Jagdish Bhagwati, 2002, Free Trade Today.
Jagdish Bhagwati recounts an episode in Seattle in late 1999 during the failed WTO meetings, when he was shepherded away from a potentially violent anti-globalization protester, with his rescuer half jokingly saying "You are the foremost free trader today; we cannot afford to lose you." His rescuer is fight. If such a situation re-emerged, this eminent economist should indeed be saved, but now we should also toss a copy of Free Trade Today to the protestor, and shout "Read this book!"
In Free Trade Today, Bhagwati provides an invaluable public service, documenting a comprehensive and compelling case on the benefits of free trade. He traces the demise of theoretical challenges to free trade, and proceeds to systematically address many of the current attacks on trade forwarded by anti-globalization types. It should be noted that although he is an ardent supporter of free trade in goods and services, he is not in support of "deep integration" of the global economy, and has nicely argued that the case for free capital mobility is significantly less strong than that for free trade (see for example the often quoted "The Capital Myth" in Foreign Affairs May/June 1998).
With Free Trade Today, Bhagwati continues to cement his reputation as a master craftsman of his argument in a witty and lucid tongue accessible to all, while maintaining a solid foundation in rigorous theoretical and empirical research. The distinguishing feature of this entertaining book comes from Bhagwati's dual role of academic economist (University Professor at Columbia University) and tireless advocate of free trade in the policy arena.
The law of comparative advantage, upon which free trade rests, has remained one of the central tenets among economists. This is because, given competitive prices driving resource allocation, free trade allows countries to specialize in the production of goods for which they have the highest relative cost advantage over other nations.
While theoretical challenges emerged as to the optimality of free trade based on distortions in factor markets (such as capital market imperfections in developing countries justifying protection in the 1950s a la the infant industry argument) and product markets ("new trade theory" arguments of welfare increasing trade interventions due to imperfectly competitive product markets), by the end of the 1990s they had subsided. Bhagwati's own ground-breaking work in the 1960s (with V.K. Ramaswami) went a long way in the defense of free trade, showing that domestic distortions are best addressed by policy instruments that directly target the source of the distortion, rather than trade interventions. For example, if there exists a positive externality in production (such that the level of output is lower than is socially optimal), then the appropriate government intervention is a production subsidy, and not a tariff.
The theoretical optimality of trade interventions in the presence of external distortions and oligopolistic markets (strategic trade policy), has been countered by questioning the empirical relevance of imperfect markets, the potential losses from anticipated retaliation, and lastly (mostly importantly in my opinion), the political economy implications pioneered by Bhagwati himself, along with Anne Krueger in the mid-1970s. Although an intervention may be theoretically justified, its practical application in the presence of governments influenced by special interests, could lead to a lower welfare outcome than no intervention.
Whereas a consensus has been reached on the theoretical front, a new genre of free trade critics has arisen and Bhagwati takes them on convincingly, using tools developed in the first chapter. The second chapter, though less technical, is a crucially important piece as it provides a cogent, coherent response to i) those who directly attack free trade on the grounds that it hurts the environment, will lead to reduction in labor and environmental standards ("race to the bottom"), increases poverty in poor countries, increases wage inequality in advanced economies and to ii) those who try to subvert free trade with ideas of so-called "fair trade" and talk of attaching social and moral aspects to the free trade agenda.
The argument of targets and appropriate instruments is cleverly threaded throughout his response to anti-globalists. The idea that you cannot kill two birds with one stone is emphasized. In fact it may lead to completely missing both birds!! This is the argument used to respond to demands for the WTO to incorporate a social and moral agenda to its goal of promoting multilateral free trade and economic growth. Bhagwati argues that other institutions, suitably strengthened, would be more suitable in dealing with these issues, such as letting enforcement of existing labor standards be handled by the UN's International Labor Organization (ILO). Similarly, for those who blame deteriorating environmental conditions on trade, he points to the need for an environmental policy, not a no-trade policy! In fact he even counters that agricultural trade liberalization may improve the environment as this would result in lower output of pesticide-intensive European agriculture!
Bhagwati also chastises US policymakers for the use of trade sanctions under Section 301 for what they called "unfair" trade and the degenerative tendency to categorize asymmetries among trading partners as somehow unfair. In this vein he is completely against (and rightly so) calls for harmonization of standards, particularly those of labor and the environment. He argues that concerns of "race to the bottom" are unfounded as empirical evidence shows the level of these standards does not affect firm location choice. Further, who is to judge that an American child delivering newspapers is a healthy exercise in responsibility-building, while a Pakistani child sewing soccer balls at home after school is abhorrent child exploitation! Bhagwati is sympathetic to those with honorable concerns on social issues in developing countries. What his book does, is help expose those policies pushed by domestic special interests dressed up in a cloak of social conscience and identification with the poor in the developing world.
It is also interesting that his distaste for `fair trade' issues applies not only to advanced economies but also to developing countries. He espouses the benefits of "going it alone"--that of unilateral trade liberalization, arguing in the words of Joan Robinson, that if other nations throw rocks into their harbor that is no reason to throw rocks into our own. Any remaining reciprocal trade liberalization he argues is best dealt under the auspices of the WTO in a multilateral framework, instead of the current array of preferential trade agreements that clutter the trade environment. Here the rosy theoretical consensus falls apart. While the benefits of free trade are well established, the path to getting there is still under construction. However, it appears the very things that worry Bhagwati about preferential arrangements like NAFTA are manifesting themselves lately. Consider the recent increase in US steel tariffs and the exemptions granted to our NAFTA partners Canada and Mexico. This implies that we can expect an increase in higher cost Canadian and Mexican steel displacing cheaper Korean and Japanese steel, because they have become more competitive in the US market simply due to the price wedge created by the special tariff exemption. Welfare-reducing trade diversion at work!
Bhagwati also draws attention to the direct impact of trade on poverty in poor countries and cites the reduction of poverty in India since that country's liberalization in the early 1990s. Indeed both India and China attest to the poverty reducing benefits of freer trade. However, more work needs to be done on this relationship by the profession because it appears now the yardstick with which we judge policy success is its ability to reduce poverty.
Free Trade Today is a great read for all those interested in international trade and development, regardless of their ideological stance. It offers deep insights of a powerful idea not only to those fogged by rhetoric and misinformation, but also to many of its strong supporters.
Ravi A. Yatawara University of Delaware
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|Author:||Yatawara, Ravi A.|
|Publication:||Comparative Economic Studies|
|Article Type:||Book Review|
|Date:||Dec 22, 2002|
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