Free Trade and the Developing World

 Originally published at MercatorNet.com

Last week I considered the effect of free trade on families in developed countries. This week I want to complete that analysis by analyzing the effect of free trade on families and children in developing countries.


Critics such as Greenpeace and other anti-free trade activists point, with great justice, to many abuses that are at best uncorrected, and at worst caused by free trade. It is hard, and indeed would be wrong and unnatural, to be unmoved by the arguments of these activists, who contend -- while holding up pictures of child slave laborers living through horrors no adult, much less a child, should experience -- that we cannot reduce morality to a simple equation of dollars and cents. Elizabeth Barrett Browning in a 19th century poem encapsulated the force of these arguments in her compelling but chilling warning about the child labor of the day: “But the child's sob in the silence curses deeper, Than the strong man in his wrath.” How can we celebrate “free trade” sustained by children labouring in chains? Freedom for whom?

And yet, is stopping free trade the answer? Will these children be any better off if the factories close their doors, the industry moves offshore, and their families are left to starve for lack of income, in a country which now lacks the tax base to assist them? Are their living conditions likely to be any better if trade is stopped, and ethically minded consumers and governments in developed countries are unable to lobby and boycott rogue businesses and nations into changing their ways?

In 1999 the World Trade Organization wrote a report entitled “Trade, Income Disparity, and Poverty”. In the report they found that, in general, poor countries and rich countries were not experiencing convergence; rich countries were getting richer and poor countries were getting poorer. The exception to this was the case of trading partners. When a rich country and a poor country trade with each other, both get richer, but the poorer country improves its situation more rapidly than the rich country, leading to a closing of the income inequity gap between the two countries.

More recently, a Brookings Institute study released the happy news that we have just experienced the “most dramatic” reduction in poverty ever seen in history. The authors estimated that the “United Nations Millennium Development Goal to halve the rate of global poverty between 1990 and 2015 was probably already achieved by 2008 - seven years ahead of schedule”. A reduction, the report confirms, that was largely caused by economic growth in developing countries, not Bono concerts or swanky summits on global poverty.

If, as is predicted, income poverty in China basically disappears by 2015, and the average Chinese income is $85,000 by 2040, child labor in China will almost certainly experience drastic reduction in a way more permanent and straight-forward than any charitable foundation could devise. Quite simply, parents who are making $170,000 a year send their child to university, not a factory. Naturally this is no reason to stop campaigning against child labor until the economy reaches that point of evolution where child labor is less “necessary”, but is an argument against destroying (rather than attempting to reform, for example by forcing countries who wish to trade with us to address the most outrageous of labor abuses) the very institution that is likely to eventually bring reform and prosperity to these disadvantaged families.

There is no doubt that every economic change will result in, especially short-term, winners and losers, but as the WTO rather dryly puts it, “While growth may not benefit everyone in an economy, the growth process must be strongly biased against poor people to produce perverse outcomes on poverty.” It also notes: “There is little reason to fear that growth associated with freer trade will fall systematically into this class, and the argument that openness stimulates long run growth has a good deal of empirical support.”

The best we can do is try to mitigate damage in the short-term. I am not convinced that the alternative, of forcing poverty stricken countries into economic isolation, will yield better results for families or the cause of human dignity around the world.

Free Trade and the Developed World

Originally published at MercatorNet.com

Last year I read a book with the curious title A Year Without ‘Made in China’. At least, the title might have sounded curious to an average reader some decades ago, when international trade was a much smaller part of our lives, and when objects made in China might have been a rarity, rather than filling Wal-Mart shelves across the country. In the book, Sara Bongiorni’s decision to boycott Chinese products resulted in sometimes major struggles to complete even the simplest of purchases. Children’s sneakers? The only alternative to Chinese shoes were Italian ones out of a catalogue - at almost $70 a pair.


Bongiorni’s struggles to find products manufactured anywhere but China, much less Made in America or Made in Canada, reflects the growing encroachment of international trade into our daily lives. But is this encroachment a good thing or a bad thing for families?

There can be little doubt that liberalizing trade has resulted in lower prices for consumers. And, while some contend that is hardly a clinching argument -- after all, what price another cheap t-shirt? -- lower prices have contributed to increased living standards for low-income families in developed countries. One study found that during the period of 1999 to 2005, inflation was seven percentage points lower for low-income people than for the wealthiest Americans.

While cheaper clothes and toothbrushes at the Walmart and Target checkouts are undoubtedly good for families, it hardly seems a great deal if the trade-off is higher unemployment, or, at best, lower paying jobs -- if you are lucky enough to get one. Globalization has certainly wreaked havoc in many North American industries. But will this always be the case? And is it reason enough to curtail freedom of trade?

In the United States, the decline of manufacturing jobs, which have traditionally paid a decent wage for workers without higher education, has almost certainly contributed to increased short-term hardship for many working families. On the other hand, so has almost every improvement in efficiency and technology, from steam power to automation. While these eventually led to incredible advances in the quality of life of all Americans, in the short term the buggy makers almost certainly resented the “job stealing” automobiles.

In the global economy America has a comparative advantage in many areas (economist-speak for “they still do some things better than their competitors”) and this is a principal reason why US industry still continues to produce many items and services it could theoretically import from overseas. As wages rise in developing countries (economist Robert Fogel from the University of Chicago predicts that the average per capita income in China in 2040 will be $85,000 -- more than double the income predicted for residents of the European Union, making Chinese labor twice as expensive as French labor) and the US dollar declines (as it is already doing), America will once again become an attractive destination for manufacturing and industry. There will be the added bonus that this time they have not only the North American and to a certain extent European markets to cater to; they will also have newly rich consumers across the globe eager to purchase their products. Even today, in an ironic reversal of the recent stereotype, Indian companies are taking advantage of low wage rates in certain American states to outsource call centres to America.

In short, we may reasonably conclude that free trade is good for consumers, and is at worst rather ambiguous in the long-run for workers in developed countries.