Justice and Inequality in the World Trading System: A Critical Assesment

It has been argued that the global trading system is supposed to promote global efficiency and growth, but a rising chorus of voices is asserting that the global economy operates in a way that is fundamentally unfair and seems to be ‘rigged in favor of the rich’2. Those voices require more equality in the World Trade Organization (WTO). Yet, neo-liberals argue that unequal outcomes in the world economy are acceptable on the assumption that equality of opportunity still exists.3 Others defend the world trading system on the grounds that existing inequalities are fair, because they promote better overall positioning of the worst-off. For the purpose of assessment it is undoubtedly useful to invoke a straightforward normative approach. Nevertheless, the more newsworthy disposition could be reached by implying the normative assumptions to the theoretical frameworks of justice.

As a result, this essay takes an unconventional approach toward assessing fairness in the international trading system, namely, using theories of political philosophy. The Rawlsian theory of justice, Nozickian libertarian idea of ‘means and ends’, and egalitarianism will be used as frameworks to argue that the world trading system shows inherent one-sided unfairness to developing countries. In turn, the essay evaluates instances of limited membership, ideas of reciprocity, and double-standardization in the application of WTO regulations and preferential status of less-developed countries (LDCs) to assert that neo-liberal assumptions do not fend off from criticisms of unfairness.

Rawlsian Difference Principle

A reasonable starting point is the Rawlsian ‘principle of difference.’4 Developing countries complain that the acquired ‘Special and Differential (S&D)’ status in the WTO through U.S. implemented generalized system of preferences (GSP) system is actually not in their interest.5 Moreover, they argue that in fact it is preferential to the needs of the developed countries. The ‘principle of difference’ in the Rawlsian theory, modified to fit analysis of international scale, states that ‘international social and economic inequalities in trade negotiations are just only if they result in the benefit for the least advantaged nations.’67 In addition, Rawls argues that inequality in natural endowment should be compensated in fair re-distributative preferences that favor worse-off. In the case of S&D one might easily notice that S&D status provided to the developing countries is embodied in impracticability due to volatile term of ‘developing’ that is usually exploited by agents that are not the ones needing such status. Mavroidis remarks that at the WTO a country is deemed ‘developing not based on economic scale, but rather through self-selection’.8 The problem is that not all developing countries are ‘least advantaged’ that claim preferential status. Thus, as long as Singapore, Korea, or China claims the status of developing country, they will have this designation unless specific agreements provides otherwise. Therefore, it results in unequal treatment of preferences on unfair basis of self-selection. As a result, Pakistan’s receipt of more generous tariff preferences than India on the European textile market because of alleged unique drug trafficking problem; or the competition between Brazil and even poorer Caribbean nations to sell sugar in the E.C. 9 is seen unfair to the ones that need the help most. It grants exploitable potential for countries such as China. While competing with world powers, it enjoys the fruits of preferential treatment snatching market scope from the developing countries.

In addition, to be qualified for GSP and S&D countries have to liberalize and deregulate their economies. While rich countries keep their markets closed, poor countries have been pressured by the International Monetary Fund and the World Bank to open their markets at breakneck speed, often with damaging consequences for poor communities.10 The new vacuum space in the ‘confused’ country is often exploited by MNCs from the rich countries rather than national governments themselves. For instance, MNCs can gain flexibility by moving certain activities to a country which presents more opportunities while reducing potential threats. Due to the impending loss of their GSP status, several Korean and Taiwan firms shifted some of their production facilities to Thailand in order to use Thailand’s GSP status to facilitate their products’ entry into the United States. As a result, the income is being transferred to the benefit of the MNCs usually belonging to the developed states. Henceforth, GSP and S&D status does provide only superficial rather than actual approach to greater share of industrial production to developing countries.11 As a result, free trading system provides MNCs and industrially developed countries a way to steal the domestic sphere of production and exploit it in the benefit of their own.

