Research & Policy Briefs From the World Bank Malaysia Hub No. 25, October 2019 How Do Cultural Differences Affect Trade Reciprocity between Developed and Developing Countries? J. P. Singh Cultural distance in this Brief refers to the gap between development narratives promoted from the developed world—from experts, policymakers, and international organizations—versus political-economy practices in the developing world. The cultural distance analyzed here focuses on paternalistic factors in advanced countries contributing to trade barriers facing developing countries. Gradual moves toward reciprocal rather than discriminatory preferential access, as well as export diversification, can benefit the developing world. This Research & Policy Brief analyzes the link between diversification. Instead, the developed world provided international trade and development through the lens of culture: side-payments and limited trade concessions to the developing the values, beliefs, and symbols that contribute to collective world. Recent writings have praised Western paternalism and consciousness. Cultural distance refers to the gap between the global hierarchies for securing the needs of the developing world way developmental values and beliefs were posited among (Lake 2009; Barnett 2005). The following evidence demonstrates officials and experts in the developed world, including great otherwise: first, through a historical analysis of trade relations powers and international organizations, versus practices in the between developed and developing countries, and subsequently developing world. with reference to quantitative models linking Western paternalism with the lack of trade concessions to the world’s poor. In the postcolonial era, powerful and historical ‘top-down’ narratives shaped the international development agenda (table 1). Historical Context Trade theory and European history provided the rationale for industrialization and free trade, but the cultural distances between Historically, the developing world received nonreciprocal trade great powers and their former colonies influenced trade practices preferences from the developed world, which not only affixed that followed. The history of European industrialization shaped the them in a position of “definitional inferiority” (Zartman 1971, ix), push for a similar trajectory in the developing world, until the but produced long-term dependencies on these carve-outs, such instruments were altered to provide for more balanced growth as the specialized and differential treatment (Bagwell and Staiger that included agriculture (Hirschman 2014) and in the last 2001, 2013). Definitional inferiority, a position at the bottom of generation for a more encompassing and human view of the hierarchy of power and wealth in the international system, development (Sen 1999). Interestingly, none of these entails great powers dictating the terms of political-economic narratives—industrialization, agriculture, human capabilities— interaction. The chief instrument for this definitional inferiority in reflected the way the developing world was incorporated in the the context of this Research & Policy Brief was a historical postwar trading order. As detailed in the discussion that follows, paternalism, a leftover from colonialism, defined here as an trade patterns may actually have thwarted industrialization and infantilizing and exploitative discourse about the developing world Table 1. Development Organizations and Top-Down Narratives WTO World Bank UNDP UNESCO Main objective Trade liberalization Development loans Technical assistance Culture of Peace Main narrative Trade causes growth Institutions and markets Human development Cultural and human cause growth rights approaches Theoretical exemplars Neoclassical trade theory Institutional political Amartya Sen, Mahbub World Commission on economy, Randomized ul Haq Culture and Development Control Trials (RCTs)* Subsidiary narrative Special and differential Community development, Markets and technology: Think-tank of the world treatment, capacity building participatory development instruments of change Practices Negotiating and Providing ideas, Providing ideas, Promulgating norms enforcing rules implementing development implementing projects development projects Main practitioners Economists, government Economists, a few social Economists, development Intellectuals, UN ministries scientists, government scholars, UN bureaucrats, bureaucrats, government ministries, NGOs government officials, agencies, a few NGOs a few NGOs Note: NGOs = nongovernmental organizations; UN = United Nations; UNDP= United Nations Development Programme; UNESCO = United Nations Educational, Scientific, and Cultural Organization; WTO = World Trade Organization. *Randomized Control Trials (RCTs) randomly assign participants to a ‘treatment’ and a ‘control’ group and analyze the effects of a development intervention. See J-PAL: https://www.povertyactionlab.org/ Affiliation: Schar School of Policy and Government, George Mason University, and Robert Bosch Academy. Email address: jsingh19@gmu.edu. Acknowledgement: This Research & Policy Brief is based on the author’s keynote speech at the conference Globalization: Contents and Discontents (World Bank, Kuala Lumpur, January 15-16, 2019). Young Eun Kim, Norman Loayza, Vijayendra Rao, and conference participants contributed with comments and suggestions to this brief. Nancy Morrison provided editorial assistance. Objective and disclaimer: Research & Policy Briefs synthesize existing research and data to shed light on a useful and interesting question for policy debate. Research & Policy Briefs carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions are entirely those of the authors. They do not necessarily represent the views of the World Bank Group, its Executive Directors, or the governments they represent. How Do Cultural Differences Affect Trade Reciprocity between Developed and Developing Countries? Table 2. Tariff Rates in U.S. and