Free trade deals come at the expense of developing economies

This article appeared original in Gulf News: link to original article

The term comparative advantage is used to describe a country that can produce a good — and a service — competitively and more efficiently compared to other countries. Such an advantage should have been at the core of today’s international trade system, which advocates the signing of free trade agreements (FTAs) … except that it is not.

FTAs are an extension of a push towards market liberalisation that goes back to the 1980s as part of the ‘Structural Adjustment Programmes” (SAPs) demanded by the “Washington Consensus” — the World Bank and the International Monetary Fund — in their conditional lending. This was at a time when countries were suffering from a balance of payments crisis due to higher oil prices among other factors.

The economic reforms brought about by SAPs were not the problem, but the liberalisation of markets for economies that were not ready for it left countries in worse fiscal situations than before SAPs.

For countries that were still relying on agriculture for their economic growth, especially those in the poorer South, SAPs’ reforms exposed their agriculture sector and domestic food systems to a system that mimicked the much more developed domestic food systems in the North. Though SAPs did not necessarily induce economic reforms for agriculture only, agriculture and food production were, however, the most affected by policy reforms enacted by countries to satisfy the Washington Consensus.

Market liberalisation, on unfair trade grounds, have diminished food production capabilities in the South and have possibly set back their agricultural sectors for years to come. As a result, countries like Egypt and Sri Lanka lost their self-sufficiency in certain food commodities that were key for their domestic food security. Moreover, opening up to international markets have driven countries away from the production of food security commodities to others that could garner higher prices.

An example here would be Bangladesh’s agricultural production, which shifted substantially from rice cultivation to shrimp farming over the past three decades.

FTAs today are finishing off what SAPs started in the 1980s. While there is no question here that FTAs could be central for the food security of countries that cannot grow its own food, it being on unfair grounds — through subsidies and protectionist measures — have made it an extension of SAPs rather than make up for it.

In his book “The Global Food System: Issues and Solutions”, William Schanbacher points out that subsidies and unwarranted protection for farmers have prevented comparative advantage in food production to shift naturally from the North to the South. This is despite predictions by the UN’s Food and Agriculture Organization (FAO) that future food expansion will have to come from the South.

To achieve that, countries that have unnaturally retained comparative advantages in food production, because of subsidies and protectionist measures, must abolish those to allow for the natural shift to occur from their agricultural sectors to ones that are more efficient, wherever those are. A similar historic shift has taken place with regard to textiles, which means that it’s only a matter of time — regardless of how long — before a shift in food production takes place too.

Planning for it though, instead of doubling down on subsidies and protectionist measures, will ensure that disadvantaged countries can divert their time and money to other food or non-food commodities.

That being said, investments, from sovereign wealth funds for instance, must go into countries where food production is yet to realise its full potential, and where expansion in food production is expected to be. What remains to be decided is what food and non-food commodities should be produced and traded by what countries in a new global trade system that has comparative advantage as its main driver.

A hastily induced market liberalisation is a common theme between SAPs of the 1980s and FTAs of the 2000s, with different culprits and neo-old victims. What is wrong with today’s FTAs is that they do not necessitate fair competition between countries, with a few exceptions, in producing and trading food.

Consequently, countries that have lost their advantage in food production decades ago have retained it through subsidising and protecting their agricultural sectors. To amend such a situation, where comparative advantage shifts to where it rightfully belongs, steps by countries in the North and the South must be taken today to create a better future global food security.

The last thought that I want to leave you with: What will happen for countries that cannot grow their food nor produce what can be traded for it?