Missing Links

The Free-Trade Paradox

Why is trade booming while trade talks are crashing?

One of the most perplexing trends of our time is that free-trade negotiations are crashing while free trade itself is booming. For more than a decade, attempts by governments to get a global agreement to lower trade barriers have gone nowhere. These trade talks are routinely described as "acrimonious," "gridlocked," and "stagnant." In contrast, international trade is commonly described as "thriving" or "surging," and almost every year, its growth is lauded as "record breaking." It’s no surprise that trade negotiators feel as despondent as international traders are cheerful.

The last time official trade negotiators had reason to celebrate was in 1994, when 125 nations agreed to a significant drop in trade barriers and the creation of a new institution charged with supervising and liberalizing international trade, the World Trade Organization (WTO). Since then, efforts to liberalize global trade through negotiations have stalled. In many countries, free trade agreements are now politically radioactive, with imports routinely blamed for job losses, lower salaries, heightened inequality, and more recently, even poisoned toothpaste and deadly medicines. The domestic politics of trade reforms are inherently skewed against trade deals. While the benefits of freer trade exist as future promises, the costs can be real, tangible, and immediate. And while the benefits of trade liberalization are widely distributed throughout the entire population, the costs are borne by highly concentrated groups. Cutting agricultural tariffs, for example, may benefit society at large by reducing what we pay for the food we eat. But it will immediately reduce the income of farmers, who will therefore have a strong incentive to organize to derail trade deals. The same is true of workers in factories forced to compete against far cheaper imports. These social and political realities go a long way in explaining why enthusiasm for reaching trade agreements has dried up in many countries.

It started in 1999, when the attempt to launch a new round of trade negotiations crashed in Seattle. Those botched meetings are now remembered more for the violent clashes between the police and anti-trade activists than for the fact that negotiators went home without even agreeing to start the negotiations. Ironically, the activists were protesting against a deal that wouldn’t have happened anyway. Two years later, the trade ministers met again in Doha, Qatar, and decided to initiate a new round that, they agreed, would be concluded in four years. It was not to be. That deadline — and others — came and went. This past June, after six years of talks, negotiators left the meetings on the Doha Round and denounced each other as uncooperative.

Meanwhile, world trade continued to grow at its usual breakneck pace. In 2006, the volume of global merchandise exports grew 15 percent, while the world economy grew roughly 4 percent. In 2007, the growth in world trade is again expected to outstrip the growth rate of the global economy. This sustained, rapid pace of trade growth has led to a more than fivefold increase in world merchandise exports between 1980 and 2005. An unprecedented number of countries, rich and poor alike, are seeing their overall economic performance boosted by strong export growth.

So, what explains the paradox of gridlocked trade agreements and surging trade flows? The short answer is technology and politics. In the past quarter century, technological innovations — from the Internet to cargo containers — lowered the costs of trading. And, in the same period, an international political environment more tolerant of openness created opportunities to lower barriers to imports and exports. China, India, the former Soviet Union, and many other countries launched major reforms that deepened their integration into the world’s economy. In developing countries alone, import tariffs dropped from an average of around 30 percent in the 1980s to less than 10 percent today. Indeed, one of the surprises of the past 20 or so years is how much governments have lowered obstacles to trade — unilaterally. Between 1983 and 2003, 66 percent of tariff reductions in the world took place because governments decided it was in their own interests to lower their import duties, 25 percent as a result of agreements reached in multilateral trade negotiations, and 10 percent through regional trade agreements with neighboring countries.

So, who needs free trade agreements if international trade is doing just fine without them?

We all do. Although trade may be booming, giving up on lowering the substantial trade barriers that still exist — in agriculture, in services, or in manufactured goods traded among poor countries — would be a historic mistake. Even the more pessimistic projections show that the adoption of reforms like those included in the Doha Round would yield substantial economic gains, anywhere from $50 billion to several hundred billion. Moreover, according to the World Bank, by 2015 as many as 32 million people could be lifted out of poverty if the Doha Round were successful.

But it isn’t just the money. As the volume of trade continues to grow, the need for clearer and more effective rules becomes more critical. In this century, the quality of what is traded will be as important as the need to lower tariffs was in the last. The recent cases of deadly dog food and toxic toothpaste coming out of China prove as much. No country acting alone stands as good a chance of monitoring and curtailing such lethal goods as does the WTO working in concert with governments across the globe.

Moreover, a rules-based system accepted by a majority of nations can protect smaller countries and companies from the abusive practices of bigger nations or large conglomerates. The rule of law is always better than the law of the jungle, even in resolving trade conflicts.

But perhaps what is most important to keep in mind is that, despite all the misgivings about international trade, the fact remains that countries in which the share of economic activity related to exports is rising grow 1.5 times faster than those with more stagnant exports. And though we know that economic growth alone may not be sufficient to alleviate poverty, we have also learned that without growth, all other efforts will fall short. That argument alone should be enough to make us root for the trade negotiators, and not just the trade.

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