Transforming the geography of global trade Guyana and the wider world
By Dr Clive Thomas Stabroek News
June 26, 2005

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The changing geography of international trade reflects many factors at work. One of these is the rise to dominance of the transnational corporations (TNCs) and their elaborate global production and distribution chains for their goods and services spread over several continents, regions, and countries. These chains have become increasingly sophisticated, reflecting changes in the way particular locations are chosen as units of the enterprise.

While originally labour availability/ cost/productivity and favourable tax incentives might have been the dominant considerations in the choice of location, many of these locations have since become complex production units adding value to the growth of the firm in areas like innovation, R&D, and design. These complex units reap the benefits from 'agglomeration' of activities in geographical clusters, and these dry up only when significant overcrowding emerges. So far there has been little evidence of this.

It is such structures that drive the unparalleled growth of intra-industry trade, which I have mentioned so often in these columns in recent weeks. Intra-industry is characterised in the transformation of trade from an 'arms-length' activity between two separate and differently owned enterprises to what is essentially intra-company transfers. Thus today it is estimated that as much as 40 per cent of the imports of the USA is made up of purchases from subsidiaries of US companies.

Impact of regional integration

Another significant factor transforming the geography of trade has been the equally unparalleled growth and expansion of regional integration and trade arrangements. Under the WTO Agreement all trade and integration arrangements have to be officially "notified" to that organisation where it goes to its Committee on Regional Trade Agreements (RTAs). It is the responsibility of this committee to review these agreements to ensure they are compatible with WTO rules and regulations.

At first blush it would appear to most readers that the spread of regional arrangements would contradict the multilateral trade agenda of the WTO. There is indeed a danger that they could prove to be stumbling blocks or impediments to the wider global liberalisation of trade, but it is the responsibility of the committee to ensure otherwise. That is, the arrangements should become 'building blocks' for the WTO's global project. I shall explore some of these considerations later, but let us accept for now that these regional arrangements, which are complex in nature, can be designed to promote the liberalisation of trade on a global basis.

At the moment the total number of trade and integration arrangements that have been notified to the WTO is a whopping 170. In its last report the committee has indicated that between January 2004 and February 2005 as many as 43 such trade and integration arrangements have been notified, thereby indicating a growing momentum in favour of this type of approach to trade. It has been reported that Mongolia is the only country presently not involved in one of these trade and integration arrangements. Indeed some countries belong to several, as for example most Caricom countries, with the well-known ones being the OECS, ACS, Cotonou Agreement, CARIBCAN, and the CBI. Some countries like Guyana have a multiplicity of bilateral trade arrangements also with other countries, eg Brazil, Venezuela, India and China.

Spaghetti bowl

The situation in this area has become so complex that economists refer to it as a 'spaghetti bowl' of trade rules and regulations in which developing countries swim around. There is great potential for overlapping regulations, confusion, and even conflict in resolving all the different obligations countries have to fulfil. And, it does not require great wisdom to appreciate that this increases the transaction costs for both the governments which have to negotiate these agreements, and the firms that have to produce and compete under them.

The reasons behind this rapid growth of regional trade and integration arrangements are also many and complex. I shall review these in light of Caricom's experiences beginning next week, but for now I wish to draw attention to some of the immediate concerns behind the dramatic surge in these arrangements in recent times.

One cause is clearly that the WTO liberalisation process at the global level has been faltering badly. With the past failure of well-publicised ministerials, and especially the most recent at Cancun, Mexico, there is some amount of resignation to the fact that the current round of global negotiations on trade is not likely to produce anything near the highly optimistic expectations when the present Doha Round of Trade Negotiations commenced in 2001.

This round has been termed a 'development round,' as the effort is directed at putting development to the centre-stage of the WTO. As readers would know, the WTO was not conceived as a 'development institution' in the way let us say the World Bank is. Its remit is to produce trade rules that are fair, transparent, predictable, certain and enforceable. Its expectation is that development will occur simply because freer and more liberalized trade will lead to faster economic growth and the improved welfare of all participants in the process.

