Free Trade, the WTO, and American Politics

Sunday, August 17, 2008

The definition of free trade is relatively straightforward: trade in which prices are not distorted by tariffs and subsidies, or restricted by quotas or other forms of non-tariff barriers (besides those necessary for public health and safety). The logic behind free trade is also simple: it results in lower prices, which benefit the world economy.

Countries throughout history have avoided free trade in order to bolster certain sectors of their economy at different stages of development. Today�s developed countries once employed high tariffs to protect domestic producers, and still rely on various subsidies. Developing countries feel the need to protect their industries from more efficient outside producers.

There is healthy debate about the extent to which protectionist policies have helped developing countries. Some researchers point to the interventionist policies of today�s Asian powers as evidence that free trade is not the best path for developing nations. Others point out that the protectionist policies employed over many decades in Latin America have had at best mixed results.

There is a general consensus, however, that over time the world should move in the direction of freer trade. The transition will not be painless; there will be many losers, especially the unproductive agricultural sectors of the developing world.

Even though agriculture�s share of GDP is decreasing throughout the world, in many countries agriculture still employs a disproportionate share of the workforce. Developing countries, particularly China, are worried that more imports of cheaper food will put their farmers out of work and lead to massive unemployment. This is a legitimate fear, and explains why phased-in commitments and assistance for the transition period have been part of the WTO Doha negotiations. In addition, developed countries have agreed to cut their agricultural subsidies in exchange for lower tariffs abroad.

In the latest round of the Doha negotiations, China wanted to include a safeguard to raise tariffs significantly if imported food starting flooding their markets. The Chinese suggestion was refused because it went against the reason for lowering tariffs in the first place. This led to a deadlock which has derailed the negotiations for at least another year.

From an economic perspective, these trade talks have been bizarre because they rely on a mercantilist mindset: countries will only agree to reduce their protectionism if others do so as well. In reality, each country would be better off if it unilaterally moved towards freer trade.

Agricultural subsidies in the U.S., the EU, Canada, Japan, and South Korea are a particularly egregious form of corporate welfare. They artificially depress world prices, lead to over-production, and degrade the environment. All these countries would be better off if they eliminated subsidies regardless of what other nations do.

High tariffs force China, India and other developing countries to pay higher prices for food. Lowering their tariffs would reduce both food prices and inflation. If done slowly over a period of time, dislocations could be minimized and investments made in more productive agriculture and other forms of employment.

I would venture that 90% of Americans lack a basic understanding of free trade. Increasingly, they seem to believe that freer trade (particularly NAFTA) is responsible for many of America�s economic ills, e.g., lost manufacturing jobs and stagnating wages. Blaming �unfair foreign competition� is an old game in politics, and plays into other xenophobic fears.

Ironically, it is America that for decades preached the benefits of free trade and free markets to the rest of the world. Now, with our own economy hitting a bump in the road, Americans are lashing out in frustration. The truth is that U.S. consumers have benefitted tremendously from lower trade barriers; the average American probably saves several hundreds of dollars per year because of these lower prices.

Stagnating wages and job losses have not been caused by freer trade. They have been caused by technological innovation, increasing returns to education, and, in the case of the U.S. auto industry, persistently short-sighted management.

More protectionism by the U.S. would not raise American wages or restore American jobs. It would only raises prices and weaken our economy further.

The fact is that in our increasingly globalized and technological age, people without college educations (and more advanced degrees) are going to fall further behind. We need to engage in a serious discussion about education reform, put in place public policies to assist with lifetime education, and work towards increased safety nets. It�s wrongheaded to evade the real issues, and blame free trade for our woes.

Voices of Reason

Free Trade, the WTO, and American Politics