Clearly, the introduction of balance and fairness into WTO rules is desirable from the perspective of developing States. A diff erent question arises as to whether liber-alization per se is a prudent strategy from a human rights point of view. Th e justifi -cation for trade liberalization is that it will improve global and national economic effi ciency, and lead to economic growth and development. Th is is said to be so even on a unilateral basis, as liberalization will improve the effi ciency of a State’s indus-tries and allow its consumers access to cheaper goods.
¹¹6 See United States—Subsidies on Upland Cotton—Recourse to Arbitration by the United States under Article 22.6 of the DSU and Article 4.11 of the SCM Agreement, WTO docs. WT/DS267/ARB/1 and WT/DS267/ARB/2 (31 August 2009) (Decision by the Arbitrator).
¹¹7 See WTO, ‘Poverty Reduction: Sectoral Initiative in Favour of Cotton’ (WTO Committee on Agriculture), WTO doc. TN/AG/Gen.4 (16 May 2003).
¹¹8 World Development Report 2006, above n 58, 212.
From a human rights point of view, the important issue is whether liberaliza-tion is likely to lead to poverty allevialiberaliza-tion and better economic outcomes on a distributive basis rather than better economic performance on a national or global basis. Nevertheless, it is relevant to human rights to assess whether liberalization promotes economic growth, as that outcome should increase a State’s capacities to fulfi l its human rights obligations. Conversely, economic regression decreases those abilities. Furthermore, the short term detrimental impacts of free trade, which are undeniable for those in ineffi cient industries, cannot be justifi ed if the long term benefi ts are not in fact likely to eventuate.¹¹9 Of course, if free trade is promoting economic growth, such growth per se does not alleviate poverty due to possible distributional discrepancies. Th e impact of trade liberalization on economic growth, poverty, inequality and development is therefore examined further below.
Comparative advantage: theory and practice
In 1776, the economist Adam Smith challenged the protectionist orthodoxies of the time by proposing the theory of ‘absolute advantage’—that State A should produce goods for which it has an advantage over State B, and should export those goods to B, while importing from B goods for which B has an advantage with regard to State A. Advantages derive from country conditions, such as cli-mate, natural resources, size of population, and levels of urbanization. So long as trade between the States is not obstructed by trade barriers, both countries benefi t from cheaper goods and have more effi cient industries which concen-trate on the most suitable production outputs, rather than wasting resources on ineffi cient industries. David Ricardo advanced Smith’s theory in 1817 by prom-ulgating the theory of ‘comparative advantage’, which applied to all countries regardless of whether they had an ‘absolute advantage’ in the production of any product. State A, according to Ricardo, should concentrate on producing and exporting those goods which it is best suited to produce while importing from State B those goods that B is best at producing. Th e theory applies even if State A has an absolute advantage over State B with regard to the production of all goods.
Suppose A is better at producing both wheat and grapes than B, and that A is bet-ter at producing wheat than grapes. B is betbet-ter at producing grapes than wheat.
Under Ricardo’s theory, A should concentrate on producing and exporting wheat to B, while importing grapes from B, as A suff ers an opportunity cost in divert-ing resources from wheat to grapes. B should concentrate on its grape produc-tion. Under this theory of comparative advantage, numerous advantages accrue to all States if they trade freely without trade barriers. Th e production processes brought about by specialization become more effi cient and sustainable in each State, while consumers in all States enjoy access to lower priced goods of the best
¹¹9 Th e converse proposition however is not necessarily true. Th at is, short term consequences are not necessarily justifi ed under international human rights law, even if the long term benefi ts do arise.
quality. Furthermore, increased competition from free trade provides incentives to increase effi ciency and to innovate.¹²0
Of course, numerous economic theories have built on or departed from this 200- year- old theory. Many modern economists recognize qualifi cations and nuances to this pure trade theory.¹²¹ However, most free trade advocates still see comparative advantage as ‘off ering the best description of how international trade creates wealth’.¹²² Th e WTO’s website proclaims the theory of comparative advan-tage as ‘arguably the single most powerful insight into economics’.¹²³
Ricardo’s theory is based on a perfect market.¹²4 Professor Joel R Paul has listed four requirements for a perfect market where prices refl ect the true costs of produc-tion: an absence of trade barriers, homogeneous goods (where a product from State A may substitute for a product from State B), perfect consumer knowledge of the relevant market so that consumers buy goods at the most competitive price, and an adequate pool of buyers and sellers to stave off market manipulation by monopo-listic practices.¹²5
Th e most obvious trade distortions arise from barriers to free trade. Despite the eff orts of the GATT and the WTO, numerous trade barriers still exist. Indeed, certain trade barriers are mandated, namely IP rights under TRIPS. Linked to IP protection are distortions which arise from marketing, whereby consumers are convinced that certain branded products (where trademarks are protected IP) are better than others, which allows those products to be sold for a higher price.
