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.

Trade Diversion & CAFTA’s Passage: Cause & Effect?

Although CAFTA’s passage certainly depended upon last-minute horse-trading in Congress, it received plenty of support because the agreement will benefit US exporters. And as the US Trade Representative’s office proudly trumpeted, many of those benefits will be due to trade diversion: “Eliminating these tariffs will create in many cases preferences for U.S. exporters over third country suppliers, including those in Canada, Europe, and South America, helping to restore lost U.S. market share and expand overall U.S. exports.”

Celebrate CAFTA’s passage by reading Pravin Krishna’s classic paper on this topic:

Preferential trading arrangements are analyzed from the viewpoint of the “new political economy” that views trade policy as being determined by lobbying of concentrated interest groups. Two conclusions are reached: first, that trade-diverting preferential arrangements are more likely to be supported politically; and second, that such preferential arrangements could critically change domestic incentives so multilateral liberalization that is initially politically feasible could be rendered infeasible by a preferential arrangement. The larger the trade diversion resulting from the preferential arrangement, the more likely this will be the case.

CAFTA + DMCA

I previously complained that CAFTA was driven by non-trade interests like regional security. Now Declan McCullagh notes that CAFTA will harmonize copyright standards by having our six CAFTA partners adopt the bulk of the Digital Millenium Copyright Act. I wish “trade liberalization” would return to liberalizing trade.

[Hat tip: H&R]

What if activists really understood agricultural subsidies?

In a post on anti-subsidy activism by celebrities on behalf of Oxfam, Kerry Howley of Reason wonders: “What if Hollywood activists all started making sense?”

She then notes that Minnie Driver’s agricultural product of choice to have dumped on her head was cotton “because she needed to remain relatively clean after her photograph, since she was in the middle of a press tour for a London play.”

Here’s an alternative universe where Minnie Driver does make sense:

Ms. Driver chose cotton because she wanted to protest the agricultural subsidy most damaging to LDCs. Citing a recent conversation with Arvind Panagariya, Driver explained that the campaign against most agricultural subsidies was actually being driven by the middle-income Cairns Group of developing countries, as LDCs already enjoy preferential access to EU markets. Noting that the EU’s internal price for cotton wasn’t elevated above world prices, the actress explained how the abolition of cotton subsidies would not result in a terms-of-trade deterioration for LDCs, whereas the cessation of sugar subsidies would damage the terms of trade for poor exporting nations such as India and the African, Caribbean and Pacific (ACP) countries.

If that didn’t make sense, read this PDF.

Robert Guest – The Shackled Continent

Today I read The Shackled Continent by Robert Guest. It’s a non-technical book by the Africa editor of The Economist seeking to help answer the question: Why is Africa so poor?

Sub-Saharan Africa’s poverty has become the central focus of development discussions in the popular press and amongst NGOs over the last year or so. As someone not very familiar with development literature specific to the continent, I found the book to be an excellent primer on Africa.

Given my greater familiarity with development literature generally, I found Guest to be at his best when delivering detailed historical accounts (such as Robert Mugabe’s wrecking of Zimbabwe, the failure of ANC economic policy in South Africa, and disastrous civil wars), telling entrancing personal narratives (such as his journey on a truck delivering Guinness in Cameroon or troubles warding off prostitutes), or offering amusing asides (such as his use of a North Korean computer operating system). These gems aren’t found in the other books I’ve read.

Unfortunately, much of the content in this non-technical text will be familiar to those that have read books like Johan Norberg’s In Defense of Global Capitalism and William Easterly’s The Elusive Quest for Growth. As such, I found the book at its weakest when it was covering well-treaded ground such as agricultural subsidies, the failure of development assistance, and the lack of transparent property rights.

Nonetheless, for those with more than a passing interest in development, I’d recommend The Shackled Continent.

My most serious complaint: The introduction, which at twenty-five pages (10% of the total) is far too long, provides an outline of the topics to be covered so exhaustive that one later reads many sections with a sense of deja vu.