That this has not occurred at the pace anticipated has led countries to turn to regional arrangements to provide stimulus for their export and economic growth. For some WTO members the committee reports that as much as 90 per cent of their external trade takes place within these schemes. While there is this common economic motive driving these schemes forward, the manner of pursuit of integration arrangements differs sharply among countries.

It would be a mistake, I believe, to see recent trade and integration arrangements in purely economic terms. Important as the economic considerations are, others also play a prominent part. One of these is foreign policy concerns in the broadest sense of encompassing security and other geo-strategic considerations. Nevertheless the end product is clear: all countries, including those most committed to WTO global trade liberalisation, like the USA, are today pursuing regional arrangements with considerable intensity.

Several of the regional trade and integration arrangements that are presently being forged seek deeper levels of integration than that offered currently by the WTO, which is why they are often referred to as 'WTO plus' arrangements. Indeed for some countries these schemes not only offer opportunities for deeper integration than is foreseeable in the WTO but it is hoped that the coming into existence of these regional arrangements would itself act as a leverage taking the WTO towards deeper integration of global trade, I shall pursue these issues further next week.

We saw last week that in its original formulation Caricom was conceived as a "radical project." It was radical in the sense that its basic premises challenged the then existing global division of labour and the prevailing structures and patterns of world trade. It was, to put it bluntly, an anti-colonial and anti-imperialist initiative. In essence Caricom leaders at the time treated the world as an uneven playing field, one in which developing countries were disadvantaged and systemically exploited by the rich industrialized ones. In particular these disadvantages were found to apply with great force in the case of small developing countries, where smallness meant crippling vulnerability to natural as well as human-engendered disasters. The purpose of regional integration therefore, was to correct for this smallness and vulnerability through increasing national market size; pooling national resources: labour skills, enterprise, capital and technology; and, generalizing risks.

Autonomous self-centred development

Somewhat pretentiously, Caricom leaders boasted of promoting an autonomous self-centred path for the development of the region, which would lead to the structural transformation of its economies. They also accepted as essential to this purpose the pursuit of a state-led process of development, which emphasised regional import-substitution in the first instance. At the next phase of development, with regional industries well established on the regional market, an export platform could then be built for firms to engage the global market from competitive positions.

Not surprisingly, this development model also emphasised the role of domestic savings to finance the required investments rather than focus on attracting foreign capital inflows at all cost, combined with a focused effort to build-up the education and training of the workforce. As we saw last week, Caricom was also expected to be more than a trade arrangement, as from the onset it embraced functional co-operation, support for a wide range of regional institutions, and the pursuit of a common foreign policy by member states.

Over the years this original vision of Caricom has been badly derailed. This has been due to both negative developments in member states as well as the impact of globalisation on the region.

Derailing Caricom's trajectory

Starting from the mid to late 1980s, it is difficult to overestimate the negative consequences to Caricom resulting from the internal economic crises and dislocations that developed among several states. While Guyana and Jamaica are by far the worst examples of this, other Caricom states did not escape these afflictions entirely. The most dramatic manifestations of these internal crises showed up in the macro-economy: devaluation of national currencies; the growth of massive external indebtedness; the rampant spread of inflation; regular shortages of basic foods and services (including electricity and medical care); the rise of a flourishing underground economy; and, huge public sector deficits. In response, governments resorted to all sorts of administrative and heterodox measures to halt the disintegration. There was a proliferation of capital controls, credit controls, rationing, licensing of imports and restrictions on ownership of foreign exchange. Eventually all these measures failed and countries were then forced to turn to the IMF and World Bank for 'rescue packages.'