Markets are also distorted by monopolies and anti- competitive practices, which currently remain outside the mandate of the WTO. Multinational corporations (MNCs) dominate world trade and have enormous exploitable advantages against new competitors. Much international trade today is in fact conducted within MNCs: an MNC will often import components from its off shore subsidiaries even if lower priced components are available elsewhere.¹²6 Th e severe impact of monopolies in agricultural markets is discussed in Chapter 6.
Th e application of the theory of comparative advantage in the context of a free fl ow of capital resources across borders, such that the trade advantages within a
¹²0 Paul, above n 35, 290–2.
¹²¹ Van den Bossche, above n 41, 19–20.
¹²² G Richard Shell, ‘Trade Legalism and International Relations Th eory: An Analysis of the World Trade Organization’ (1995) 44 Duke Law Journal 829, 858. See also Jagdish N Bhagwati,
‘Challenges to the Doctrine of Free Trade’ (1993) 25 New York University Journal of International Law and Politics 219 (1993); Michael H Davis and Dana Neascu, ‘Legitimacy, Globally: Th e Incoherence of Free Trade Practice, Global Economics, and the Governing Principles of Political Economy’ (2001) 69 University of Missouri Kansas City Law Review 733.
¹²³ WTO, ‘Understanding the WTO: Th e Case for Open Trade’ (undated) <http://www.wto .org/english/thewto_e/whatis_e/tif_e/fact3_e.htm> accessed 18 September 2010. Martin Wolf, in Why Globalisation Works (Yale Nota Bene, London, 2005), describes the idea of comparative advan-tage as ‘perhaps the cleverest in economics’ at 80.
¹²4 See also Stiglitz and Charlton, above n 18, 115.
¹²5 Paul, above n 35, 292. See also 292–6.
¹²6 Ibid, 295. Van den Bossche, above n 41, states that ‘two thirds of all trade takes place within companies’ at 9. However, he states that the amount is ‘one third’ at 703.
State can be appropriated by off shore traders, is dubious.¹²7 In this respect, one may note the diff erence between measuring economic performance by Gross Domestic Product (GDP), the market value of all goods and services produced within a State, and Gross National Income (GNI), which diff erentiates according to the ownership of income, thus taking account of the income which stays in a country, or which is imported into a country by its nationals (such as those MNCs headquartered in a country), and excluding income exported out of the country (such as by foreign MNCs).¹²8 If production (of goods or services) in a State is dominated by foreign MNCs with little trickle- down to local businesses, and the State is home to few investors with off shore activities, its GNI will lag signifi -cantly behind its GDP. In such a situation, GDP is an over- optimistic indicator of the State’s economic performance.¹²9 Th is is not to say that foreign investment is bad for an economy: such investment can of course provide jobs, technological transfer, and business for local industries. It is simply to suggest that outfl ows of capital ultimately benefi t or ‘confer advantage’ on the receiving rather than the sending State.¹³0
Finally, comparative advantage theory dictates that effi ciency gains will ensue from the transfer of the means of production, such as labour and capital, from ineffi cient industries to effi cient industries.¹³¹ However, the freed-up capital may in some cases move off shore. Furthermore, Stiglitz and Charlton have noted that developing States in fact have vast labour reserves. Th erefore, ‘trade liberalization is not required to “free up” these resources for use in new industries’.¹³² Removal of protection for existing industries therefore may mean that underemployed people in ineffi cient industries move to ‘zero- productivity unemployment’.¹³³
Th erefore, the relevance of Ricardo’s theory to the realities of the present day is questionable.¹³4 Paul has estimated the amount of goods traded in a ‘perfect market’ to be 25 per cent of the world’s exports ‘and probably signifi cantly less’.¹³5 In any case, assertions of the benefi ts of a truly free trade regime may never move beyond the theoretical. Free markets are currently impeded by the signifi cant level of protectionism which is permitted under WTO rules as well as globally man-dated IP rights. Political realities render it unlikely that world barriers will ever
¹²7 See also Wolf, above n 123, 83 (quoting Ronald Jones, Globalization and the Th eory of Input Trade (MIT Press, Cambridge, Massachusetts, 2000) 135–6), though Wolf argues that ‘this qualifi -cation to the theory seems far less important than one might expect’ due to the general lack of foreign direct investment in many developing States.
