Optimism and Pessimism: Global Free Trade

Alex Singleton, president of the Globalization Institute and a man whom I admire, has a thoroughly optimistic article on the state of trade liberalization in The Business. It opens:

It has been a great few days for supporters of global free trade, despite the best efforts of reactionary forces in the United States, Britain and Brussels. The Central American Free Trade Agreement, which extends open markets to six nations plus the US, passed in the House of Representatives, defeating the sugar producers and trade unions that fought desperately against it.

In the crucial House vote, only 15 out of 202 Democrats voted for the trade agreement, and it was carried by a wafer-thin majority of two votes, but the end result was nevertheless a big victory for free trade. The agreement was also passed in the Senate and has now been signed into law; its main beneficiaries will be ordinary people in Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the US, who will enjoy faster economic growth in the long term, more jobs and better living standards.

This is either unfounded optimism or desperate spin. These were not “a great few days” marked by “a big victory for free trade.”

CAFTA is not a meaningful trade agreement. It grants preferential access to some US exporters, but otherwise does not significantly lower trade barriers. As Dan Griswold and Dan Ikenson of Cato lamented in a pro-CAFTA briefing paper, “the agreement is less ambitious than it could and should have been. But despite those shortcomings,” they argue, “CAFTA is an affirmative step toward the policy goal of free trade.”

In the wake of CAFTA’s diminutive stature, most free trade advocates argued that passing the agreement was a critical symbolic gesture. These proponents said that the Bush administration needed a win on trade to keep up liberalizing momentum.

If the fight over CAFTA was merely a symbolic flexing of the Bush administration’s liberalization muscles, then free traders ought to be very worried. The Bush administration didn’t build a compelling case for free trade that captured public opinion; it squeaked out the deal’s passage by only two votes. Moreover, the passage required plenty of horse-trading on non-trade issues. Overcoming resistance with pork-barrel bribes isn’t exactly building momentum.

The Bush administration has no meaningful leverage on trade issues. CAFTA carved out large exceptions for textiles and sugar, yet protectionist forces still mounted significant opposition to the deal. The administration also allowed opponents to use outsourcing as a smear against the deal. There’s little reason at this point to have confidence in the Bush administration’s ability to win the next trade fight.

Nevertheless, Singleton writes that “despite the protests of opposition parties, free trade is on the rise again.”

As another piece of evidence for his thesis, Singleton notes:

Asian countries are pushing ahead with their own trade deals. India and China want a bilateral trade agreement…

This is far from desirable. Throughout the 1990s, the Asian economies steadfastly adhered to the doctrine of “open regionalism,” whereby they cooperatively lowered their trade barriers on a Most Favored Nation basis, preserving the hallmark of good trade policy – nondiscrimination. (For an excellent discussion of this approach, see Europe, East Asia and APEC by Peter Drysdale and David Vines.) The region’s new fondness for bilateral, preferential trade deals should be taken as the most serious signal that the global trading system is in danger. MFN has already been abandoned by the EU, and now Asia is following suit.

Singleton continues:

Nations wanting more liberal trade will increasingly turn to agreements outside the WTO to make progress. Supporters of the multilateral agreements made at the WTO point complain that bilateral agreements are often messy and discriminate against countries not party to the agreements. This is a fair criticism, but countries have to make the choice between a perfect agreement that is not on the table and a bilateral one which, though impure, does at least make some progress.

I’ve covered the regionalism vs multilateralism debate many times before. The arguments for why bilateral deals will usually do more damage than good are too numerous to reprint here; I merely want to note that Singleton ought not to so easily conclude that bilateral deals “at least make some progress” toward global free trade.

It is likely that I am being overly pessimistic about trade liberalization’s prospects. Even so, Singleton’s take on the issue is overly optimistic. In his concluding paragraph, he writes:

The Central American Free Trade Association is just at the beginning of a century of trade liberalisation, more significant and powerful than any previous wave of liberalisation.

The Asian abandonment of non-discriminatory trade policy, the increasing popularity of bilateral agreements, and the Bush administration’s inability to pass a largely meaningless CAFTA deal without eleventh hour pork promises are signs that free trade faces an uphill battle at the start of the twenty-first century, not indicators that it is on the rise.

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