Could a Commonwealth Free Trade Area be a success?
By: Mark Normington
Tags: Economics, International, Politics, Trade, Commonwealth

Originally written for The Royal Commonwealth Society, October 2018

Trade is back on the agenda. Following the UK’s vote to leave the European Union and the election of Donald Trump in the USA, trade policy has moved from the fringes to the front and centre of contemporary geopolitical discussions. The erosion of the consensus around global trade was unthinkable even five years ago, yet it continues to unravel before our eyes. Discussions as to how this could have happened have become increasingly framed around the sinister rise of reactionary nationalism, as contrasted with the enlightened, forward-thinking proponents of free trade fighting to protect the status quo.

To some, for example Shanker Singham writing in the Daily Telegraph, the Commonwealth represents a potential bulwark against the rising tide of protectionism which threatens the global economic order. The possibility of reorganising the informal grouping of countries into a formal trading bloc has loomed large in post-Brexit debates, with the hope that such an agreement could kick-start multilateral trade talks which have been at a standstill in recent decades.

The recently released UNCTAD Trade and Development Report 2018, titled ‘Power, Platforms and the Free Trade Delusion’ may pour some cold water on these ambitions for a Commonwealth Free Trade Area. The report tells some hard truths about the state of the global trading system, showing that far from being a result of any recent growth of populist nativism, the cracks in the global economic order have been growing for a long time, and not without good reason.

Discontent with the state of the international trading system can be seen as early as 1964, when policymakers from the Global South raised concerns that the rules governing this system seemed to benefit wealthy countries at their expense. The proliferation of free trade agreements and bilateral investment treaties in subsequent decades, culminating in the creation of the World Trade Organisation (WTO) in 1995, opened up the markets of developing countries to foreign investors and competitors, shifting the global economy into a period of what UNCTAD’s report refers to as ‘hyper-globalisation’.

Yet despite the assurances given to countries in the Global South, the supposed gains from embracing hyper-globalisation never materialised. The average per capita income growth rate of 3.2%, which countries in the Global South enjoyed during the period of state-led developmentalism during the 1960’s and 70’s, fell to 0.7% in the 1980’s and 90’s. Even worse, in Sub-Saharan Africa per capita income actually fell by 0.7% annually throughout the 80’s and 90’s. In Nigeria, the poverty rate rose from 28% in 1980 to 66% in 1996. Global inequality soared, with the ratio of the richest fifth of the world population’s income to the poorest fifth’s rising from 30:1 in 1960 to 74:1 in 1995.[1]

There were a few success stories during the period of hyper-globalisation, but only a few. As UNCTAD’s report highlights, only a small number of countries have managed to use increased international trade as a means to transition away from low-value activities (e.g. agriculture and mineral extraction) and develop higher-value manufacturing and service industries — necessary for providing higher wages and living standards. In most cases it resulted in increased specialisation in the production of low-value goods, further entrenching the countries’ positions in the low-income bracket.

The reason which the UNCTAD report gives for this is that increasing the volume of trade alone is not sufficient to produce positive outcomes for developing countries. Rather, ‘without policy interventions to generate structural change, channel profits into productive investment and bring better quality employment, trade can nurture more economic, social and environmental damage, at odds with the Sustainable Development Goals.’

At the same time, ‘many of the rules adopted to promote “free trade” have not promoted a rules-based system that is inclusive, transparent and development friendly.’ Instead, these rules have increasingly prohibited developing countries from using such state-led development strategies as were used to great success by many present-day developed countries, and most recently China, during their industrialisation. These strategies include tariffs on imports, capital controls, regulation of foreign direct investment, state-owned enterprises, and other measures which are considered ‘market-distorting’.

The dissatisfaction of developing countries with the state of the international trading system came to a head with the Doha round of WTO negotiations. Beginning in 2001, the negotiations — designed to further integrate countries into a hyper-globalised world economy — dragged on until 2008, when the talks collapsed. Unable to reach an agreement, multilateral trade talks through the WTO have been at a standstill ever since.

It is against the backdrop of WTO stagnation that regional trade agreements — such as the Trans-Pacific Partnership and the hypothetical Commonwealth Free Trade Area — have gained in popularity, the idea being that negotiations between a bloc of countries may prove easier than those at the global level. However, this is a misdiagnosis of why the multilateral trading system is at a standstill. The problem is not one that can be solved simply by selecting the right grouping of countries. As the UNCTAD report shows, the problems with the international trading system run much deeper than that. Until the concerns of developing countries are addressed and the rules governing international trade adjusted to benefit them, any attempt at a Commonwealth Free Trade Area is unlikely to succeed. Indeed, given the deleterious effects of previous free trade agreements on developing countries’ economies, the creation of a Commonwealth Free Trade Area may actually be undesirable.

UNCTAD’s report has little good to say about those who advocate more free trade as a route out of poverty for developing countries: ‘simple-minded calls for more trade liberalisation are no substitute for development strategies…’ Furthermore, the rules-based global economic order cannot be saved from the present threat of protectionism by simply ‘doubling down on business as usual’. Instead, policymakers must recognise the problems which global trade rules have caused developing countries and ‘move the system in a more inclusive, participatory and development-friendly direction.’

As a voluntary association of independent and equal states committed to sustainable development, where the voices of developing countries are given equal weight to those of their wealthier counterparts, the Commonwealth is well-placed to push for this transformation.

[1] Statistics obtained from Jason Hickel, The Divide, pp. 158, 160, 174