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Trade policies and its impact on Poverty

Trade policies and its impact on Poverty

Trade policies and its impact on Poverty

Trade policies wield significant influence over poverty levels globally. The intricate relationship involves the impact of economic, social, and political factors. One primary mechanism is the effect on income distribution, where globalization and liberalized trade can exacerbate inequality within countries, widening the wealth gap and hindering opportunities for lower-income groups. Employment dynamics are also influenced, with expanded trade creating jobs in certain sectors but potentially displacing workers in others, particularly affecting vulnerable populations in developing nations.

The global nature of trade policies magnifies their impact, as decisions by major economic players reverberate across the world. The asymmetry in negotiating power can lead to unfavorable terms for weaker participants, perpetuating or deepening poverty in less developed regions. Global supply chain dynamics and external events, such as financial crises or pandemics, further underline the interconnectedness of economies and their potential impact on poverty.

Trade policies intersect with social and environmental considerations, affecting vulnerable communities disproportionately. Environmental degradation, child labor, and inadequate labor standards can be exacerbated by insufficient regulatory frameworks within the context of global trade. In conclusion, a nuanced approach to trade policies is crucial, considering their intricate connections to poverty on a global scale. Sustainable and inclusive trade policies are essential for harnessing the benefits of globalization while mitigating its adverse effects on income distribution, employment, and social well-being.

The Trade Dilemma: Balancing Benefits and Challenges:

Trade has played a significant role in fostering economic development and reducing poverty. Between 1990 and 2017, developing nations increased their global export share from 16 percent to 30 percent, coinciding with a decline in the global poverty rate from 36 percent to 9 percent. While the benefits of trade have not been uniform across all countries, the overall impact has been remarkable, lifting approximately 1 billion people out of poverty in recent decades.

Trade offers numerous advantages, including accelerated productivity growth, particularly for sectors and nations involved in global value chains (GVCs). These chains enable developing countries to specialize in producing specific components, gaining access to foreign technology, expertise, and investment. Additionally, trade facilitates the dissemination of technologies that address environmental concerns, such as solar panels, wind turbines, or drought-resistant seeds. Although some sectors and workers may face increased competition, consumers benefit from a greater variety of goods and services at lower prices.

Despite these advantages, globalization faces criticism for its perceived role in the loss of manufacturing jobs in advanced economies, environmental harm, and disruptions to essential supplies like vaccines. Geopolitical tensions have led major players to erect trade barriers, subsidize domestic production of critical goods, and engage in restrictive practices during crises, as seen in disruptions to food supplies in 2022.

Trade disputes and restrictions have weakened the rules-based global trading regime, notably the World Trade Organization. Smaller developing economies, dependent on exports, require fair competition to thrive and lack the fiscal resources to counter protectionist measures by advanced countries. The World Bank warns that increased trade tensions could push millions into poverty by 2030, rivaling the impact of the COVID-19 pandemic in 2020.

To address these challenges, both developing and advanced economies can focus on deeper regional trade agreements, enhance border procedures and infrastructure to reduce the cost of moving goods and embrace policies that leverage the growth of trade in digital services. The global trade system should balance concerns about national security and access to essential goods without compromising development. It should distinguish between subsidies that contribute to public goods and those distorting trade, ensure widespread availability of subsidized technologies, and discourage export restrictions during crises while encouraging the permanent reduction or elimination of import tariffs.

Global Integration: Developing Nations in the Era of Value Chains:

Up until the late 1970s and early 1980s, most developing countries experienced a surplus in agricultural exports over imports. However, economic shocks in the early 1980s prompted a move towards agricultural trade liberalization and a shift away from urban bias. The Uruguay Round in the 1990s marked a significant reduction in agricultural tariffs, decreasing from 30 percent to 18 percent. Developing nations embraced liberalizing measures, eliminating import restrictions, devalued exchange rates, and export taxes.

Over the past three decades, developing countries have substantially reduced distortions to agricultural incentives, especially compared to wealthier economies. Between 1980–84 and 2000–04, agriculture-based countries further lowered protection of agricultural imports and reduced taxation of exports. Despite these changes, the liberalization of agricultural trade led to a decline in food and agricultural exports from developing countries in the early 1990s due to factors such as global food safety standards, stagnant agricultural productivity, and rising compliance costs.