Western Europe Commodities and Stages of Processing, 1960 (percent) Commodity Stage of processing EEC United Kingdom United States Copper Mattes, unwrought copper, 0 0–10 7–8 waste and scrap Tube and pipe fittings 15 20 21–24 Cotton Cotton not carded or 0 0–10 0-8 combed Fabrics of standard type 17 23 25 Iron and steel Iron ore 0 0 0 Pipes and fittings 13.5 17.5 10 Source: Adapted from Curzon 1969, 229–30. Note: EEC = European Economic Community. resulting from a position of economic and political strength and than tariff concessions or reciprocity. Following the Committee III cultural differences. The assumption in these discourses was that findings and the formation of UNCTAD, developing world advocacy the formerly colonial paternal powers would “provide” the was at its height. Economist Rául Prebisch, the architect of promised public good of a fair multilateral trading order. UNCTAD, supported nonmarket mechanisms such as preferential access and price controls for products from the developing world. In practice, the multilateral trading order functioned with a Meanwhile, the moves toward the EEC, and the birth of Common coerced or assumed cooperation from the developing world and Agricultural Policy in 1962 to encourage European agriculture, the promise remained unfulfilled. The needs of the colonial or meant that exports from the former colonies could be reduced. newly emergent postcolonial countries were ignored at the The EEC could protect its agriculture if it provided partial access to emergence of the General Agreements on Tariffs and Trade (GATT). the developing world, while arguing paternalistically that this The chief topic of concern in negotiations in the 1940s that led to the creation of GATT was the system of imperial preferences, access was preferential. While the United States remained which at that time were important to the colonizers (Irwin 2008). opposed to imperial preferences, by the late-1960s the developed In 1938, 49.9 percent of British exports and 40.4 percent of British countries moved toward and accepted a multilateral system of imports were to countries within the British empire (Feis 1946, preferences that would be governed through GATT. 668). The United Kingdom defended these preferences, including A 10-year GATT waiver for preferences was worked out in 1971. Tories who directly linked them to the continuation of an empire. The Generalized System of Preferences (GSP), implemented by With nearly negligible colonies, the United States viewed these several developed countries through GATT, granted zero or low preferences as trade protectionism that excluded U.S. products. nonreciprocal tariff preferences to specific products from The developing world’s articulation of its interests was different. designated developing countries. At GATT’s next set of multilateral The few (Keynesian) trade negotiators from the developing world negotiations (1973–79), the Tokyo Round Declaration in 1973 argued for infant-industry protections, to enable industrialization. made special mention of the GSP (GATT 1973, 2–3). The Enabling GATT Article XVIII (c) allowed such protections, but restrictively. Clause of 1979 institutionalized this understanding as part of the The United States was dismissive of developing country concerns Tokyo Round’s Framework Agreement. It allowed market access for industrialization. It was not until the 1960s that the developing for the developing world on nonreciprocal and nondiscriminatory world was allowed these industrial instruments after strident bases, favorable treatment with respect to nontariff barriers, advocacy and the formation of the United Nations Conference on special provisions for least-developed countries, and acceptance Trade and Development (UNCTAD). of preferential trade among developing countries. For the United The developing world also faced tariff differentials for its States, the Enabling Clause would supersede the European products (Table 2). In 1957, GATT appointed Committee III to Community’s preference schemes, which it had long been examine trade barriers for the developing world. Distinguished opposed. economist Gottfried Haberler headed the committee, which included other notable economists such as Roberto de Oliveira The implementation of GSP reveals that it resulted in paltry Campos, James Meade, and Jan Tinburgen. The subsequent benefits to the developing world. Hudec’s (1987, 116) report, popularly termed the Haberler Report, concluded that straightforward assessment is that GSP was a “tool used to win trade protectionism in the developed world impeded exports friends and punish enemies.” Meier (1980) characterizes it as an from the developing world (GATT 1958). Imperial preferences instance of trade diversion and protection, and notes that the were “predominantly trade diverting and not trade creating” (p. developed countries granted these preferences “begrudgingly.” 120). In terms of tariff differentials, Committee III found that tariffs Developed countries slipped in exceptions, escape clauses, and became higher if developing countries added any value or quantitative restrictions to undercut them. An early study (Karsenty processing to raw materials. In summary, the developing world and Laird 1987) showed that GSP exports to the “donor” countries faced many barriers in realizing any gains from trade, were only 2 percent higher than what they would have been industrialization, and growth. Several other economists attributed without the preferences. In 1996, GSP in the U.S. applied to 4,500 this to tariff differentials (Grubel and Johnson 1967; Balassa 1965). products from 140 countries with a total value of $16.9 billion—less than 2 percent of the total U.S. trade but 16 percent of the total An unfortunate convergence of interests from the European imports from developing countries (Holliday 1997, 8–11). Economic Community (EEC) and developing world led to a system of systematized preferential access for the latter building on In opting for GSP, the