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31 May 1999

Not an ogre, but a friend to the poor

Even the mighty USA has to watch out when the World Trade Organisation rides into town. Philippe Leg

By Philippe Legrain

A new menace is threatening the world’s poor. Its name is the World Trade Organisation (WTO). The global trade policeman is only four years old, yet it is already wreaking havoc. It is foisting free trade on the developing world, jeopardising jobs and economic growth. Like the IMF and the World Bank, it is a tool for rich countries such as America to impose their writ on the poor.

Or so it seems to many on the left. But those who genuinely care about the poor are wrong to demonise the WTO. Free trade offers the best hope for poor countries to escape misery. According to a study by Jeffrey Sachs and Andrew Warner, two economists at Harvard University, developing countries with open economies grew by 4.5 per cent a year in the 1970s and 1980s, while those with closed economies grew by only 0.7 per cent a year. At that rate, open economies double in size every 16 years, whereas closed economies have to wait 100 years.

Open economies do better because they can attract foreign investment and technology. And with free trade, even the poor can buy cheap imports rather than rely on shoddy, over-priced goods produced by local monopolies.

Developing countries were among the keenest participants in the Uruguay round of the Gatt, which lowered trade barriers worldwide and gave birth to the WTO. Three-quarters of the WTO’s 134 members are from the developing world; many more developing countries, including China, are queuing up to join.

The WTO is a system based on rules, where weak and strong have equal say. When one country thinks another is breaching the rules, it can appeal to an impartial panel whose rulings are binding, even on the US and members of the EU. Thus the poor can secure justice from the rich, and the weak from the strong. Ask Ecuador, where the annual income per person is around £1,000 and 10 per cent of people depend on bananas for their livelihood. Banana production and exporting is wholly in the hands of local people, and workers enjoy full union rights. But the EU imposes strict limits on how many bananas they can export, and imposes licence fees and hefty duties if they want to sell their fruit in Europe. After much kicking and screaming, following a WTO ruling, the EU has agreed to change its banana regime. Similarly the US lifted its restrictions on imports of Costa Rican underwear after the WTO said America was in the wrong.

All of this is being overshadowed by the bitter battle over bananas between America and Europe. This is often portrayed as wicked American multinationals such as Chiquita using the WTO to drive Caribbean banana-growers out of business. The reality is that the EU’s banana regime mostly benefits European companies that market Caribbean bananas, such as Ireland’s Fyffes, rather than Caribbean growers themselves.

According to a study by Brent Borrell, an economist formerly at the World Bank, the EU’s banana regime costs European consumers $2 billion a year in higher fruit prices; over half of that ends up as monopoly profits for fruit distributors. Banana growers in the poor countries that the Europeans claim to care about gain only $150 million a year. And the equally poor countries that the EU does not favour, such as Ecuador and hurricane-hit Honduras, lose. In short, the EU rules are a rich man’s racket, not a boon for the poor. And, in any case, the WTO will still allow the EU to give preferential access to Caribbean bananas. Its only stipulation is that the EU give fair access to bananas from the rest of the world, too.

To be sure, the WTO is not perfect. Many barriers to trade remain, and rich countries ought to open their markets more to exports from developing countries. More could – and should – be done to help poor countries use the WTO better. But the alternative to a rules-based system such as the WTO is the law of the jungle, where big beasts have free rein to trample on smaller fry. Despite its faults, the WTO is a friend of the poor, not a foe.

Philippe Legrain is the trade correspondent for the “Economist”

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