Free trade debate - The Economist

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Free Trade: Pro, Against
A motion against
The Economist, May 9, 2010

Defending the motion
Ngaire Woods
International Political Economy Prof. and Director, Global Economic Governance, Oxford University

Free trade is not always in a country's interest. Jagdish Bhagwati's argument assumes that trade liberalisation will expose protected industries and the crony capitalism which goes with them, causing them to disappear. So far so good, but that does not ensure growth.

Against the motion
Jagdish Bhagwati
Economics and Law Professor, Columbia University and Senior Fellow, Council on Foreign Relations

Ngaire Woods is sympathetic to allegations that free trade is a malign force. Try telling that to the nearly 500m people who have been pulled up over the poverty line in the last two decades of rapid growth in India and China, in part because of changed policies that included exploiting trade and inward investment opportunities.

Featured guest
Simon J. Evenett

Don't vote for what you can't fully understand. No one can know what fair trade really stands for. Between our proposer and opponent at least half a dozen notions of what fair trade were advanced. Who knows what alternative notions others subscribe to? These two points should be warning enough: even if you favour one aspect of fair trade don't think that a government or an international organisation committed to promoting fair trade supports the same things. Be careful what your fellow travellers want. Emotive terms like fair trade provide a false sense of unity.

Nor is fair trade a reliable guide to constructive policymaking. Whether it's China's fixed exchange rate regime, the current bête noire in Washington, DC, or Japanese or Korean industrial policy, bugaboos from the past, often subtle and complex matters are reduced to sound bites about the fairness of trade. These emotive appeals are a deliberate attempt to shift attention from those domestic interests that will be hurt if punitive measures be taken against whichever cheating foreigner is being criticised today. Intelligent citizens should not be fooled by the strategic use of the language of unfair trade.

It would be far better to have a debate about the specific rights and wrongs of the ends and means of trade reform and the integration of national economies into the world economy. There are no rhetorical short cuts here: cross-border transactions have become so much a part of daily life for consumers, employees, firms and governments that the only honest option for the analyst is to lay out the full picture. Indeed, such an open approach can reveal important surprises. For example, one of the background papers for the Copenhagen Consensus 2008 project showed that the benefits of further trade reform paled in significance besides the benefits of allowing greater migration from developing countries. More such evidence-based policymaking is needed.

None of this is to imply that the world trading system is perfect; far from it. Rather, that we stand little chance of fixing it with shoddy thinking and emotive rhetoric. The term fair trade is almost always employed in cheap attempts to mislead voters and policymakers alike. Cheap because the issues are typically more nuanced than presented. Misleading because the nature of global interdependence is such that firms’, consumers’ and employees’ welfare cannot easily be sorted into neat camps for and against free trade. Every child of the Enlightenment should repudiate the notion of fair trade and demand better of policy analysts, policymakers and NGOs.

The moderator's rebuttal remarks
May 7th 2010 | Mr Saugato Datta

Simon Evenett, one of our invited guests, notes that we have had about half a dozen definitions of fair trade being advanced by either side so far. Ken from Ohio writes: "What seems fair to one, may be unfair to another. And so universal 'fairness' is an impossibility. All we can do is maximize freedom—and let the issues of fairness work themselves out between all of the participants". But Ydoodle says: "'Free trade' is a rhetorical term that means whatever you want. Bearing little relation to actual agreements in which special trade relations are spelled out … At best, it is a convenient analytical fairy tale like the ball that rolls friction-free down an inclined plane."

Our participants, however, are valiantly attempting the seemingly impossible. One set of ideas about fairness relates to the rules of international trade, which are seen to be set by rich countries and stacked against poorer ones. Jagdish Bhagwati counters this by pointing out that in manufacturing, which has been the focus of the multilateral trade negotiations for much longer than agriculture, barriers are actually much lower in rich countries than in developing ones. He also argues that developing countries have more say in multilateral negotiations than in bilateral ones with rich countries.