Yet, neo-liberal defenders argue that the importance of the domestic policies rather than international trading system should not be reevaluated. There is an impression that the goods and services that people, businesses and governments currently buy are somehow made available by the planet and then unequally – and hence – inequitably – distributed among countries, leading to unfair original position of the worse-off. However, right libertarians argue that rich countries are rich because their citizens produce more per head, not because they have secured privileged access to ‘the planet’s goods’ or to its resources.12 It is their good governance, including sounder economic policies, that make them appear in the situation they are now.13 Rawls argues that inequalities arisen from ex ante disadvantage in the allocation of natural endowments might lead to incapability of developing countries which may have ‘small economies’ or an unfair share of factor endowments to compete with rich countries,14 therefore the international trading system is treating them unfair by imposing same crude rules that industrialized powers share. However, examples of Luxemburg, Singapore, and Switzerland, which can hardly be called rich in natural resources show that original positioning might depend on factors such as their good governance, including sounder economic policies, that make them appear in the situation they are now.15 Henceforth, lenient treatment of underdeveloped countries would indeed be unfair to developed countries.

While it is right to claim that MNCs are often encouraged by free trade, they are also driven by investment incentives from national governments. Korean and Taiwan firms were actually encouraged by tax benefits from Thailand’s Board of Investment.16 Therefore, it is crucial to understand that domestic policies of the governments play their part in exploitation process, rather than the system mishap alone. Nevertheless, the domestic policies are also greatly influenced by the international trading system. It is the IMF and World Bank conditionalities implying a ‘grab bag’ of political and other requirements that influence the change of domestic policies and therefore benefit developed nations more than developing countries.17 Those kinds of barriers introduce an overall bias into the MFN (Most Favored Nation) trade policies that are borne by the measure of trade restrictiveness constructed by the very same IMF and World Bank that impel developing nations to trade openness.18 Therefore, the world trading system has a closed structure that never descends to the needs of developing states. This could undoubtedly be seen as violating the ‘principle of difference’ as the rules of international system, according to Oxfam, seems to be ‘rigged in favor of the rich’19. Yong-Shik Lee argues that current preferential schemes benefit the least advantaged less than the U.S. and the EU themselves and therefore fail to meet the requirement of just trade under the ‘difference principle.20 However one should bear in mind that many critics of world trading system fail to address the individual human rights approach, which does not impart a legal right to development to developing countries, nor a moral duty on the part of developed countries.21 Therefore, one should address criticisms on the ‘principle of difference’ with a grain of caution.

Nozickian Means and Ends

If skeptical about the ‘difference principle’ as a reasonable sign-point of fairness, one might adopt approach borrowed from political philosopher Robert Nozick. Nozickian principal states that an agent cannot be used as means for other person’s ends. To bend his principle to the international scene, one might argue a nation ought not, in fact, must not be used as a utility object for the positive outcomes of another state if it were to be treated fairly. It could be argued that violation of Nozickian principle is inherent in the producer-bias of the WTO rules, which favor rich industrialized rather than the poor developing countries and the whole system exposes a high degree of utility orientation towards industrial states.

One might argue that the ‘dumping’ effect influenced by the EU and the U.S. agricultural subsidies is inherently unfair because it exploits the comparative advantage of developing countries through tariff restrictions. As a result they use the economic incapability of developing countries for reciprocal actions to dump the excess of productivity on lower prices destroying the internal infrastructure. The United States and the European Union dominate world markets in agriculture and each gives heavy subsidies to their own farmers. It has been estimated that these subsidies amount to roughly half the value of agricultural output in these economies.22 As Hoekman argues due to the huge agricultural subsidies of OECD countries (more than 150 billion $ p.a), less-developed countries, could not fully exploit their comparative advantages.23 These policies have three devastating effects on developing countries. Firstly, it keeps world prices for agricultural commodities artificially low. Secondly, it excludes LDCs from markets in the main industrialized countries and thirdly it exposes country producers to ‘dumping’ of artificially cheap produce from industrialized countries.24 While developing countries markets are seen as of less use to the developing, they are seen as peripherical and are used only for the needs of the OECD countries.25Hence, agricultural subsidies and the ‘dumping’ effect accompanied with pressured liberalization and tariff inequalities provide a basis for using developing countries as means for industrialized nation’s ends. On the other hand, while foreign subsidies harm certain industries within the country, it is unreasonable to conclude that the nation will be worse off in absolute terms. Any harmful effect of subsidies on one sector could be offset by the gains made in other sectors.26 Subsidized production can save useful money that can be invested in different spheres. Nevertheless, this does not offset the unfairness of the terms that subsidized productivity is based on one-sidedly directed utility.Continued on Next Page »