The standard structural adjustment programmes of those times (SAPs) are well-known and there is no need to repeat them here. The basic thrust behind them, however, was that in exchange for support from the IMF/World Bank, the donor community, and other international interests (in the form of loans, grants, technical advice and so on) member states were required to pursue strict economic policies (known as conditionalities). These policies brutally reversed the emphasis of those in vogue with governments at that time. Thus state-led development was abandoned and the private sector became the focus as the engine of economic growth. Government deficits were found to be unacceptable and had to be reduced, even if it meant cutting back substantially on government spending on essential services and wages. Administrative controls on credit, goods and services, and foreign-exchange were abolished. The state productive sector, which was spawned as a result of nationalizations, was dismantled and most, if not all such enterprises privatized. The economy was re-structured to facilitate the inflow of foreign direct investment (FDI). Import - substitution as a deliberate policy of governments was stopped because of the reported inefficiencies it created behind high protective barriers. Imports and exports of goods and services were also set free from administrative barriers and restrictions.

Open-regionalism

Although these were national programmes introduced into some member states, the end result was that these policies directed a re-focusing of Caricom. Caricom's strategic goal could no longer be to challenge the global division of labour. Instead, it had to provide a 'building block' for the further consolidation of the then existing division of labour. To ensure this, all regional integration measures had to follow policies generally described as favouring "open-regionalism."

Open-regionalism meant that the purpose of Caricom was to 'create' trade within the trading-block not to 'divert' trade of non-members into Caricom sources. In effect this meant that if Caricom led to increased competition among firms within it, so that the more efficient firms within the union out-competed the less efficient ones and captured greater market shares as a result, this would be seen as contributing to both its own (Caricom's) well-being and that of the rest-of-the-world. Caricom would have in this instance created trade. If, however, instead Caricom became a protective barrier or shield within which less efficient firms than those outside of Caricom captured the regional market for themselves, it would have reduced global welfare and that of Caricom as well. Caricom would have in this instance diverted trade.

Such policies negated the strategy of regional import substitution, which lay behind regional protection. As we shall see next week this position was later to be intensified as 'open-regionalism' itself gave way to what is now termed, the 'new regionalism.'

Last week I indicated that as a result of both internal and external factors, Caricom, initially designed to radically challenge the then existing patterns of trade and the global division of labour, became instead more an effort to accommodate the region to what was termed the 'global realities.' Because of internal weaknesses as a result of poor macroeconomic management in several key member states, the collapse of important export commodity prices (bauxite and sugar), rising oil prices, and extreme external indebtedness countries were forced to enter into structural adjustment programmes (SAPs) with the World Bank and the IMF. At the time these were very doctrinaire programmes with rigid conditionalities designed to ensure that countries conformed to the then emerging globalisation. As I showed last week, this meant that regional integration schemes had to practise "open regionalism" in order for its members to fulfil their WTO commitments.

This open regionalism was based on a model of development that favoured free trade, private enterprises and market-oriented policies. Thus it was in keeping with the privatisation of state enterprises, the dismantling of administrative and bureaucratic intervention in the economy and an emphasis on export-led growth, foreign direct investment, and the liberalisation of imports to ensure competition for local firms. The previous policies of import-substitution were therefore frowned upon, as were policies of foreign exchange control, directed credit, and the subsidisation of local enterprises.

The new regionalism

More recently, however, this open regionalism has given way to what has been termed the 'new regionalism.' If open regionalism reversed the strategies of development with trade that were being pursued in the original regional integration efforts, the new regionalism has taken the process one step further. Its goal is nothing less than to prepare countries, particularly the developing ones, for full participation in the WTO-led process of global trade liberalisation. As a consequence two striking developments have occurred.

Formerly it was the view that if regional integration was to be an instrument of development it would best serve this purpose if it involved countries at broadly similar levels of development. In this circumstance countries would have roughly similar economic and technical competences and their development needs and the strategies pursued to achieve these would also be broadly similar. If, as in the case of Caricom, history, institutional arrangements and traditions favoured closer cooperation, these would be big pluses. It is for such reasons that countries of the same broad geographical region tended to form these integration arrangements. In the case of Caricom all the above-mentioned forces were at work in its formation.

