Robin Koshy: Fair trade: For better or worse?

In 2003, the US exported 3.8 million tonnes of rice, making it the third largest exporter in the world after Thailand and Vietnam. This is despite the fact that it costs twice as much to grow rice in the US than it does in the other two countries.

Such sterling export performance has been aided by $1.3 billion (72 per cent of the total cost) that the American rice farmers got as subsidies in 2003! (Oxfam Briefing Paper 72: Kicking Down the Door, 2005)

Not all countries can afford to bankroll their way to a comparative advantage in trade, especially when there is none. Certainly not the developing countries. The dictum of classical economic theory where trade specialisation takes place according to comparative advantages is out of operation in a trading architecture riddled by trade distorting domestic support and high tariff boundaries.

Will free trade that removes these distortions restore comparative advantages of developing countries in agricultural commodities, increase their export earnings, boost wages of their unskilled labour and stimulate economic growth in general?

Arvind Panagariya of Columbia University, thinks otherwise. His conclusions are born out of the fact that most least developed countries (LDCs) are net importers of agricultural commodities "" 45 of 49 LDCs import more food than they export.

In his paper, Agricultural Liberalisation and the Developing Countries: Debunking the Fallacies (2004), Panagariya contents that if subsidies are removed, the net importers of food will end up paying more for food.

This loss will not be offset unless they can become sufficiently large net exporters. A cut in rich country subsidies will, therefore, benefit only big agricultural exporters such as Brazil and Argentina, while most LDCs will be worse off than they were.

Although his arguments are not backed by substantive empirical analyses, some other studies estimate that larger countries will benefit while smaller countries in the same regions will suffer. If poor countries emerge as net losers, it could stem their enthusiasm for the Doha Development Agenda and jeopardise liberalisation of trade in future.

Therefore, Panagariya argues that the poorest nations are better off with high domestic subsidies in developed countries so long as they get preferential access, while larger developing country exporters are kept out by high tariffs.

He cites the European Union's Everything But Arms (EBA) initiative (or more precisely, Everything but Arms, Bananas, Rice and Sugar initiative!), which gives duty- and quota-free access for LDCS to sell at the high prices prevalent in the EU markets.

William Cline of the Centre for Global Development draws diametrically different conclusions about the impact of trade liberalisation on the basis of his empirical analysis and economic modeling in his book Trade Policy and Global Poverty.

He argues that liberalisation of agricultural markets is the most important way to reduce global poverty as three-fourths of the world's poor are in rural areas. The rural poor are more likely to be dependent on farming and any increase in export opportunities will increase their income.

The gains of the rural poor will outweigh the losses of the urban poor and there will also be a redistribution of income from cities to villages. Cline estimates that global free trade could increase agricultural prices by 10 per cent, hike real wages of unskilled labour in developing countries by 5 per cent and boost global economic welfare of developing countries by $90 billion annually.

This, he estimates, could pull 200 million people out of poverty, or 650 million if one factors in capital investment and a longer term period of 10-20 years. Welfare gains are highest from liberalisation of agriculture, followed by textiles and apparels.

The $90 billion that developing countries could gain will dwarf the $50 billion that they receive as aid. Yet another argument in favour of freer and fairer trade over aid and preferences. Interestingly, this corroborates Oxfam's calculation in its trade report in 2002 (Rigged Rules, Double Standards) that put the loss to developing countries due to rich country trade restrictions at $100 billion a year.

Cline cites evidence that only a sixth of the world's poor live in the net food importing countries and estimates that over 130 million people could be pulled out of poverty in India and China alone. If this were put in the perspective of the global target of halving poverty by 2015, it would reflect significant advances in the two biggest battlefields.

Here, one of Pangariya's arguments merits consideration "" trade liberalisation has adjustment costs that could impact smaller and poorer countries more. Hence, compensation programmes need to be designed smartly to factor these costs in and prevent these countries from being disenchanted.

However, to cite these adaptation pangs and static losses to net food importing countries as reasons enough to preserve status quo and debunk trade liberalisation where it is needed most, is strange. As strange as the American comparative advantage in rice.

Moreover, it cannot be ignored that many LDCs are net food importers today due to pressures from beyond their borders. Rice imports in Haiti, an LDC, increased by 150 per cent between 1994 and 2003 after the International Monetary Fund forced it to cut rice tariffs from 35 per cent to 3 per cent.

Ironically, three out of four plates of rice consumed in Haiti today come from the US. Any guesses on the number of empty plates in the homes of impoverished Haitian rice farmers?

The author is with the Centre for Trade and Development, an Oxfam GB Initiative, New Delhi. Views expressed here are personal.