Future of trade: Global economic liberty

Read our article in the Cayman Financial Review Magazine, eversion 

The world is currently undergoing two struggles: the drive for prosperity and development and the desire to retain identity and traditions. 

Governments should offer global economic liberty by implementing a framework that incorporates democracy, equity, reduced consumption, cooperation and pre-caution. The pursuit of only profits has a tendency to undermine biological and cultural diversity, social and environmental costs, and inequitable access to and the overuse of natural resources.

Principles of democracy

When trade occurs at market prices between locations, benefits for both locations can be measured when there is comparative advantage in the production of some tradable commodity or when different regions’ size allows for the benefits of mass production; trade exist between regions.

Evolution in international trading systems will occur once the two largest economies determine how to approach trade. The size of the US trade deficit with China and the US views on trade liberalisation and its support for the World Trade Organization has the potential to sway the outcome. Through the WTO, the United States has sought to address unfair Chinese trade practices, such as intellectual property theft and unfair government procurement practices.

Significant global economic benefits have come from the WTO through the liberalisation of world trade since its establishment, 1995. The rules on trade were stabilised and provided an effective dispute settlement mechanism that managed trade conflicts by the WTO which is viewed as a key institution for global economic governance.

This has given businesses the confidence to engage in the type of global trading strategies that have allowed a company like Apple to have iPod components manufactured and assembled in different countries and then shipped back to the United States, generating greater profits for Apple and ultimately providing a cheaper product to consumers.

Equity, fair trade

If you value freedom and prosperity, societies must move away from free trade and move toward equity of trade.

Low-income artisans and farmers from the North and market produces in Asia, Africa and Latin America receive their income for their work through an equitable and fair partnership that was established by the development of fair trade.

Organic produce and eco-labelled production are new methods that have been promoted to encourage trade in environmentally friendly products.

Under equity of trade, if the nation or other trading entities wants to export some manufactured item or food product into the US, and if the item in question is priced lower than a comparable item manufactured or grown in the US, then the trading entity is required to pay an import duty at the port of entry that equals the difference between the landed-price of the good and the average cost of a comparable American-made good.

Despite benefits of the WTO, continuous challenges in its role as the primary vehicle for liberalising trade remain and serious questions have been asked concerning the effects of global trade on sustainability of which must be viewed broadly to include not only a healthy economics, the soundness of the environment, stability of employment, purchasing power, distributional equity, national self-reliance and the maintenance of cultural integrity.

The Doha Development Agenda was established in 2001 with the WTO to spur trade negotiations. Its main objective was to lower trade barriers around the world, which will help facilitate the increase in trade, but discussions stalled in 2008 and the increase of free trade agreements puts into question the effectiveness of the WTO.

Consumption
Profit, people and planet

The concept of creating more goods and services while using fewer resources and creating less waste and pollution means doing more with less. How will the reduction in consumption be measured in order to ensure that a sustainable infrastructure has been put in place? Often we are thinking in one dimension, but the future requires thinking in three dimensions.

In 1994, John Elkington introduced the phrase “the triple bottom line” as a method of measuring three different and quite separate bottom lines that include financial, social and environmental performance over a period of time. The triple bottom line (TBL) thus consists of three Ps: profit, people and planet.

The traditional measure of profit, the “bottom line” of profit and loss, the bottom line of a “people account”, a measure the measurement of how socially responsible an organisation has been throughout its operations. The third is the bottom line of the “planet”, a measure of environmental responsibility.

Since early 2000, reducing cost was a number-one priority, the hidden social and environmental costs of transferring production and services to low-cost countries such as China, India and Brazil became increasingly visible to western consumers. Thoughtless logging of the Amazon basin, the excessive use of hydrocarbons and the exploitation of cheap labour were being noticed.

Nike and Tesco along with others re-assessed their sourcing policies keeping a closer eye on the ethical standards of their suppliers in places as far apart as Mexico and Bangladesh, where labour markets are unregulated and manufacturers are able to overlook social and environmental standards.