Geographical contiguity and

similar levels of development

With the 'new regionalism' geographical contiguity and similar levels of development are no longer matters of prime consideration. Thus rich and poor countries can form trade and integration schemes, as well as near and distant ones. When one considers this, the outcome has been a far-reaching transformation of the notion of economic integration as a development tool compared to when it was first promoted. Clearly, schemes that involve rich and poor, near and distant countries would replicate at the regional level much of the asymmetries and inequalities that already exist at the global level. Such schemes, therefore, are more than likely to reinforce the existing patterns of global trade and the geographical division of labour on a world scale than challenge and transform them. We have as examples of these schemes the proposed Free Trade Area of the Americas (FTAA) and the Economic Partnership Agreements (EPAs) designed to replace the Cotonou Agreement in 2008, this agreement having replaced the Lome Convention.

Multilateralism

A question that I am often asked is what is the world view which drives the processes of this 'new regionalism'? A short answer as an approximation is that it is favoured by the outlook of multilateralism. Multilateralism takes the world view that nations can and should work in harmony with each other. While this is clearly desirable, in practice it is not happening. Indeed, the reverse might be, more often that not, the reality. Multilateralism is best suited for a world that is comprised of nations where four features are approximately the same. These are economic size; technical, institutional and scientific capacities; diplomatic leverage; and military effectiveness. Regrettably, our world is made up of countries with vast disparities in all these characteristics. Indeed it is the prevalence and pressures arising out of these disparities that have done much to push the region into closer and closer forms of economic cooperation. Today, therefore, we can safely conclude that multilateralism's vision of the world is under continuous threat.

Such is the threat that the disparities in the characteristics listed above have given rise to global hierarchies. Indeed, the Cold War era had distinguished itself with the emergence of two superpowers locked in deadly confrontation with each other. Since then the superpower rivalry has receded as one indisputable hegemon has emerged - the USA.

The existence of a hegemonic power contradicts the very essence of the liberal view of multilateralism.

This is starkly revealed when the USA insists on its own way, regardless of the world consensus around it. We find many on-going examples of this such as the issue of global warming, the jurisdiction of the World Court, and in attitudes and dealings with the United Nations and its agencies. This hegemonic response has given rise to new formulations and coalitions around the USA. Again, as examples we have the 'coalition of the willing' for the Iraqi war and the 'can-do nations versus the rest,' which emerged after the collapse last year of the WTO Ministerial at Cancun, Mexico.

The important observation for us from all this is that despite the limitations of multilateralism's vision of the world, it still inspires the new regionalism. As a force, this new regionalism has been growing and its open embrace by the WTO, a body dedicated to the multilateral liberalisation of trade in goods and services is the best testimony to this outcome.

In last week's column I had referred to the explosive growth of regional trade and integration arrangements worldwide. It is projected that regional agreements will account for significantly more than half of the total value of global trade by the end of this year. The motivations behind this phenomenal development are many and complex, coming as it does in a period of globalisation of the world economy and the multilateralisation of trade under the umbrella of the WTO. While some argue that this rapid growth of regionalism contradicts the global free trade agenda of the WTO, others see it as a building block on the way to a more open, liberal, free-trading world economy. Indeed the current Doha Development Round of trade negotiations, which started in 2001, has opened the way for this outcome by explicitly recognizing regional trade arrangements as contributing to the liberalisation of global trade.

If the latter view is indeed a true representation of what is happening, then modern day regionalism is very different in its intent when compared to the early efforts at regional integration, as for example when Caricom was established. On the eve of Caricom Day and the Caricom Heads of Government Conference in St Lucia, it is timely to examine this explosive growth of regional trade agreements worldwide in the context of Caricom, as I had promised in last week's article.

