Four reasons why free trade doesn’t promote development

Table of Contents

Last Updated on September 12, 2023 by Karl Thompson

Andre Gunder Frank (1971) argues that the reason trade doesn’t work for poor countries is a legacy of colonialism – before independence, the colonising power simply took these commodities. After independence, developing societies are often still over-dependent on exporting these primary commodities, which typically have a very low market-value, and rich countries are happy to keep things this way because this enables them to stay rich.

Four reasons why free trade doesn’t always promote development

Dependency Theorists point to at least the following reasons why trade doesn’t help poor countries develop:

Poor countries are often dependent on low value, primary products for their export-earnings.
Value is added to primary commodities by rich countries.
The terms of trade are often biased against poor countries

Poor countries have been pressurized into exporting to clear their debts.

Poor countries export low value, primary products

According to Elwood (2004) three commodities accounted for 75% of total exports in the poorest 50 countries, but because of the declining value of such commodities, the developing nations need to export more and more every year just to stay in the same place. One developing nation leader described it as ‘running up the downward escalator’. For example, in 1960, the earnings from 25 tons of natural rubber would buy four tractors, today it would only buy one.

One example of a country which appears to be still dependent on the export of low value primary products is Malawi:

Tree map showing exports from Malawi. — *Malawi – dependent for most of its income on one primary agricultural product – Tobacco*. (Source.)

However this may not apply to that many African countries today. According to data from Statista, while there is still a colonial legacy which affects African exports, more African countries have moved towards exporting oil and gas which are more profitable than the more traditional agricultural commodities.

Value is added to primary commodities by rich countries

Primary products such as cocoa, tea and coffee, sell for relatively low prices, so the farmers growing and selling such products make relatively little. However, once these products have been processed, branded and turned into the goods you see on the supermarket shelves, they can sell several times the original price. The problem (for developing countries) is that most of this processing and branding is done in the West. Thus, poor countries stay poor, and rich countries get rich.

With some commodities, there are several links in the chain of trade – take coffee for example – it goes from grower (in Ethiopia for example), to the local buyer, to the exporter, to the roaster (in Germany for example), to the supermarket and then to the consumer – 6 links in the chain. A bag of coffee might cost the consumer £2.50 in the supermarket, but the grower is lucky (very lucky) if they receive even 10% of this.

This infographic on the economics of coffee from Visualcapitalist shows shows how little poor farmers make from coffee compared to the end retailers. The breakdown is as follows:

growing – $0.07

exporting coffee – $0.16
Roasting – $0.35
distribution – $0.04

retail $2.17
total = $2.80

So the farmers growing the coffee get around 2% of the end price!

The terms of trade are often biased against poor countries

Western nations impose tariffs (import taxes) or quotas (simply limits on how much a country can import) on goods from the developing world, which seriously impairs the ability of poor countries to make money from exports.

At the same time as restricting imports from poorer countries, Western governments subsidize some of their own industries. This results in over-production in some sectors, which can result in cheap, subsidized Western goods being dumped on poor countries, which undermines local industries in poorer countries. This happened in Haiti in the early 1990s, when cheap, subsidized American rice was dumped on the Haitian market, forcing local rice farmers out of business (because the American rice was cheaper.

This 2015 video from Al Jazeera focuses on this issue in Kenya – Kenyan cotton farmers are finding it very difficult to compete with subsidized American cotton farmers. You get to see the large scale U.S. operation which is subsidized by the American government, who exports their cotton: the US is the largest cotton exporter in the world. And you also get to see how American cotton production contrasts with the much smaller scale nature of Kenyan cotton production, cotton which they cannot export because they cannot compete with the subsidized US cotton.

More recently, OXFAM has been concerned with the recent increase in bilateral ‘free trade’ agreements (FTAs). For example, in 2007, the EU singed FTAs with India which opened up Indian markets to the import of poultry and dairy products, despite the fact that 85% of demand is met locally by Indian farmers, and the introduction of big supermarket chains into the Indian marketplace.

In 2020 War on Want argued that aggressive new post-Brexit trade deals between the UK and Ghana hit Banana exporters in Ghana with £20 000 worth of tariffs a week, putting the livelihoods at risk.

Exporting to clear debts

The World Bank sees loans and debt as a ‘normal’ part of development, and poor countries are required to maintain repayments on (often low-interest) development loans to be eligible for more loans, thus keeping up repayments on loans is a crucial part of development for many countries.

Ellwood (2004) argued that this has resulted in the ‘social violence of the market’ – the constantly escalating pressure on farmers and workers in the developing world to produce more for less, which results in a problem called ‘immiserating trade’ – the more a developing country trades, the poorer it gets.

Conclusions

Marxists conclude that the terms of world trade are far from equal. Developing countries are very much junior partners in global trading relationships and are consequently exploited by more powerful countries, TNCs and their agents.