How can trade harm developing countries

For this reason, the international community has launched the Aid for Trade initiative, which has been designed to help developing countries build their supply capacity by developing infrastructure investments, productive capacity investments and transition assistance.

This will, for example, help Haitian rice producers or Kenyan flower producers to export their products to international markets. To minimize unemployment distress from the open markets transition, developing countries also need to develop social safety nets. As developing countries liberalize, workers in sectors without competitive advantage will face unemployment.

There is thus a need to reallocate workers to the newly growing sectors, which implies education, training policies and unemployment benefit programmes. In the short term, trade reform will also decrease government tariff revenues, reducing social spending particularly needed to face the rise in unemployment.

The international community should therefore assist developing countries in addressing these adjustment costs, one of the reasons why the United Nations system insists on integrating all development policies into the National Development Strategy of each developing country. To conclude, in the words of Bono, co-founder of the "One" campaign against poverty, trade reform is not about charity, but about providing developing countries the necessary tools to achieve the MDGs.

Trade is an important instrument to accelerate economic growth and reduce poverty. However, trade openness has to come with comprehensive reforms in line with each country's specificity and degree of development. The international community has acknowledged these issues in the last few years. United Nations action in social development is therefore crucial in helping developing countries profit from the growth opportunities provided by trade.

Those sectors are delivered mainly via mode 2, 3 and 4 and covering services such as education, travel, tourism and associated hotels, and restaurant services, as well as air passenger transport services and construction and other business services that require the movement of skilled and unskilled professionals across borders.

Travel and transport restrictions due to COVID—19 are likely to negatively affect the trade in services in Possible scenarios point to declines of 60 per cent to 80 per cent in international tourist arrivals in One of the most important contributors to international trade in services is tourism.

In addition to the direct service itself, tourism has large multiplier effects that extend to the domestic economy. It promotes growth and employment in a multitude of economic sectors, such as transportation, hotels and restaurants, retail trade, financial services and cultural services. It also attracts domestic and foreign investment and promotes the development of the private sector. For many developing countries, tourism is one of the most important exports and an essential source of revenue.

Figure 12 shows that, on average, tourism contributes to the economy at comparable rates in developing, developed and transition economies. Moreover, the contribution of tourism to the economy seems to be increasing over time.

The coverage is over 90 per cent for developing economies and per cent for developed economies. As mentioned above, tourism has a multiplier effect on the domestic economy through several channels. One of these, depicted on map 2, is through its direct contribution to employment creation. Despite its increasing economic weight, touristic service supply is still relatively concentrated.

Around 43 per cent of all international tourists were still travelling to European countries in As illustrated in figure 14, other regions of the world received a comparatively small share of international tourist arrivals. In many regions of the world, tourism still has unexploited potential as a means of development.

However, this is gradually changing. Worldwide tourist arrivals increased by almost 50 per cent between and While tourists travelling to Europe and Northern America increased by only 41 and 32 per cent, respectively, over the same period they increased by 93 per cent in South and South-East Asia and by a remarkable per cent in Central Asia.

The only developing region that did not benefit from this dynamism in tourism was Sub-Saharan Africa, where the number of tourists fell by nine per cent over the period. SDG target 8. However, even if tourism can bring substantial revenues and economic opportunities, it can also bring challenges for sustainable development. Tourists also directly contribute to greenhouse gas emissions and climate change in many ways: through transportation by air, rail, road and sea, and by consumption of goods and services whose production is intensive in energy, water or other resources.

Tourism is a labour-intensive sector that could provide employment for a large share of people, including women and other underrepresented groups.

It is also a sector with a high concentration of small and medium enterprises, self-employment and family businesses. However, as revealed by the precipitous decline in international travel and tourism in the aftermath of the COVID outbreak, this is a pro-cyclical sector with high elasticity to global and regional economic trends.

In addition, it is very sensitive to perceived security, health and environmental risks. Figure 14 shows the daily evolution of commercial flights during the first half of in comparison with and COVID pandemic severely hit the global commercial aviation because of lockdowns and bans restricting flights across the globe. As of the end of June , the number of commercial flights worldwide was down by 74 per cent compared to the same period of However, commercial flights record a steady recovery in recent months with an average positive growth of 10 per cent in June compared to the previous month.

Indeed, recent figures already show a catastrophic year for the sector. These figures show that, while international tourism could provide substantial opportunities for many developing economies, it remains exposed to high global and regional volatility. Considering the vulnerabilities of developing economies and especially LDCs exposed by the COVID crisis and the longer-term implications, international support will be essential not only for responding to immediate recovery needs, but also for accelerating structural transformation, trade support and assistance and development of resilience to external shocks.

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Table of contents. Figure 1. Trade openness index. Figure 2. Trends of goods and services trade in developing economies. Millions of United States dollars. Table 1. Evolution of LDCs' and developing economies' share of global trade. Different baselines scenario, in percentage. Map 1. If the productivity increase occurs in low-tech output, a sector that does not compete with Northern labor, there is no reason to expect the ratio of Northern to Southern wages to change.