Challenging the global division of labour

Like other regional arrangements the motivations behind the formation of Carifta and later Caricom were many and complex. While economic considerations loomed large, others were very important including political, cultural and geo-strategic ones. Moreover, the arrangements centering on the former British colonies of the West Indies history, and in particular a response to the previous colonization by the British, permeated the very core of Caricom's early existence. As a consequence, certain principles were embodied in the original formulation of Caricom, which need to be kept in mind if one is to arrive at a clear understanding of where Caricom is today.

One of these principles is that Caricom was constituted to challenge the then global division of labour. It was conceived as an instrument to further decolonise the region and to resist any forms of neo-imperial control that might arise. In that sense Caricom was premised on the view that the then existing world trade order was an uneven playing field, one in which the rich industrialized countries systematically exploited the poorer ones. Caricom was therefore an instrument for the development of the region. It was certainly not conceived as a 'neutral' trading arrangement, confined to agreements on the 'rules' for regional trade. This contrasts to the WTO, which now prides itself as being a rules-making trading body concerned with compliance to rules that are transparent, certain, and predictable, and eschewing any pretence at a deliberate development function.

Second, Caricom embraced a distinctive model and strategy for the self-development of the region. In that regard it sought to achieve three things. One was to pursue a state-led process of development for the region. Thus it emphasized planning and where necessary the creation of a state productive sector, through nationalization or other forms of public ownership of the 'commanding heights' of the economy. Another was to propel the process of 'import-substitution,' already well in train at the national level to the regional level. And, finally the regional market was to be used to integrate production and prepare a platform from which firms could enter the global market in a competitive manner.

Dual function: attraction and exclusion

A third principle was that the regional market offered a better basis for attracting foreign investment than national markets. In large measure this was due to the fact that the regional market was far larger than any national market and therefore was likely to offer more profitable opportunities. This occurred even though Caricom through its common external tariff and coordination of external trade policy acted as a protective shield to keep out competition by third parties (non-member states). This dual function, as it were, of both attraction and exclusion was felt to be a creative response to a global trading order based on the participation of countries with vastly unequal capacities and competences to benefit from trade.

Fourthly, Caricom from its inception pursued levels of integration, which went much further than free trade. The two best examples of this is the existence of forms of functional cooperation among member states and the coordination of foreign policy. The former embraced a wide variety of activities in the social, economic and cultural sphere. It also embraced support for certain regional institutions like the University of the West Indies and the Caribbean Development Bank. When compared to other regional trade and integration arrangements this gave Caricom considerable depth. This was later to lead to the Grande Anse Declaration and the proposed formation of the Caricom Single Market and Economy.

The notion of a Caricom single market embraces a common market for all goods and services as well as productive factors. The notion of a single economic space implies coordination of macroeconomic policies, a common currency, a common budget, as well as full mobility of all the productive factors, and in particular labour.

Special and differential treatment

A fifth essential principle of Caricom is that it recognised not only that the global economy was an 'uneven playing field,' but also that within the region itself there were countries whose capacities and competences for participating in regional trade were a priori unevenly developed. It therefore provided within the body of the agreement "special and differential treatment (SDT)" for disadvantaged member states. This was best exemplified in the deliberate recognition of the Organization of Eastern Caribbean States (OECS), which permitted a group of "smaller economies" to constitute themselves as a unit within Caricom and to be entitled to special dispensations in regard to Caricom treaty obligations.

These principles mentioned here, which Caricom originally enshrined are not exhaustive. However, enough has been said to indicate that at its core the aim was to challenge the existing global division of labour. In that sense Caricom was originally intended to be a 'radical' project, even though as I shall argue later it was still premised on a market-led trade and integration process much like the way integration works in the global economy. As we shall see, this radical project was to be soon derailed and Caricom transformed into a complicit mechanism with which to facilitate the integration of the region into the global economy - not challenge it.

Next week I shall discuss this co-optation.