Another set of ideas about unfairness revolve around unequal market access. Ms Woods, for example, cites American reluctance to unilaterally reduce US subsidies "when the economic benefits to the USA from such policies were clear", because America would not want to reduce what it could offer other countries in return for more access to their markets. Equally, she gives the example of developing countries clinging to high bound tariffs even as they reduce the actual tariff rates they apply, because "they know that they need weapons in their long-drawn out battle to gain access to industrialised country markets such as in agriculture".

Ms Woods' point is one about the reality of trade negotiations and the otherworldliness of unilateral liberalisation. But my reaction on reading this was to ask: if the United States would clearly benefit from reducing its subsidies but won't because it will reduce its bargaining power in trade negotiations, and developing countries want more access to rich-country markets, then it appears that both eventually want freer trade. * Zhouzhou_1* writes: "The arguments brought against free trade actually … are targeted at instances when trade is actually not free … it is unclear how trade can be made fair without making it free". I would like to see this point addressed by our debaters. It may be scandalously unfair that rich countries shield their farmers using enormous subsidies, but isn't the way to remedy this unfairness to remove those subsidies, thus making trade freer?

Our debaters also disagree on the benefits of trade liberalisation. Mr Bhagwati cites middle-income countries like China and India, where "nearly 500 million people have been pulled up over the poverty line … in part because of changed policies that included exploiting trade". Ms Woods points out that countries like China or Korea "carefully managed their export-led growth using exchange-rate policies, government investment and industrial strategies, and access to markets in other countries". But does this example show that reducing trade barriers is bad? Or do these cases show that reducing trade barriers is more useful when a country has other policies that make the opportunities that trade opens up valuable? Presumably Mr Bhagwati does not believe that the only thing that countries need to do to develop is drop trade barriers (after all, he mentions successful developing countries exploiting trade "among other reforms"). But I would like to know more, including whether Mr Bhagwati believes that opening up to trade can sometimes be harmful. I am also struck by the absence of much discussion of how consumers are affected by trade.

Ms Woods also cites the de-industrialisation of African economies after they lowered their barriers. What happened to growth, I wonder? It is not clear, after all, that the share of manufacturing in output must always rise as countries develop. Comparative advantage need not lie in manufacturing. Or in growing bananas, as a reader, Latintrader, points out: "(I)t's harder to produce bananas on the hills of Trinidad than in Ecuador, hence the price difference. … Trinidad really shouldn't be producing bananas." Mr Bhagwati mentioned the effects of trade liberalisation on growth and poverty, but we could do with more detail.

Another area where our speakers disagree is about what trade policy should be trying to accomplish. Thea Lee, one of our invited experts, argues that "external pressure can be helpful in including treatment of workers in developing countries and the linkage of trade and worker rights need not devolve into simple protectionism". But Mr Bhagwati opposes using trade negotiations to impose "all kinds of trade-unrelated demands" on developing countries. Meanwhile Mr Evenett says that "emotive terms like fair trade provide a false sense of unity". Ah, but that's why having this debate is important. I look forward to the final round of arguments, which I hope will provide us with more evidence and more nuance.

The proposer's rebuttal remarks
May 7th 2010 | Ngaire Woods

Free trade unleashes unambiguously positive results in any country choosing to liberalise, or so Jagdish Bhagwati would have us believe. It is a very tempting argument. Free trade could be the silver bullet of economics. It could be the policy which at one stroke of a pen restructures an economy, unleashing new forces of entrepreneurship and competition. It does not seem to require other policies, nor other countries' cooperation. Why would we eschew it?

Professor Bhagwati argues that removing all barriers to trade is in every country's interest, regardless of whether other countries reciprocate. Neither part of this proposition is universally true.

Free trade is not always in a country's interest. Professor Bhagwati's argument assumes that trade liberalisation will expose protected industries and the crony capitalism which goes with them, causing them to disappear. So far so good, but that does not ensure growth. Next it is assumed that new sectors will magically emerge, creating non-traditional exports and accelerating a country along a path of comparative advantage towards rapid growth.

Is this what happened in China, Korea, Taiwan, or Japan? Not quite. Each carefully managed their export-led growth using exchange-rate policies, government investment and industrial strategies, and access to markets in other countries. The rest of the world still complains that each of these countries is protectionist. If trade liberalisation is a silver bullet, these cases show that it needs a special kind of gun and a carefully selected target.