Southern labor will produce low-tech goods more cheaply, and the fall in the price of those goods will raise real wages in the North. But if Southern productivity rises in the competitive medium-tech sector, relative Southern wages will rise. Since productivity has not risen in low-tech production, low-tech prices will rise and reduce real wages in the North. What happens if Southern productivity rises at equal rates in low- and medium-tech? The relative wage rate will rise but will be offset by the productivity increase.

The prices of low-tech goods in terms of Northern labor will not change, and thus the real wages of Northern workers will not change either. In other words, an across-the-board productivity increase in the South in this multigood model has the same effect on Northern living standards as productivity growth had in the one-good model: none at all.

It seems, then, that the effect of Third World growth on the First World, which was negligible in our simplest model, becomes unpredictable once we make the model more realistic. There are, however, two points worth noting. First, the way in which growth in the Third World can hurt the First World is very different from the way it is described in the Schwab letter or the Delors White Paper.

Third World growth does not hurt the First World because wages in the Third World stay low but because they rise and therefore push up the prices of exports to advanced countries. That is, the United States may be threatened when South Korea gets better at producing automobiles, not because the United States loses the automobile market but because higher South Korean wages mean that U. Second, this potential adverse effect should show up in a readily measured economic statistic: the terms of trade, or the ratio of export to import prices.

For example, if U. The potential damage to advanced economies from Third World growth rests on the possibility of a decline in advanced-country terms of trade. In sum, a multigood model offers more possibilities than the simple one-good model with which we began, but it leads to the same conclusion: productivity growth in the Third World leads to higher wages in the Third World. What changes if we now imagine a world in which production requires both capital and labor?

From a global point of view, there is one big difference between labor and capital: the degree of international mobility. Although large-scale international migration was a major force in the world economy before , since then all advanced countries have erected high legal barriers to economically motivated immigration.

But most labor does not move internationally. In contrast, international investment is a highly visible and growing influence on the world economy. During the late s, many banks in advanced countries lent large sums of money to Third World countries. This flow dried up in the s, the decade of the debt crisis, but considerable capital flows resumed with the emerging-markets boom that began after Many of the fears about Third World growth seem to focus on capital flows rather than trade.

Even Labor Secretary Robert Reich, at the March job summit in Detroit, attributed the employment problems of Western economies to the mobility of capital. In effect, he seemed to be asserting that First World capital now creates only Third World jobs.

Are those fears justified? The short answer is yes in principle but no in practice. As a matter of standard textbook theory, international flows of capital from North to South could lower Northern wages. The actual flows that have taken place since , however, are far too small to have the devastating impacts that many people envision. To understand how international investment flows could pose problems for advanced-country labor, we must first realize that the productivity of labor depends in part on how much capital it has to work with.

As an empirical matter, the share of labor in domestic output is very stable. But if labor has less capital at its disposal, productivity and thus real wage rates will fall. This might be because a change in political conditions makes such investments seem safer or because technology transfer raises the potential productivity of Third World workers once they are equipped with adequate capital. Does this hurt First World workers?

Of course. Capital exported to the Third World is capital not invested at home, so such North-South investment means that Northern productivity and wages will fall. Northern investors presumably earn a higher return on these investments than they could have earned at home, but that may offer little comfort to workers.

Before we jump to the conclusion that the development of the Third World has come at First World expense, however, we must ask not merely whether economic damage arises in principle but how large it is in practice.

How much capital has been exported from advanced countries to developing countries? During the s, there was essentially no net North-South investment—indeed, interest payments and debt repayments were consistently larger than the new investment. All the action, then, has taken place since How much pressure has this placed on wages in advanced countries? A back-of-the-envelope calculation therefore suggests that capital flows to the Third World since and bear in mind that there was essentially no capital flow during the s have reduced real wages in the advanced world by about 0.

There is another way to make the same point. Anything that draws capital away from business investment in the advanced countries tends to reduce First World wages. But investment in the Third World has become considerable only in the last few years. The real untapped potential for further trade growth lies in regulation. Meeting these formidable, complex and often opaque rules requires financial and technical resources, which means that the smallest and most vulnerable companies and countries pay the heftiest price.

While these measures and other regulations are legitimate, the sheer number of them continues to fragment trade. And we can expect the importance of regulation — particularly when related to public health, safety and the environment — to increase in the future, increasing costs to trade as they do so.

This chart shows the percentage of exports from each of the 48 least developed countries into advanced, G20 countries that are affected by non-tariff measures in red and traditional tariffs blue. Protests against trade deals quickly erupt if governments are perceived to be endangering the good of the public or the environment for better trade deals. This is the new frontier in the global trade agenda.

Trade policy cannot question the right of countries to protect their citizens and promote sustainable development. But trade policy can, and must, guide how countries exercise this right. The manner in which a country implements its regulatory choices, and the way it operates its regulations, is not a free-for-all — especially when it frustrates the attainment of sustainable development through trade by other countries, particularly the poorest countries.

The transparency of existing regulations needs to be increased. UNCTAD is leading an international effort to collect and freely disseminate comprehensive data on currently imposed non-tariff measures. These efforts go hand-in-hand with capacity building. The international trade community should increasingly embrace i nternational standards.