All Talks, No Action
Forget about the stalled Doha round negotiations -- developing countries can do plenty to fix their trade restrictions without the World Trade Organization's help.
The Doha round of World Trade Organization talks is teetering once again on the edge of total collapse, about to miss yet another absolute and final deadline for an agreement. Last month, Director-General Pascal Lamy beseeched members of the WTO’s Trade Negotiations Committee to "reflect on the consequences of failure," especially for "the smaller and least-developed [member countries] which are more dependent on an improved set of global trade rules."
But, in fact, there are plenty of incredibly valuable trade reforms that poor countries can carry out without a global agreement. There are a range of trade barriers in place in developing countries that don’t make sense even to those who like tariffs and quotas to support industrial development. With little local political opposition to overcome in these cases, there’s no need for a WTO-style international grand bargain to push them through. And if they re-engineer their tariffs and quotas to ensure a maximum variety of goods at home, countries with small economies will do an immense service to their citizens.
Basic trade textbooks harp on about comparative advantage, the idea that countries are relatively more efficient at producing certain types of goods because of the comparative cost of things like labor and capital, and that this is what drives trade. It’s the theory most commonly trotted out to justify trade agreements, among other things. But international trade is actually much more complicated than that. The nature and benefits of global trade flows are increasingly determined by maximizing the variety of goods, not the relative efficiency of their production.
In 2004, New York Federal Reserve economists Christian Broda and David Weinstein calculated that there had been a fourfold growth in the varieties of goods imported into the United States between 1972 and 2001. In 1971 the United States imported 7,731 different goods (cheese, sports footwear, cars), each from an average of about 10 countries. By 2001 it imported 16,390 different goods, each from an average of 16 countries. The United States also exported a lot of the types of goods it was importing, and many of the new trade relationships involved importing the same type of product from a second or third country — yet consumers still benefited from more choice. Just the impact of all this extra variety raised real income in the United States by an equivalent of 3 percent.
But economies smaller than that of the United States — that is, everyone else — suffer from more limited import variety. They don’t just import fewer goods — they import fewer different kinds of goods. Each doubling of an economy’s size involves roughly a 27 percent rise in the variety of its imported goods.
Stanford University economist Paul Romer provided an explanation for this phenomenon 17 years ago. There is a fixed cost to trade, he explained — whether you’re importing 1,000 pairs of running shoes or just one, you still have to find a supplier, figure out how to pay it, and navigate the complexities of shipping, customs, and, most importantly, local regulatory and tax rules. That makes it simply uneconomic to try to import many goods for which there aren’t a lot of potential customers with a strong demand — and ability to pay — for the product. Romer pointed out that raising tariffs further increased the fixed costs of importing and would thus further limit the variety of goods imported. He suggested, as a result, that a broad-based 10 percent import tariff might have an impact on the purchasing power of consumers in a small country equivalent to a 20 percent reduction in national income.
Of course, the more potential demand for the product, the more it will be worth overcoming these barriers. And demand is likely to be highest where there is no domestic production of a good with immense appeal — a lifesaving vaccine, for instance. But Romer pointed out that tariffs in combination with quotas, strict regulatory rules, domestic content requirements, and corruption could all raise the fixed cost of imports high enough that even very attractive goods might not be worth importing.
So what does this suggest for developing countries’ tariff and quota policies? They should be designed to maximize variety — especially in public goods. In some areas, taxes and tariffs are pretty harmless to meaningful variety. Pretty much every country in the world can produce beer, for example, and even small countries are large enough to have competing producers, so the impact of a beer tariff on quality of life is probably fairly small. It’s not exactly the end of the world if Liberians — who have their own thriving brewery sector — can’t buy Milwaukee’s Best at the local market.
By contrast, putting a tariff on imported vaccines would obviously be ridiculous. From a public policy perspective, we want people to use vaccines — and there’s no other product that’s easy to substitute in their place. But a World Health Organization survey of over 150 countries carried out a few years ago found that one-third of countries still levy import duties on vaccines, even though many of them don’t have a domestic vaccine industry to protect; in some African countries, the tariff on pharmaceuticals is as much as 40 percent. This is a huge deal in low-income countries, where medicines account for as much as 70 percent of total health-care expenditures, most of it paid by private individuals. Worse, the added costs limit access without doing the treasury departments of these countries much good — pharmaceutical tariffs generate less than one-tenth of 1 percent of GDP in revenues in all but nine of the countries that the World Health Organization surveyed.
Vaccines are just the beginning — developing countries should look at eliminating tariffs on the range of goods purchased by poor people worldwide that are not produced domestically. For example, Ethiopia has a 100 percent tax on imported solar products, and Malawi has a 48 percent tax on LED lighting systems, tariffs that will considerably depress — and may even wipe out — imports of solar-powered lamps that can have considerable health and economic impacts for those unconnected to the electricity grid. Ethiopia and Malawi aren’t protecting the solar panel and LED manufacturers in their countries — there aren’t any. And it is doubtful the policy is the result of extensive lobbying from the kerosene distributors association. More likely it is just that no one has thought through a move toward a more rational tariff policy.
That the last 30 years have seen quality-of-life improvements throughout the developing world is in considerable part a testament to the power of variety of new goods and services — mobile telephony, vaccines, and bed nets, to name a few — to make a better life more affordable to even the poorest people. The last thing that governments should do is stand in the way of that progress. And they don’t need a global trade agreement to make the change.