Free trade or protectionism?

Published: October 9 2007 18:24 | Last updated: October 11 2007 16:31

“Turn to the leading US newspapers these days and you will read about the ‘loss of nerve’, even ‘loss of faith’, in free trade by economists”, writes Jagdish Bhagwati, professor of economics and law at Columbia University and senior fellow at the Council on Foreign Relations. But, he argues, “free trade is alive and well.”

Does imperfect global competition really mean free trade is an unachievable ideal? Does protectionism do more good or harm? And what do globalisation, the emerging mega-economies of China and India, and the offshoring of jobs mean for free trade?

Mr Bhagwati answered FT readers’ questions on free trade in an online discussion.

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Should the European Union not have developed Airbus in the name of free trade, buying instead Boeings?
Jose Oscategui, Peru

Jagdish Bhagwati: A very good question. I would say that, given the scientific expertise and endowments that are broadly similar between the US and the EU, I would expect that there would be knife-edge advantage on air planes in ”steady state”, and that the development of the Airbus does not violate the basic economics of comparative advantage. But if Airbus needs continuing subsidies to compete, then I would say: let it go. ”National champions” who have to be bottle-fed and mollycoddled are hardly champions!

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Free trade economists have not lost their nerve. But some US politicians have. Do you view this as another cyclical bout of protectionism to which well-honed answers are required or a more fundamental shift in American attitudes towards globalisation that must be addressed with new ideas?
Eoin Callan, Financial Times, Washington

As an admirer of your writings in the FT, I welcome your question. I am afraid the problem in the US today is a Fourth item that I dealt with and dismissed on scientific grounds in the FT (op ed on January 4, 2007): that labour groups and many workers generally, and perhaps some segments of the middle class post-outsourcing-alarms,are convinced that trade with the poor countries is depressing real wages. Nearly all the New Democrats have bought into this; and the Democratic Primary candidates, Hillary included, have had to fall in line.

In the Afterword to the new Edition this July of my Globalization book, I deal with this question and offer a holistic view of why globalisation today creates volatility of comparative advantage - not its absence as Tom Friedman’s Flat Earth analogy implies - and how we need an altogether new set of institutional changes to meet this challenge. I urge you to read this Afterword as the US politicians have to understand that responding to modern, international competition in this ”new epoch” with protectionism, is not a solution but that implementing systematic and wide-ranging changes in our institutions, keyed into the central features of this new epoch, has to be the creative answer.

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A recent report from the IMF said that the way some free trade arrangements that had been implemented recently had worsened income distribution. Is it correct?
Juan Manuel de Nigris

Jagdish Bhagwati: FTAs are something else again. I have a little book coming out in early Spring from Oxford, titled Termites in the Trading System: How Preferential Trade Agreements are Undermining Multilateral Free Trade.

The main problem with them is that the hegemonic powers are using them to drive trade-unrelated agendas, forcing small countries often in one-on-one negotiations, to accept all kinds of inappropriate demands by simply pretending that these are “trade related”!

Now, any policy reform can have income distributional effects: rarely does any policy change lead to everyone gaining, like Russell Crowe’s Roman legions where everyone marches at the same pace.

The question we need to ask is whether this inequality matters; and to remember that there are very many different ways in which inequality may be measured and that their political and social salience will vary with the country in question.

Also, the emphasis placed by the World Bank and IMF, and by some NGOs, on inequality may be counterproductive to the far more important battle against poverty: inequality-fighting policies more typically degenerate into growth-reducing policies (as they did in India for over a quarter of a century of slow growth) that increased poverty.

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Are developed world trade barriers holding back the developing world as many argue - or is this a smokescreen for internal issues within the developed world? If so, what are the key barriers and what can be done about it?
Paul Sharma

Jagdish Bhagwati: My friend Dani Rodrik recently wrote in the FT that the world was now characterised by hugely open trade and even immigration, so barriers on them were not important to worry about. I think that is close to nonsense. Within trade, many countries find themselves seriously affected by substantial subsidies and price supports in the EU and the US. Service sectors are still very restricted. Within migration, many estimates show that even a small relaxation of existing barriers would lead to huge gains.

Which barriers are the most important? The answer depends on which issue we are talking about, if priorities are to be established. Thus, for the Cairns Group of agricultural exporters, removal of subsidies in the west promises enormous gains: as it does for the cotton growers and exporters in Africa.

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According to you and most other economists, free trade is here to stay. Most of you also seem to agree that international trade will increase in both scale and scope. My question is: if free trade is the general trend, which major events or phenomena could disturb or alter the course towards market integration on a global scale?
Roland Engkvist, Stockholm, Sweden

Jagdish Bhagwati: I am afraid I do not share the view that free trade is necessarily here to stay.

We have had reversals in the Interwar Period, as you doubtless know, when the globalisation on trade, investment and migration in the decades prior to the first world war was interrupted, only to be resumed once again in the postwar period. To the extent that trade expands due to technical change like communications and transport innovations, that would continue. But policies are reversible, so we always have to be vigilant about man-made policy reversals. And since economists’ ideas do play some role, I decided to examine the US media hype about the alleged collapse of economists’ consensus on freeing trade.

