‘Globalization  

is  a  fact  of  life.  But  I  believe  we  have  underestimated  its  fragility’  
were the words of Kofi Annan, seventh secretary general of United Nations. It has
come out to be even truer in the current climate. The Economist Intelligence Unit
(2009) suggests that the in the last quarter of 2008, some economies have shrunk at
annualized rates of over 10%. Shrinking international trade, both in terms of goods
and services has meant that the countries that were growing at a faster rate are also
the ones to be affected by it the most. These countries, generally the developing
economies face a greater threat and bigger challenges to overcome and this essay
outlines the key issues in the context of international trade for goods and services. It
explores the options for and against some of the key topics like protectionism that
includes trade and non-trade barriers, corruption, poverty, focus on services, and
South-South trade as these really are the key challenges amid immense growth in the
developing world.

A key area of debate here is protectionism. High tariffs and trade-distorting domestic
subsidies in the developed countries are likely to hinder future growth for net
exporting developing countries. In a paper submitted to WTO by nine major
developing countries (2005), it was alleged that many developed countries maintain
high tariffs, tariff peaks and tariff escalation on products of interest to developing
countries concerning world trade. Cuthbertson and Carmichael (2006) acknowledge
that while protection is high, it has changed its course. They give an example saying
that while average industrial tariffs in OECD countries have been reduced from 40
percent to 4 percent through multilateral agreements, non-tariff barriers such as
changes in domestic policy, voluntary export restraints have escalated beyond the
authority of international rules and agreements. They have grown to the point where
they now affect a substantial proportion of world trade in goods and services.

But it is not just the protection in developed countries that pose a danger for
developing  countries,  campaigns  like  ‘Buy  local’  within the emerging economies are
also a challenge for themselves. The Economist (2009) reports that recently, Vietnam
increased import tariffs on dairy products; India has upped tariffs on some types of
steels and Indonesian government will soon introduce regulations that will penalize
four million officials if they do not buy locally produced goods. These inward
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policies are inevitable for most of the developing countries in the short term but it is
the international trade in goods and services that suffer in the long term. For
example, in countries like Vietnam, Thailand and Malaysia, exports account for more
than fifty percent of the economy, and for more than one-third in Indonesia and
China. Retaliatory barriers can hit these countries hard. In such a situation, local
governments are torn between what they say in public about the evils of trade
barriers- and the desire to protect special interest, taxpayers and voters at home. But
although the world trade has grown rapidly, the WTO members have not been able to
adjust the maximum levels of tariffs and other barriers that they could maintain on
goods and services. Mattoo and Subarmanian (2009) still hold the view that trade has
grown throughout the globe because many governments have increasingly come to
believe that openness promotes long-term development. Many unilaterally have
liberalised their regulations on goods and services. According to them, the tariffs on
goods have declined from a worldwide average of over 25 percent in 1980 to less
than 10% today. Even though much of this liberalisation has taken place in the form
of regional agreements such as NAFTA, other critics may still argue that
protectionist measures are still favoured among the developed.

Traditionally, protectionist measures are favoured by some politicians who believe

that it is politically and commercially justified. On the contrary, Willet et al (1984)
believes that by consistently applying a protectionist strategy to preserve current
employment patterns in the face of competition (which frequently is from other
domestic rather than foreign sources) would rob the economy of its dynamism over
the long run and leave us all poorer. This raises another challenge for developing
countries in international trade in goods and services; poverty.

The current long wave of globalization, greater exchange of goods and services
beyond the borders confirms neoliberal economic theory. Wade (2007) from London
School of Economics agrees that more open economies are more prosperous and
people who resist further economic liberalization must be acting out of vested
interests. It can be seen that this evidence validates the rationale of the World Trade
Organisation, the World Bank, the IMF and many other multilateral economic
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organisations. A statistical evidence form IMF (Thomas, 2009) indicates that the gap
between the real GDP growth in emerging markets and in rich countries widened
from nothing in 1991 to about five points in 2007 and predicts will stay at 5.3 points
in 2009. But according to Martin Ravallion (2009) of the World Bank, roughly one
person in six in emerging markets had raised themselves above the $2-a-day poverty
line in 2005, though they still got less than a $3-a-day. So, the challenge now as ever
is being able to eradicate or reduce the number of poor people in developing
countries. So, is the global economic meltdown helping?