Sweatshops: Still Good

This is entirely unsurprising to anyone that’s followed the sweatshop debate for a while, but here’s more evidence that sweatshops are good:

We examined the apparel industry in 10 Asian and Latin American countries often accused of having sweatshops and then we looked at 43 specific accusations of unfair wages in 11 countries in the same regions. Our findings may seem surprising. Not only were sweatshops superior to the dire alternatives economists usually mentioned, but they often provided a better-than-average standard of living for their workers. [CSM]

Christian Science Monitor article here; academic paper here (pdf). Hat tip to Arnold Kling.

WTO Membership Benefits

I thought that the world of textiles had entered “2005 and beyond: the Quota-Free Era,” so I was confused when I read this article:

Fees applied to quotas on garment and textile exports to the United States have been abolished by the Vietnamese Ministry of Finance in a recent decision.

Deputy Finance Minister Truong Chi Trung said the decision, dated July 25, was good news for about 800 US-bound garment and textile exporters in Vietnam.

The decision was made in the context that Vietnamese garment and textile exporters are facing fierce competition from their Chinese rivals, with the threat of decreasing exports.

Trung went on to say that the abolishment of quota fees will not cause a big impact on the country’s tax revenues as fees collected from garment and textile exports are estimated at a mere VND50-55 billion a year….

To boost exports to the US, Vietnam plans to negotiate with the US to increase quotas for Vietnamese garment and textile exporters and simplify procedures on granting export permits, Trung said. [Yahoo]

I was aware of the calls for the imposition of “emergency” quotas upon Chinese textile exports, but how is the US getting away with plain old protectionism?

Here’s the trick: Vietnam isn’t a member of the WTO. Neither are Russia, the Ukraine, nor Belarus. The US maintains textile quotas against each of them.

Japanese seek to punish Byrd Amendment

Japan said it will impose higher tariffs on 15 U.S. products starting Sept. 1 in retaliation for a U.S. law that distributes the proceeds from anti-dumping levies to affected industries.

The increased tariffs are worth 5.7 billion yen ($51 million), the Ministry of Finance said in a statement today, without identifying the products involved.

Japan wants the U.S. to repeal the so-called Byrd Amendment, which became law in 2000, where proceeds from anti-dumping levies against Japanese steel products are distributed to the U.S. steel industry. [Bloomberg]

The perverse structure of the Byrd Amendment encourages rent-seeking, as Dan Ikenson noted in a September 2004 column:

The legislation was surreptitiously inserted into the agriculture appropriations bill in 2000 by Sen. Robert Byrd after it failed to win support from the congressional committees that have expertise and oversight on trade issues…

By compensating petitioners and supporters of petitions, the Byrd Amendment provides an additional financial incentive to file antidumping and countervailing duty cases. Furthermore, by excluding from compensation those companies that do not support the petitions, the law encourages them to change their positions simply to maintain eligibility for compensation.

Yet despite opposition to the law from President Clinton and advocacy for repeal from President Bush, Congress shows no sign of relenting. [Cato]

Regionalism in Standards: Good or Bad for Trade?

Maggie Xiaoyang Chen and Aaditya Mattoo are breaking new ground in the literature on preferential trade by exploring the topic of regionalism in standards:

Two factors explain the shift in regional negotiating emphasis away from conventional barriers and toward standards. First, multilateral negotiations have achieved remarkable reductions in tariffs and quotas but done relatively little to reduce the trade restrictive impact of technical barriers. Second, while multilateral trade rules governing regional agreement on tariffs seek at least in principle to balance the interests of integrating countries and the rights of excluded countries, the rules treat regional agreement on standards as always benign and worth of encouragement.

Are regional agreements on technical barriers indeed an unambiguous blessing for global trade? The voluminous research on regionalism with its almost exclusive focus on tariffs and quotas provide no adequate answer. This paper is a first step in the theoretical and empirical analysis of regional initiatives on technical barriers to trade.

I haven’t yet finished reading the paper, but it’s quite interesting thus far.