The growth of the Fairtrade movement was encouraged by TBL. Fairtrade adds its brand to products that have been produced and traded in an environmentally and socially “fair” way, of course, that concept is subject to interpretation.

The Fairtrade movement has picked up steam in the past decade and Harriet Lamb, executive director of UK Fairtrade Foundation said “What’s really phenomenal is that Fairtrade sales have gone on growing despite the recession: 14 per cent growth last year, 12 per cent the year before. Times are tough in Europe but the West still has the resources to mobilise. By contrast, if you go to a country like Mali, 4 out 10 children are in school. That’s absolute poverty, and Fairtrade was set up so that all can play our part in helping tackle it.”1

Impacts that can be measured related to the environment include the consumption of finite resources such as energy usage, and water quality and availability and pollution emissions. Social impacts include health, employee and guest safety, education quality and diversity.

A Monitor Institute study estimates the size of the current impact investment market at $50 billion. However, with the right market infrastructure, Monitor estimates impact investing would represent one percent of the total global investment market by 2019 – and that’s $500 billion in capital used for direct social and environmental impact for global trade and sustainability.

Cooperation and pre-caution

Rules are created to be followed, but should only be used when they make sense.

Labour standards saw a profound effect due to the vast expansion in trade and investment in the 1990s, around the world. While some regions have benefitted, regions in Asia and South America where minimum labour standards are regularly violated and trade union organisers are forbidden entry, negative effects were prevalent.

This has lead to discussions to determine whether the international community should establish a link between the right of nations to engage in international trade and respect for the basic rights of labour.

Growth is necessary, or society’s needs cannot be fulfilled and financed. A helpful instrument for sustainable trade and recognised by the Foreign Trade Association (FTA)is the Sustainability Impact Assessment (SIA) provided it puts the same emphasis on economic impact as it does on the social and environmental impacts.

Though SIA may provide the value for measuring social and environmental impact, FTA must ensure that SIA does not become the source for new barriers to trade and should not be the standard to start and process international negotiations.

Another consideration is to measure what is the threshold of tolerance, when is a negative impact unbearable and when can it be tolerated to meet the development needs of countries.

The support of the world’s largest economy for the WTO continues to be extremely important in enabling it to be an effective international institution for global economic governance. The WTO’s need to exercise power to engage in global economic governance requires that concerns about their legitimacy be addressed.

Conclusion

Up until now, the WTO has been most sensitive to concerns about the institution’s legitimacy, and they have taken steps to address this issue. Our responsibility as corporate citizens is to ensure that we are thinking in three dimensions, even though our counterparts may only be thinking in one.

We must be innovative and explore ways that will propel the growth of future trade while minimising exploitation of natural resources, people and cultures. Effectively, it is the WTOs role to hold countries accountable to their current global trade commitments while being aware that the effects of behaviour on society, the environment and the economy are being set for future generations.

Endnotes 

  1. Financial Times, House & Home, At home, Harriet Lamb, 21 July/22 July 2012

 

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Kim Wales

Kim was the CEO of a fund administrator and has 17 years of experience, advising and leading Banking initiatives in various jurisdictions including New York, United Kingdom, Bermuda, Cayman Islands, Malta, Guernsey and Switzerland.  Kim is the founder of Wales Capital, specialising in Crowd funding and social, environmental and economic sustainability using Global Impact Investing Rating Standards.  Kim is a founding member of the Crowdfunding Intermediary Regulatory Advocacy and Crowdfunding Professional Association.  
 

Kim Wales
Founder & CEO
Wales Capital
New York
NY 10018

T: +1 (212) 736 6884 
E: kim@walescapital.com  
W: www.walescapital.com

 

 

 

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New York
NY 10018

T: +1 (212) 736 6884 
E: kim@walescapital.com  
W: www.walescapital.com