drain the wealth of smaller countries towards the larger ones, or to increase inequality between richer and poorer regions.”

If the rich countries don’t want to move, or be reluctant, other countries must force them. Brazil asked the WTO to condemn the US government for subsidizing 25.000 local cotton farmers. In spite of the fact that their production costs are much lower than those in the US, countries such as Brazil, Burkino Faso, Chad, Mali and Benin were unable to get a bigger share in the international market. On June 18 the WTO ruled that the US-subsidies to its cotton farmers are unfair. This case can have profound implications, since Brazil and other WTO-members now can apply on other unfair subsidized goods such as rice, soy, wheat and sugar. Brazil, Australia and Thailand already did by submitting a complaint against EU sugar subsidies. A WTO-ruling is expected soon. And they have to go on. Being in chair of the Rio-Group, Brazil should now take the opportunity to lead a passionate coalition of among others all the Latin American countries, Africa, India and China combating for fair world trade and the abolition of all forms of protectionism. Only if they form front, they can force the economic superpowers to open up their markets. If Lula da Silva perseveres, he can be the real executor of the ideas of Adam Smith and David Ricardo.

Dirk Verhofstadt
Staff member of Liberales (