While liberalization exposed consumers and producers to greater price volatility, richer economies contributed to commodity price instability through increased protectionism and subsidies. Speculative capital inflows into agricultural commodity markets further exacerbated the situation. The shift in global trade in manufactured goods has also transformed middle- and low-income countries, opening protected domestic markets, encouraging exports, attracting foreign direct investment (FDI), and promoting innovation.

Developing countries have increasingly participated in global value chains, with their share in merchandise exports rising from 20 percent in 1990 to over 40 percent in 2012. The integration of global investment and trade into international production networks has challenged state regulation of multinational employers. Some developing nations have experienced “premature deindustrialization,” becoming service economies without full industrialization, while others, particularly in Asia, have maintained industrial growth through favorable financial environments.

Trade for Poverty Eradication in Developing Countries:

International trade is a pivotal tool for developing nations in their pursuit of the Millennium Development Goals (MDGs) by 2015. Acknowledging trade’s potential to spur economic progress and alleviate poverty, countries have increasingly opened up to global markets. However, the relationship between trade and growth is nuanced, and caution is advised to navigate potential short-term challenges. The international community, recognizing the importance of trade for development, has launched initiatives such as Aid for Trade and the WTO Doha Round to ensure that the benefits of trade are widespread.

The impact of trade on poverty reduction is evident, with developing countries experiencing robust growth in the last decade, leading to increased employment and investment levels. Trade liberalization has played a crucial role in reducing global tariffs, and fostering export revenues. Despite progress, challenges persist, including disproportionately high tariffs on products of export interest to developing countries. Successful cases, such as Mauritius, Rwanda, and Kenya, exemplify how tailored trade policies can contribute to achieving the MDGs.

While trade remains a potent instrument for economic growth, caution is advised. The complex relationship between trade openness and growth depends on various factors, including macroeconomic stability and infrastructure. Trade liberalization alone cannot guarantee MDG achievement; it requires comprehensive reforms and international support to address potential challenges. Developing countries should enhance their supply capacity before fully engaging in global competition, with initiatives like Aid for Trade facilitating infrastructure and productive capacity investments.

Addressing unemployment concerns during market liberalization is crucial. Developing social safety nets, education, and training policies are essential to reallocate workers to growing sectors and mitigate short-term challenges. The international community’s role is crucial in assisting developing countries in coping with adjustment costs, emphasizing the integration of all development policies into each country’s National Development Strategy.

In the quest for poverty eradication, trade reform is viewed not as charity but as a means to equip developing countries with essential tools to achieve the MDGs. Trade, when coupled with comprehensive and tailored reforms, emerges as a vital instrument for accelerating economic growth and reducing poverty, requiring continued global cooperation and support.

Positive Impacts:

Trade-induced fluctuations in prices may arise directly from shifts in supply or demand, or indirectly through variations in the exchange rate triggered by changes in the terms of trade. The potential for trade to enhance real incomes and alleviate absolute poverty lies in its capacity to lower prices of imports and import substitutes that are crucial for the impoverished or to elevate prices of exports or import complements produced by individuals in poverty.

The reduction of relative poverty can also occur if lower-priced imports or higher-priced exports disproportionately involve the poor. Nevertheless, the predominant impact of trade on poverty often stems from its role in fostering economic growth. This indirect effect can be substantial, often overshadowing more direct poverty reduction mechanisms. Efficiency gains resulting from trade may bolster employment and investment opportunities, including investments in human capital, or enhance the availability of complementary factors of production that augment the productivity of the poor. The extent to which the poor can access these potential benefits is a pivotal factor in determining the poverty reduction effect.

While the general trend of trade liberalization and expansion benefits the poor, it is imperative to acknowledge that not all trade-related effects on poverty are uniformly positive. Changes in trade flows or patterns typically reshape the landscape of risks and uncertainties faced by the poor. Shifts in trade flows or patterns have the potential to disrupt social stability, particularly affecting those on the fringes of society. Alterations in terms of trade or exchange rates, especially those impacting tradable sectors that involve substantial numbers of the poor or near poor, such as small-scale agriculture, can yield considerable impacts, whether positive or negative, on poverty incidence.