Some contrary examples reinforce the point that trade policy must be integrated into a country's overall economic strategy. In Africa several countries liberalised trade in the 1980s and 1990s. For many, this was seen as an antidote to the protectionist, import-substitution industrialisation of the 1960s and early 1970s. But what came next was a disappointment. New export industries did not magically emerge. To the contrary, what mostly occurred were rising unemployment and deindustrialisation.

Across African economies, manufacturing dropped as a share of GDP from 10-15% (between 1960 and 1975) to less than 5% in most countries by the end of the 1990s. This is bad news for countries that need to diversify. Too many African countries are locked into producing one or two commodities or raw materials for a small clutch of dominant global companies at prices which are volatile. To escape the trap they are in, they will need more than free trade to catalyse growth. Hence the case some economists are not making for new kinds of protection (applied by industrialised countries) which could foster growth and opportunity.

Professor Bhagwati also argues that free trade does not need to be reciprocal to be beneficial. A small matter of politics mucks this up. In the real world of trade negotiations, reciprocity is the name of the game. Powerful countries dismantle their trade barriers only when offered reciprocal reductions by others. I recall interviewing a US Senator, Chuck Grassley, for a BBC documentary a few years ago. I asked him whether he would support unilaterally reducing US subsidies and protectionism when the economic benefits to the United States from such policies were clear. His answer was an emphatic "no". Why reduce your armoury before going into war?

Unilateral trade liberalisation weakens what a country can offer in exchange for getting access to other countries' markets. This is the logic behind developing countries clinging to high-bound tariffs, even when in practice the tariffs they apply are much lower. They know they need weapons in their long drawn-out battle to gain access to industrialised country markets such as in agriculture.

So much for the case for free trade as a fix-all. What about the case against fair trade made by Professor Bhagwati? He reminds us that in the name of fair trade, US labour unions try to impose US standards as a form of protectionism. But he skips too quickly over examples such as the US-Cambodian free trade agreement which embedded incentives (greater trade access) for improvements in labour standards, bringing in not just the ILO as an international monitor, but workers' groups and Cambodian government officials into a dialogue with one another.

Professor Bhagwati goes further in his argument against universal standards, arguing that different countries have different histories and economic circumstances. These shape their capacities to compete. It may be legitimate for air polluters to pay less in Kenya than they do in the United States because there is abundant fresh air in Kenya. How far would Professor Bhagwati take this?

What if US or European companies set up their production in Kenya to avoid air-pollution charges in their own countries? (And, by the way, they will then use the case politically to press for lower pollution charges at home.) The first part of this could be good, since it brings more industry to Kenya. But what if those companies are exploiting more lax or ineffectual safety regulation? In Bhopal in 1984 this led to one of the world's worst industrial accidents, with poisonous gas leaking from a Union Carbide pesticide plant and killing some 3,800 people and affecting hundreds of thousands of others. More recently, Lehman Brothers were apparently setting up their most risky financial instruments in London to avoid US regulation. The fall-out of that affected all of us. A shrug of the shoulders in the name of free trade is not enough.

Sometimes people need protecting. International trade and commerce can either help to make their lives better or make their plight worse. The fact that protectionists use fair trade arguments does not render illegitimate all efforts to make the effects of trade fairer. People get this. All those who pay that little bit more for fair-trade coffee (and they are doing so in increasing numbers) are not undermining free trade. They are simply doing their bit to make it fairer.


Jagdish Bhagwati
The opposition's rebuttal remarks
May 7th 2010 | Jagdish Bhagwati

Beauty is in the eye of the beholder. Fairness in trade also is the way you choose to define it.

In my initial statement, I had taken, and taken apart, three fashionable concepts of fair trade which are pitted against free trade today. My most distinguished friend, Professor Ngaire Woods, is concerned with altogether different notions of fair trade, reflecting her specialisation in political science rather than in economics, her interest in international governance, and her proximity to the activist anti-trade movements and charities such as Oxfam that dominate the English landscape. But even when arguing against free trade because it is unfair according to her notions of fair trade, Professor Woods fails to persuade me.