The integration of the world economy is in retreat on almost every front. The
economic  meltdown  has  popularized  a  new  term:  ‘Deglobalisation’  and  anti-
capitalist people like Walden Bello are happy about it. Conversely, helping poorer
countries catch up has long been among the benefits claimed for increase in world
trade of goods and services. Globalisation means the global integration of the
movement of goods, services, capital and jobs. Each of these processes is now in
trouble. (The Economist, 2009) For example, air cargo traffic (responsible for over a
third  of  the  value  of  the  world’s  traded  goods)  was  down  23%  in  December  from  last  
year. (International Air Transport Association, 2009) It can be seen that the impacts
of shrinking world trade are going to be dire for developing countries many of which
depend on commodities including variety of goods and agriculture-based exports.
When they suffer due to shrinking world demand and subsequently decrease in
traded goods; poverty line is likely to catch hold of a greater number of people.

As the world economies become more integrated, and while open trade of goods and
services bring benefits to developing countries in transition, embracing this openness
also brings new risks to the developing countries. On of the key risks developing
countries  now  face  is  ‘Corruption’.  Wei  (2001),  a  fellow  at  Harvard  University’s  
International Development Center indicates that corruption is a key challenge in the
process  of  globalization.  According  to  him,  it  can  hinder  a  country’s  ability  to  absorb  
benefits of increase in traded goods and services. It is likely to do this by reducing
the foreign direct investments, may make an emerging economy more vulnerable to a
currency crisis as evident from Asian Crisis of late nine-tees.
Weaker regulation of trade and domestic policy on corruption has resulted in
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increased corruption but they are not the only causes. It is likely that globalization of
trade itself encourages the chances of corruption. A simple illustration can be made
through  a  petty  observation  of  world’s  corruption  level  chart.  If  seen  from  
international trade perspectives, the countries that are more prone to corruption
(affecting their national output or GDP resulting from export in goods and services)
are also big players on the world trade market. (Transparency International, 2008)
The governments in developing countries are trying to curb corruption by
introducing stringent laws and heftier penalties for those who turn their back on the
system but it can be hard. The challenge is to eradicate corruption from political and
judicial structures first and then from the public. While corruption is something to
avoid, developing countries need to embrace new channels for growth.

One such channel can be focusing on trade in services along with agriculture and
other goods. The export strategies of most developing economies focus on goods and
overlook the chances to diversify trade through services. This is a key challenge but
equally services provide the backbone for all trade. A report by International Trade
Forum (2005) indicated that national development plans often excluded the service
sector. As the global service markets grow and offer opportunities in off shoring,
professional and tourism, it can be argued that even commodity-exporting
developing countries depend on services. Quality education, finance, logistics and
telecom services make agricultural and manufacturing producers as well as services
companies competitive.

The  answer  to  the  question,  ‘what  is  holding  developing  countries  and  their  
businesses  back?’  lies  in  the  lack  of  vision  and  competence  when  it  comes  to  
services. A research (World Bank, 2005) shows that they have capacity and export
potential in many services sectors. Services account for at least 50% of GDP in most
developing countries but it is still well below most of the developed countries. For
example, South Asian countries especially India has seen a great surge in foreign
businesses opening and expanding their existing service operations. India has
benefited from the IT boom and mini silicon valleys are opening up around the
cosmopolitan cities of Hyderabad, Bangalore and Mumbai. On the other hand, many
services still remain to be explored by many in the developing world.
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Shahid Yosuf, a research manager at the World Bank (2001) indicated that
developing countries have tended to neglect services that accounted for a fifth of
total trade in 1999. This in numbers was about $1.3 trillion. He adds to this saying
that the developing countries continue to lose out these as their manufacturing sub-
sectors rely on the efficiency of services, e.g. marketing, advertising, consulting and
logistics to achieve higher export earnings and growth. It is to be noted however,
that trade in certain types of producer services has expanded faster than goods since
as acknowledged by the World Bank.