What worries me about trade is, not disillusionment about trade, but the fact that we still have not learnt how to prevent financial crises (like the Asian financial crisis) which can be like tsunamis. That is the soft underbelly of globalisation; and that keeps me awake. If you are hit by a devastating financial crisis, with huge amounts of capital flowing out and creating havoc, the affected public is not going to distinguish between trade and finance: they are all part of ”globalisation”! So, I was reassured a little when the far eastern countries managed to get back to trade liberalisation when the financial crisis had been surmounted. But that need not hold in other, less pragmatic cultures.

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Your polemic attack on free trade sceptics seems to me to be based on the false presumption that it is the theories of economists that guide trade policy. Would trade policy not rather be the result of interests? Of course, politicians and their intellectual acolytes scurry to legitimise their deeds through some version of economic theory. Crusading for free trade in order to save the purity of the economic doctrine should not blind us for analysing the causes for the ups and downs of particular policy ideas.
Dirk De Bivre, assistant professor of international politics, Universiteit Antwerpen, Flanders, Belgium

Jagdish Bhagwati: First, I must say that my ”attack” is neither polemical nor ideological. If the media, which in the US is hardly trained in economics - I started the Media Program many years ago in Columbia University’s School for International Affairs where we have students from areas including economics, political science, international law and regional specialisation, because I felt that our famous School of Journalism basically trained English literature students who then learnt how to write but not what to write - often hypes up non-existent dissent and builds up even half-informed people into star ”dissidents”, this has serious political consequences. So, I was documenting that. There is a long paper which documents these arguments, and recurring such episodes, in far greater detail which you can get from me by writing to me at jb38@columbia.edu.

Second, it is incorrect to say that we are crusaders who, we know, were driven by faith in Christianity. Free traders, at least the sophisticated ones today, believe in it after much argumentation and empirical evidence. Their faith is based on reason. That interests (ie lobbies) matter also is important. The interaction of ideas, interests and institutions in trade policy over many decades is discussed by me in an older book, Protectionism (MIT Press: 1987) which I urge you to read: it is SHORT!

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Is it not interesting that the overwhelming majority of free-trade proponents live in the rich industrial or post-industrial west, while those living in the developing world – acutely aware of globalisation - are mostly against it? If free-trade was such a great thing for the poor, wouldn’t the poor actually support it? Why are they so massively against it?
Steve Jennings, Germany

Jagdish Bhagwati: Many polls show that even in developing countries, there are majorities for trade, though I take most polls with a sceptical eye. Do people really understand what trade liberalisation implies, when they answer such questions? Thus, the Pew poll here often finds majorities saying that they want ”free trade” but also then going on to say that they want ”fair trade” which sounds like you are for fraternity and liberty. Few of them realise that the phrase” fair trade” is often used to deny poor countries access to rich country markets in one form or another by finding fault with the poor countries’ politics etc, as one sees today in the FTAs being implemented by the US with Peru, Colombia and Cafta (in Costa Rica).

The reason why free trade is good for the poor is because, as I point out at length in Chapter 5 of my book, In Defense of Globalisation, trade generally leads to more prosperity and growth; that, in turn, creates jobs for the poor (the extent of this effect depending on the nature of the growth, of course) and this means that you are ”pulling up” the poor into gainful employment and out of poverty.

More prosperity also means more revenues which, in turn, can be spent on social spending for the poor: as India has been doing since growth rates accelerated after the reforms in 1990s which included trade liberalization. Whether the poor are aware of this connection is a matter of whether the politics in any country are informed or not. There is little doubt, however, that their elites are aware of this and that the poor, while unaware frequently of economic relationships, benefit from freer trade.

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Some people seem to agree with free trade in principle but think barriers to trade should only be reduced gradually, and so allow a country time to establish an industry that can compete. Do you think this approach has some merit, or will protection from competition merely foster inefficiency?
Kim de Glossop, London

Jagdish Bhagwati: First, I do not believe in ”shock therapy”, as I have written frequently including in the Globalization book (Chapter 18). That is a technocratic solution of the kind that my colleague Jeffrey Sachs sold to Russia with manifest ill-effects; this technocratic approach is again something that he offers to Africa today, ignoring important issues like the absorptive capacity of many of these countries. Therefore, the best speed of reform such as trade liberalisation is not likely to be the maximum speed.

Second, this does not mean that we should shy away from trade liberalisation. I have been arguing for building safety nets in the developing countries now that they understand that trade is helpful, not a threat. If we do not have safety nets like in the OECD countries, poor-country politicians will be reluctant to take the risks of trade liberalisation.

Third, the ”infant industry” argument you allude to is grossly overdone. There are so many infants who move into senility with diapers on. A short period of import substitution followed by genuine outward orientation such that the infants learn rapidly from competition is what is necessary: that is also what the successful Far Eastern countries achieved. Countries that stuck to sheltered domestic markets unfortunately found that these lead to what I call the ”goofing off” effect!