She claims at the outset that "free trade has a bad name". She believes this, not because of unfair trade notions she cites (which I address below), but also because she seems to be sympathetic to the allegations that free trade is a malign force. She quotes Oxfam, whose writers on trade claim: "Trade robs poor people of a proper living, and keeps them trapped in poverty." Try telling that to the nearly 500m people who have been pulled up over the poverty line in the last two decades of rapid growth in India and China, in part because of changed policies that included exploiting trade and inward investment opportunities that earlier policies had shied away from.

The Report on the Future of the WTO by the expert group chaired by Peter Sutherland addresses many such allegations against free trade that are circulating today and is best consulted directly. My 2004 book, "In Defense of Globalization", also addresses the allegations that trade undermines social objectives such as gender equality and democracy and concludes that trade generally advances, rather than handicaps, these agendas as well.

Moreover, it is inaccurate to assume that free trade is rejected by the majority of people in many countries. The polls in the United States, even in the middle of the current crisis, did not shift a majority against free trade. In today's interdependent world economy, many seem to understand that exports sustain their jobs and that protectionism may save a few thousand jobs in terms of its direct impact on the protected activity but, when retaliation kicks in, the country could lose hundreds of thousands of jobs instead. It would be a policy of "penny wise and pound foolish". When my team and I recently debated three of America's staunchest protectionists, with hundreds in the audience, I had been persuaded by pessimistic statements such as that by Professor Woods that we would lose 55:45%. But the vote went 80:20% in our favour.

But then are we who favour freer trade in danger, not because freer trade causes harm rather than good or that the majority think so, but because of the charge that trade today is widely considered to be unfair? Of course, if you ask in the polls, should trade be fair, without elaborating what you mean by fairness, you are going to get a majority saying it should be. You would have to be a knave or ghoulish to say otherwise. The important question is: if people are exposed to proper debates, like the one I described or the one that Professor Woods and I are having, and understand both what is meant by fairness and what are the arguments for and against that specific notion of fair trade, what would be the vote? In that spirit, which alone can contribute to an informed democracy, let me now consider Professor Woods’ concerns.

In essence, she produces three arguments. First, that (again quoting Oxfam) the "rules of the trading system" are "rigged" against the developing countries. Second, the rules of the trading system are made by the developed and not by the developing countries. Third, the distribution of the gains from trade is skewed against the poor countries.

On the first argument, let me briefly say that "Part II and Special & Differential Treatment" have long been applied to the developing countries at the GATT. Little was demanded by way of reciprocal trade concessions. This is also why the frequent allegation that trade barriers are higher on the average in the developed than in the developing countries is incorrect for manufactures, which were the principal focus of GATT until 1995, since agriculture was excluded by the 1955 waiver.

On the second argument, I certainly agree that several institutions, such as the IMF and the World Bank, need more voice from the developing countries. It is scandalous that Dominique Strauss-Kahn and Robert Zoellick were more or less nominated by the EU and the United States respectively. By contrast, the WTO smells like roses. Pascal Lamy had to fight hard to gain his first term. Also, the WTO works by consensus; there is almost no voting by financial contribution. In fact, it is the free trade agreements with hegemonic powers that Professor Woods seems to celebrate, which are the vehicle for the asymmetric exploitation of the developing countries. All kinds of trade-unrelated demands, driven by lobbies in the hegemonic power, are imposed on the developing countries in one-on-one negotiations, under the cynical pretence that these demands are good for them: see my 2009 book, "Termites in the Trading System: How Preferential Agreements Undermine Free Trade".

For the third argument, Professor Woods turns to Oxfam again, citing its assertion that the gains from trade had accrued almost entirely to the developed and middle-income developing countries. But the middle-income developing countries often ceased to be "poor" countries because of changed policies that exploited trade better, among other reforms. Oxfam created a "stir", according to Professor Woods, maybe among other British charities and the singing troubadours whose electric guitars seem to drown out the voices of scholars effectively in Britain. But elsewhere, the 2002 Oxfam report is seen to be the rank nonsense that it is.