Still,  the  main  challenge  is  lack  of  awareness.  In  ‘services’,  which  is  a  diverse and
fragmented sector, data is hard to capture and trade statistics are understated. (ITF,
2005) Many developing economies are already exporting services but small firms
may not know they are exporting when they do businesses with foreigners. It is thus
very likely that public officials in these countries may not be aware of the scope of
their own services economy. But it is not just the awareness, the report form
International Trade Forum also indicates the regulatory barriers that exists in services
in neighboring and regional markets as a key issue. These can hinder their ability to
establish offices in export markets of interests and their ability to reach clients
abroad. Nevertheless, building credibility abroad is another challenge. The intangible
nature of services means that developing countries often have to overcome the
negative perceptions in international markets. But the perception may change as the
countries of the South command more and more growth and technology that can
influence the whole world.

Developing countries are now exercising more power in terms of international trade.
In the course of Doha Round negotiations, they demonstrated that they could veto
over world trade rules. The possibility of this continuing may seem uncertain and
thus brings the age-old  challenge  of  ‘conflicts  of  interests’  among  the  countries  of  
South. Martin Walker (2008), from World Policy Institute, indicates that there are
clear signs of divergent interests among the developing countries (he refers to it as
South) that are likely to percent them from exercising their collective weight. An
example can be of the oil exporters of Middle East, Latin America, and Africa who
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have an interest in high-energy prices than China or India, who would prefer cheaper
energy.

According to the United Nations conference on trade and development (2009) there
is still a great room for trade in goods and services among developing countries. The
promotion of South-South trade remains a desirable objective for a variety of
reasons. Firstly, the sluggish growth in developed countries and their continued trade
barriers against products of export interests to developing countries. Secondly, the
size of the rapidly growing Asian economies reduces the need for developing
countries to seek developed-country markets in order to benefit from the economies
of scale. Finally, if developing countries continue to be dependent on the developed
country markets, they are exposing themselves to possible pressure to undertake
unwanted commitments. It is important for developing countries to have an access to
developed  country  markets,  as  it  is  clearly  a  key  element  in  developing  countries’  
productivity growth. But this is only part of the story.

Trade between developing countries is also vital. The research undertaken taken by
OECD (2006) indicates that if developing countries want to reap the maximum
benefits from multilateral trade liberalisation in goods and services, they too need to
open up their markets and boost trade among themselves. But it does remain to be
seen at a large scale. The research indicates that the tariff barriers affecting South-
South trade are still much higher than those affecting other trade, at an average
11.1% compared with 4.3% for North-North trade as shown in the figure below.

OECD does, however suggest that individual tariff rates vary widely across the
South, and the poorest countries tend to be those with the highest tariffs. Protection
levels  are  higher  where  the  exporters’  income  level  falls.  This  points  to  the  fact that
poorest countries tend to face the highest form of protectionism.

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As a group, developing countries are likely to gain more from multilateral tariff
liberalisation than industrial countries. This can be proved in terms of shares of gains
in national incomes. But these gains depend significantly on the extent to which
developing countries are willing to open up their markets. For example, if trade in
services is liberalised, it will have a good effect on goods exports through cheaper
transport, communication and financial infrastructure.

When  Kofi  Annan  said  that  people  have  underestimated  globalisation’s  fragility;;  he  
was probably referring to the continuum of challenges that the countries were to face
ahead. The essay shows that developing countries already have a greater influence on
world trade in goods and services than ever before. They face tough challenges and
while some of them are inherent and in their control (corruption and more focus on
services), others come outside their own domain (protectionism in developed
countries). Poverty is a challenge that can be controlled through equal distribution of
exporters’  earnings  in  the  developing  countries  but  most  importantly,  the  key  point  is  
that they should open themselves to each other first. If the developing countries do
manage to overcome these challenges, the balance gains from trade policy reforms
will continue shifting in favour of South-South trade, making the case for low and
middle-income developing countries even stronger. On the whole, developing
countries may have to revitalise their growth channels in both goods and services.

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