developing countries, misguidedly, 2 imperial preferences that produced further dependencies, rather stepped out of the GATT system, T. N. Srinivasan (1998, 27) notes: Research & Policy Brief No.25 Table 3. Paternalism versus Trade Liberalization Concessions Developing countries participated substantially for the first time in GATT negotiations at the Uruguay Round (1986–94). Until Paternalistic handouts Combination: Negotiated trade then, their role had been relegated to agreeing to trade Paternalism and trade liberalization concessions concessions handouts agreements signed among the great powers. During the Uruguay Round, developing countries formed coalitions among themselves, • Side payments • Preferential schemes • Reduction of subsidies and also with European Community (EC), and forwarded their • Moral statements (often negotiated) • Decreasing tariffs • Trade capacity- • Special and • Eliminating quotas interests through technical groups. However, at the end of the building assistance differential treatment • Elimination of other Uruguay Round they had few benefits to show: in two issues of • Affixing developing • Some forms of tariff and nontariff world in dependency quotas (e.g. sugar) barriers importance—agriculture and textiles—the developing world was narratives supposed to have struck a Faustian bargain, gaining concessions in • Foreign aid exchange for agreeing to new frameworks on high-tech services Source: Adapted from Singh 2010. and intellectual property. Practice and empirical results indicate that this trade-off was limited. Figure 1. Agriculture Concessions Received and Official Development An index for paternalistic strength was constructed to show Assistance (percent of GNP) at GATT's Uruguay Round (1986-94) how cultural distance affects trade reciprocity. Paternalism implies the strong helping the weak with concessions or protection. 20 Conceptually, paternalistic power implies economic strength or Percent Agriculture Concessions Received prosperity, political domination, and cultural distance from paternalized countries. A factor analysis of three different indexes 15 dealing with economic and political strength and cultural distance yields the paternalism strength index (PSI). These are the export market concentration index; values of the affinity index for the 10 United States in the UN General Assembly measuring how countries follow the dominant leader; and cultural distance for a “hybrid colonizer” from other countries. 5 Factor analysis is particularly useful for examining concepts that are hard to measure. The factor analysis here outlines a latent 0 measure of postcolonial relationships that is common to a group of 0 20 40 60 80 variables, not the distinct variables by themselves. The export market concentration index from the World Integrated Trade Development Assistance % GNP Solutions database of the World Bank, examines the dispersion of products across trading partners, and measures paternalistic “Instead of demanding and receiving crumbs from the rich man’s economic strength: classic colonial relations would entail trade table, such as GSP and a permanent status of inferiority under the within the colonizer’s trading sphere and in a few products. For ‘special and differential’ treatment clause, had they participated political paternalism, PSI includes affinity votes with the United fully, vigorously, and on equal terms with the developed countries States taken from “United Nations General Assembly Voting Data,” in the GATT and had they adopted an outward-oriented compiled by Anton Strezhnev and Erik Voeten (2009). The United development strategy, they could have achieved far faster and States, as the agenda-setter hegemon in trade, is used as a proxy better growth.” for the developed world. By the time of the Uruguay Round of trade talks (1986–94), GSP Finally, PSI factors in Hofstede's four-part criteria measuring had produced two sets of developing world actors: ones that cultural distances of countries from one another on a scale of 0 to received rents from this system of protections and grew 100 (Hofstede 2015). To measure the cultural distance of a dependent on them (for example, the Group of 77) and efficient developing country, the analysis first developed a “hybrid producers that advocated for reductions in tariffs (Cairns Group). colonizer” that provides the value for seven colonizers (Britain, Collectively the developing world was now realizing that its France, Germany, Netherland, Portugal, Spain, and the United agricultural and manufactured products faced increasing barriers. States) and then calculated the cultural distance of every country In 1995, the World Trade Organization (WTO) replaced the GATT, from this hybrid colony. The cultural distance scores from the and has continued to perpetuate similar barriers to exports from the developing world. hybrid colonizer vary from 12.2 for Luxembourg to 84.6 for Guatemala in the data set. The assumption in Hofstede’s scores, Cultural Distances and the Uruguay Round based on a survey of 117,000 IBM employees around the world between 1967 and 1973, is that cultures change slowly and, This section draws upon a study correlating the lack of concessions therefore, the values remain relevant. They are especially relevant developing countries received with the cultural distance between for this Research & Policy Brief evaluating paternalism in the the developed and developing worlds (Singh 2017). Specifically, 1970s and 1980s before the Uruguay Round. Table 4 lists sample cultural distance was measured through a paternalism index values of PSI for a few countries. (explained later) to capture the presence of cultural continuities between the colonial and postcolonial experiences. Table 3 lists There is no benevolence in paternalism. The PSI and its the differences in outcomes that may result from paternalistic subindex, export market concentration (diversification), provide versus reciprocal concessions. In addition, figure 1 shows how statistically significant and positive correlations with receiving tariff foreign aid in particular has been employed as a side payment in concessions in agriculture, manufacturing, services, and lieu of trade concessions in agriculture that the developing world intellectual property (for full results, see Singh 2017, chapters 4–7; desperately needs. The almost perfect hyperbola posits an inverse data on tariffs from Finger et al 1996). Separately, being a relationship between trade concessions received in agriculture European colony in the twentieth century is also statistically and official development assistance. significant and negatively correlated with receiving concessions. 