Trade-related environmental changes also carry the risk of adversely affecting the poor. The potential costs of adjustment may be considerable for certain individuals, underscoring the need for complementary policies designed to facilitate a smoother transition. (Brooks, 2003)

Negative Impacts:

Despite its acknowledged advantages, trade policies are encountering criticism as evidenced by a 2023 report from the World Bank. Detractors attribute it to the erosion of manufacturing jobs in advanced economies, environmental degradation, and disruptions in the supply chain of crucial goods such as vaccines. These apprehensions, coupled with geopolitical tensions, have induced significant players to erect trade and investment barriers while subsidizing domestic production of items deemed essential and strategically important. A notable example from 2022 illustrates this trend, where several countries responded to disruptions in food supplies from Ukraine by imposing restrictions on the export of wheat, corn, and other staples. This reciprocal cycle had the adverse effect of escalating prices, momentarily posing a threat to global food security.

The ramifications of trade disputes and restrictions extend to the destabilization of the rules-based global trading system, with the World Trade Organization at its core. The predicament is particularly challenging for smaller developing economies, which lack self-sufficiency and rely on exports for imports. These nations are dependent on fair competition, a circumstance jeopardized by trade-distorting subsidies and protectionist measures. Moreover, the imperative of attracting investment underscores the critical need for a dependable and coherent system of global trade rules, an assurance many developing countries find elusive. The fiscal constraints faced by these nations compound the challenges, making it difficult to counteract the steps taken by advanced economies to subsidize domestic production.

According to the World Bank’s projections, an erosion of investor confidence stemming from heightened trade tensions among major economies could result in the impoverishment of 30-50 million people by 2030. This estimate hinges on the severity of protectionist policies implemented by both advanced and developing nations. A comparative reference to the 70 million individuals pushed into poverty in 2020 due to the COVID-19 pandemic underscores the potential gravity of the negative consequences associated with escalating trade tensions.

Policy Recommendations:

Prioritize Inclusive Development:

Trade policies must be designed with a focus on inclusive development, ensuring that the benefits of globalization are distributed equitably across different segments of society. It must consider the specific vulnerabilities and needs of marginalized groups, including small-scale farmers and workers in vulnerable sectors, when formulating trade agreements.

Sustainable Practices:

Environmental sustainability must be integrated into trade policies to mitigate the negative impact on vulnerable communities and ecosystems. Polices must encourage adherence to international environmental and labor standards to prevent exploitation and degradation.

Enhance Social Safety Nets:

Robust social safety nets must be implemented to protect communities adversely affected by trade policies, providing support for retraining, relocation, and economic diversification. Ensure that the most vulnerable populations have access to social welfare programs to offset any negative consequences of trade liberalization.

Include Stakeholder Participation:

Foster inclusive decision-making processes that involve various stakeholders, including civil society, labor unions, and marginalized communities, in the formulation of trade policies. Promote transparency and accountability in trade negotiations to build public trust and ensure fair representation.

These policy recommendations aim to strike a balance between harnessing the benefits of global trade and safeguarding the interests of vulnerable populations. By prioritizing inclusive development, sustainability, social protection, stakeholder participation, and fair trade agreements, policymakers can contribute to a more equitable and poverty-reducing global trade landscape.

Conclusion:

In conclusion, the intricate connections between trade policies and global poverty necessitate a balanced and thoughtful approach to policy formulation. The positive impacts of trade, such as enhanced real incomes and poverty alleviation through economic growth, are accompanied by potential negative consequences, including disruptions in vulnerable sectors and environmental degradation. The case studies of NAFTA’s impact on Mexico and Ethiopia’s agricultural export-led growth highlight the diverse outcomes resulting from trade policies. Moving forward, policymakers are urged to prioritize inclusive development, integrate sustainable practices, enhance social safety nets, and include stakeholders in decision-making processes. Fair and inclusive trade agreements that consider the developmental needs of all nations are essential for fostering a more equitable and poverty-reducing global trade landscape.

Summaiyya Qureshi
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Summaiyya Qureshi is currently pursuing her Mphil in International Relation from Punjab University, Lahore Quaid e Azam Campus. Her areas of interest are Globalization, Economic Integration and, militarization. She also works as Assistant Web editor at Daily Minute Mirror Lahore. She can be reached out at @summaiyyaqureshi4@gmail.com


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