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Wednesday, July 02, 2008

"Termites in the Trade System"

Jagdish Bhagwati, free trade advocate extraordinaire, says John McCain "is mistaken in thinking that freeing trade through Free Trade Agreements is a good idea":

Termites in the Trade System, by Jagdish Bhagwati, Commentary, NY Sun: Two different questions must be distinguished in the current political debate on free trade for America: Should we have free trade? If we agree that we should, how should we trade freely? ...

Today, the most potent argument [against free trade] is that free trade may increase income and wealth, but that it suppresses workers' wages ands even harms the middle class. Nearly all research shows that this claim also is mistaken. ... There is little doubt that, on this issue, Senator McCain has the better of the argument over Senator Obama.

But Mr. McCain, like many others in America, is mistaken in thinking that freeing trade through Free Trade Agreements is a good idea. FTAs, which are better described as Preferential Trade Agreements, or PTAs, since they free trade for members only, is like freeing trade on a discriminatory basis. As I argue in my book, "Termites in the Trading System," FTAs have several crippling downsides that must be recognized.

First, they will often divert trade from cheaper nonmember sources to more expensive member sources, bringing harm rather than good. Also, the enormous growth of such FTAs, now more than 350 and still growing, has led to a systemic effect: creating a "spaghetti bowl" of preferences and chaos in the world trading system.

In one-on-one negotiations between America and weak, smaller FTA partners, several lobbies have imposed demands unrelated to trade on these nations, increasing resentments abroad. In Seoul, there was a street demonstration against the proposed U.S.-South Korea FTA. These lobbies include labor unions seeking to raise standards and production costs of rival firms abroad, financiers seeking absence of capital controls, and firms wanting higher patent protection.

There are plenty of reasons to believe that these preferential trade agreements have slowed down our progress on the multilateral freeing of trade, as with the Doha Round of multilateral trade negotiations. ...

The free traders who are passionate supporters of these FTAs are undermining everything that we have worked for to produce and strengthen a non-discriminatory trading system. There is no better example of folly wrought by good intentions. ...

[T]he current tide of preferences has been a result of politicians mistakenly, and in an uncoordinated fashion, pursuing free trade agreements because they think (erroneously) that they are pursuing a free trade agenda.

So today we have a cumulative total of over 350 PTAs reported to the WTO. ... In short, we now have once again a world marred by discriminatory trade, much as we had in the 1930s. And we know how that turned out.

    Posted by on Wednesday, July 2, 2008 at 01:08 AM in Economics, International Trade | Permalink  TrackBack (0)  Comments (41)

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