¹²8 See OECD, ‘Glossary of Statistical Terms’ <http://stats.oecd.org/glossary/detail.asp?ID=1176>
accessed 20 September 2010.
¹²9 See ‘GDP and GNI’, OECD Observer No 246–247, December 2004–January 2005 <http://
www.oecdobserver.org/news/fullstory.php/aid/1507/GDP_and_GNI.html> accessed 22 September 2010.
¹³0 Of course, outfl ows may be matched by infl ows, in which case GDP and GNI are equivalent.
And in some States, GNI outpaces GDP, as in Japan in 2004.
¹³¹ Wolf, above n 123, 81. ¹³² Stiglitz and Charlton, above n 18, 6.
¹³³ Ibid, 26; see also 194. ¹³4 Oxfam, above n 5, 57–60.
¹³5 Paul, above n 35, 298.
allow for the truly free movement of labour, so a truly free trade regime will never materialize.¹³6
Freer trade and economic growth
Nevertheless, trade barriers across the world have dropped under the auspices of the GATT and the WTO,¹³7 so orthodox economic theory holds that there should have been signifi cant increases in wealth across the world, even if those increases are not as much as could be expected in a perfectly free market. And indeed, global economic output has soared in the last 20 years.¹³8 However, this does not mean that trade liberalization in a State will automatically lead to decreases in poverty in that State.
Th e positive eff ect of free trade on economic growth is often presumed.¹³9 However, world economic patterns have not conformed to orthodox theoreti-cal expectations.¹40 While certain infl uential studies have purported to compare groups of ‘globalizing’ countries with ‘non- globalizers’, reporting that the former group has recorded greater rates of economic growth,¹4¹ those studies reveal noth-ing about the trade policies of the respective States.¹4² States that engage in sig-nifi cant international trade may nevertheless maintain highly trade restrictive policies. China (which only joined the WTO in 2001), India, South Korea, and Taiwan have all experienced outstanding rates of growth, but those growth spurts began long before those States undertook liberalizing reforms.¹4³ Vietnam, which only joined the WTO in 2007, is another apparent economic success story, where growth and poverty reduction have occurred under a protectionist regime.¹44 On the other hand, the results in the open economies of El Salvador and Mexico have
¹³6 Dani Rodrik, ‘How to Save Globalisation from its Cheerleaders’ (2007) 1 Th e Journal of International Trade and Diplomacy 1, 10–11. <http://dev.wcfi a.harvard.edu/sites/default/fi les/
Rodrick_HowToSave.pdf> accessed 20 September 2010; World Development Report 2006, above n 58, 210. See also Wolf, above n 123, 89.
¹³7 Furthermore, liberalization outside the GATT/WTO framework has been induced in devel-oping countries by international fi nancial institutions as conditions for loans.
¹³8 See the statistics cited in David Kinley, Civilising Globalisation (Cambridge University Press, Cambridge, 2009) 14.
¹³9 See, eg, Robert Howse, above n 10, paras 15 and 29 (criticizing this ‘neo- liberal article of faith’).
¹40 World Bank, Economic Growth in the 1990s: Learning from a Decade of Reform (World Bank, Washington DC, 2005) <http://www1.worldbank.org/prem/lessons1990s/> accessed 19 September 2010; Rodrik, above n 136.
¹4¹ See, eg, David Dollar and Aart Kraay, ‘Trade, Growth and Poverty’ (World Bank Policy Research Working Paper No 2615) (World Bank, Washington DC, June 2001) <http://wdsbeta .worldbank.org/external/default/WDSContentServer/IW3P/IB/2002/08/23/000094946_02082 304142939/Rendered/PDF/multi0page.pdf> accessed 22 September 2010 and David Dollar and Aart Kraay, ‘Growth is Good for the Poor’ (World Bank Policy Research Working Paper No 2587) (World Bank, Washington DC, April 2001) <http://wdsbeta.worldbank.org/external/default/
WDSContentServer/IW3P/IB/2001/05/11/000094946_01042806383524/Rendered/PDF/
multi0page.pdf> accessed 22 September 2010.
¹4² Oxfam, above n 5, 130–1.
¹4³ Rodrik, above n 78, 18 and 24; Paul, above n 35, 312–13. ¹44 Rodrik, above n 78, 21.