|Editorial – Realigning international trade according to the full cost principle
by Virgile Perret & Paul H. Dembinski
For many converging reasons – pandemic, geopolitics, backslash against globalisation, lack of progress in Doha Round negotiations initiated 20 years ago, to name the most important – free trade is today not only in danger but also its benefits are in question. For some, it is clear that policy makers should reshape the free trading world system to care more about safety and self-sufficiency.
The risk, however, is to throw the baby out with the bath water. Indeed, “one thing is tackling a public health emergency, another one is reconsidering free-trade governance.” As recalled below, while “there are elements of trade that are questionable, such as environmental aspects, the evidence shows the huge benefits of liberal trade for rich and poor countries alike”. Another challenge to the liberal trading order stems from the distribution and internal redistribution of trade benefits: “the problems lie with institutions, policies and mentalities, which do not always help to derive social profit from agricultural or industrial productions linked to international trade.”
If the pandemic should not make us ignore the benefits of free trade, it could be the catalyser paving the way for a renewed trade regime. It is not the first time that the free trade paradigm is under pressure. In 1960’s the developing world – and its advocates – managed to achieve a partial relinquishment of the sacrosanct reciprocity rule in trade negotiations, in name of development. Since that time, the nature of trade has changed but its distributional effects, especially in relation to development remain ambiguous. Unlike in models of Ricardo and Smith, international trade of today is not so much about comparative costs of finished goods, but rather about corporate absolute costs of very fragmented, intermediate inputs further assembled within global value chains. According to WTO, two thirds of world trade is today value chain related!
The main difference in the world of global value chains is that for many – possibly the majority – of intermediate goods, the buyers, those who are in the chain closer to the final product, have a relatively strong bargaining position towards those who are closer to the raw material end of the chain. Thus, the supplier winning the contract, is the one who delivers the requested quantity at the lowest absolute price, at constant quality. According to some experts, 2-3% difference may make or break the deal. Fearing to lose jobs and export revenues, many developing exporting countries are hesitant to stiffen their labour legislation or increase their tax level. In such situations, the price invoiced is truncated and unjust as it does not cover the effective social (decent work) and environmental costs. In consequence, international community is called upon to fill the gap by supporting budget deficits and development efforts that local budgets cannot afford. Fair trade organisations – mainly NGO – have spotted the problem long ago.
Today, international trade needs again rebalancing: goods should be traded at full cost, not at truncated cost as it is often the case today. This “full cost principle” has to find urgently its way into trade treaties and practice. The change may reduce slightly the volume of trade, but will – without doubt – make it more just in terms of commutative justice and will internationally increase its distributional effects: “purposefully revised and reinvigorated measures which give overriding priority to the needs of the world’s most deprived.”