FT's Martin Wolf on the economic incoherence of Christian Aid's Trade Policy Unit

By Alex Singleton | 23 November 2005

Martin Wolf, an economist and one of Britain's most respected newspaper columnists, has an article in today's Financial Times on Christian Aid and the "trade justice" movement:

Christian Aid is among the most outspoken opponents of free trade, which it condemns as slavery. Its research even suggests that the trade liberalisation of the past two decades has rendered sub-Saharan Africa cumulatively $272bn worse off than it would otherwise have been. If true, this would be a heinous crime.

Happily, it is not. The paper on which this is based assumes that, if trade deficits exceed available finance, all adjustment occurs through income and output, rather than changes in the structure of production and consumption. Readers may remember that similar arguments were employed by supporters of a "siege economy" in the UK three decades ago. Fortunately, they were ignored. Otherwise, the UK would have gone the way of East Germany. A depreciation in the exchange rate can (and should) offset the impact of tariff reductions on imports. A long-run model that ignores this is a nonsense.

Why then might trade liberalisation be in the interests even of poor developing countries?

First and most simply, the weight of evidence shows a positive relationship between openness and income (Alan Winters et al, "Trade Liberalization and Poverty", Journal of Economic Literature, March 2004).

Second, protection is a tax on trade, paid, above all, by exports. A recent study from the International Monetary Fund shows, for example, that the export-tax equivalents of tariffs on imports in 2001 was 10 per cent in Malawi and 29 per cent in India.

Third, taxing exports is a foolish way to promote infant industries. Kenya has, for example, roughly the same dollar purchasing power as just one of London's 32 boroughs. No sane person would suggest that Lambeth has a big enough domestic market to support the development of globally competitive industries. The same is true for Kenya. A bias towards production for domestic markets guarantees a failure to grow up.

Fourth, competitive exports depend on easy access to competitively priced inputs. Even the largest economies engage increasingly in such "intra-industry trade". Countries with relatively sophisticated administrations can arrange so-called "duty drawbacks" for this purpose. But that is beyond the capacity of most of the developing countries. Export-processing zones are a possible solution. A simpler one, as Hong Kong and Singapore have shown, is simply free trade.

Fifth, the generation of competitive exports also depends on access to foreign know-how, much of which comes with foreign direct investment. The further behind the technological frontier an economy is, the more dependent on such foreign know-how it must be. Yet foreign investment in activities that benefit from protection tends to be extremely costly to the host country, since the expatriated profit then derives from a tax on the rest of the economy.

Sixth, the trade barriers of developing countries are among the most important obstacles to developing countries' exports. One of the most startling findings from the World Bank's Global Economic Prospectsfor 2004 was, for example, that the non-agricultural exports of sub-Saharan Africa faced even higher tariff obstacles in their neighbours than in the high-income countries.

Seventh, it is incoherent to be in favour of more aid and yet strongly opposed to trade liberalisation. Aid pays for imports. If aid is combined with persistently high protection against imports, it is sure to squeeze out exports instead.

Read the full article here.