3 How Do Cultural Differences Affect Trade Reciprocity between Developed and Developing Countries? Table 4. Paternalism Strength Index (sample values) farmers in cotton. This is consistent with paternalistic handouts presented in table 3. Paternalistic countries Less paternalistic countries Policy Implications United States 3.170 China -0.083 France 2.480 Brazil -0.248 In the long run, all countries will need to reexamine the cultural United Kingdom 2.340 India -0.307 beliefs and historical continuities that have affixed the developing Japan 1.160 Singapore -0.470 world in an inferior position in global trade. Developing countries Canada 0.936 Kenya -0.500 need to gradually cut the umbilical cord of preferential treatment Sweden 0.497 Mexico -0.550 that produces dependencies and inefficient production practices and weakens their hand in international negotiations (Bagwell and The Uruguay Round featured many developing country coalitions. Staiger 2013). This is particularly hard for least developed However, the results are mixed: The dummy for Cairns group countries, whose export regimes are now beholden to preferential countries that argued for agricultural liberalization is significant access. For the developed world, an equitable commitment to and positively correlated with concessions for agriculture. Of the liberalization would start with access to its heavily protected and major coalitions, the Association of Southeast Asian Nations subsidized agricultural markets. (ASEAN) received concessions in manufacturing, suggesting a trade-off with intellectual property—an area in which they were A complex case is China, a middle-income country that is now pressured through Section 301 sanction of the 1974 U.S. Trade the world’s biggest exporter, generating massive trade surpluses, Act. India and Brazil formed a hardline coalition through the and the world’s biggest subsidizer in agriculture: this shifts the Group of Ten (G10) to advance developing country interests, but agricultural subsidy dispute from a North-South conflict to one the coalition does not seem to have received any concessions. The between United States and China (Hopewell 2019). Technically, sign for G10 coefficients in all models is negative. Although not WTO rules should entail China’s classification as a nonmarket statistically significant, it suggests that coalition members may economy because of the heavy subsidies to state-owned have been punished instead of receiving concessions. In terms of enterprises, but China continually cites its developing world status domestic audience costs for undertaking liberalization in defense, often to the detriment of the latter. measures—especially in democratic societies (measured through Polity IV data) and economic prosperity alone (measured through Overall, the multilateral trading order offers little hope at GNP per capita)—the correlations are not statistically significant, present to the developing world for getting trade concessions. except in a couple of models. Overall, the paternalistic strength of Arguably, it never did. But there are ways in which the developing the developed world and being a colonizer explain the lack of world can improve its negotiation advantage. The first is through concessions to the developing world. diversifying its export markets—a policy that multilateral institutions such as the World Bank often emphasize. Export After the Uruguay Round, the developing world continued to market diversification improves bargaining advantages and is argue for opening markets in the developed world, especially in positively related to receiving tariff concessions. These results agriculture and manufacturing. In 2008, the Doha Round of trade hold even when controlling for low-income economies (measured negotiations stalled over the issue of agriculture. The United with annual per capita incomes of less than $5000 and $2000): States has variously blamed India and China, while the developing those with higher values on the export market concentration index world in general has pointed out agricultural market protections in received higher concessions (Singh 2017, chapter 7). WTO reform the developed world. The cotton dispute between the United seems politically out of question right now but would start with States and Brazil is illustrative of paternalism. The 2014 settlement tariff concessions from the developed world, and a pragmatic and reached after a decade of Brazilian legal victories at the World gradual reduction of preferential access for products from the Trade Organization (WTO) let the United States maintain its developing world. Reducing preferential access without providing domestic subsidies in exchange for a $300 million payment to the tariff concessions continues patterns with which the developing Brazil Cotton Institute for technical assistance to developing world world is made worse off in the international trade regime. References Bagwell, Kyle, and Robert W. Staiger. 2002. The Economics of the World Trading System. Cambridge, MA: Holliday, George D. 1996. Generalized System of Preferences. Washington, DC: Congressional Research MIT Press. Service, Library of Congress. ---------. 2013. "Can the Doha Round Be a Development Round? Setting A Place at the Table." 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