Basics of Global Trade

Basics of Global Trade
September 9, 2014

On September 3, Brookings summarizes a report by Miriam Sapiro, now with Brookings and formerly a deputy US Trade Representative (2009-2014). Sapiro argues strongly for the benefits of increased foreign trade. She’s writing in the context of the Transpacific Partnership (“TPP”), the huge trade alliance the US, Canada, and Mexico are negotiating with 9 Asian countries, including China and Japan. She speaks even more broadly, arguing that more trade is good for the entire global community.

Of course, more free trade sounds good for all–on the surface.  But, for those who have not had the opportunity to study major global failures in this regard, I offer a few observations, while acknowledging that some of the ills I refer to are complex and a host of other country specific factors also contribute to the outcomes I want to point out.

  • First, the direction of Sapiro’s argument is along the lines of open borders, deregulated free trade, elimination of barriers and tariffs–let the free market determine who gets the business. Sounds good on the surface.
  • Second, this trade agreement is between 12 countries. The 11 represent about 44% of US exports at this time. Only one of these countries, Peru, can be seen as early “developing,” unless you consider Mexico and China in that camp. So, the first question is what about the rest of the world? What about sub-Saharan African countries? If trade increases between the 12 in the TPP, does it mean that there is less opportunity for others, especially young developing countries, to sell to these 12? I think it does, to some degree.
  • History has shown that when borders were opened by the influence of the Washington Consensus in the 90s, with the force of IMF lending conditions behind it, foreign investment increased mostly between developed countries, and relatively few western companies made investments in the places conservative economists expected–where wages were lowest. Why? Because of lots of handicaps in those developing countries–absence of rule of law, absence of institutions, absence of infrastructure, absence of sufficiently educated work force, language, customs, etc.
  • As most clearly pointed out by economist Ha-joon Chang in his Kicking Away the Ladder, western nations are duplicitous in their demand for open borders. He points out that when they were young, the US, England, Japan, So Korea and most all developed countries had highly restrictive protections for their infant industries, high tariffs for example, no open borders, for a considerable period of years! So, have we forgotten that, or do we really feel something fundamental has changed such that infant industries of today do not need a similar period of protection to get started? Alexander Hamilton was one of the strongest advocates for that in the case of the United States, in the 18th century.
  • Furthermore, even now, we remain protective of our own. Consider the amount of subsidy we give farmers in the US, raising crops which can far more efficiently be raised in many foreign countries. Doing so, we deny our own consumers the best prices and we also flood foreign agricultural markets with products at prices locals could compete with–without our subsidies–but with those subsidies, they cannot.
  • Many countries forced to open their borders had catastrophic consequences: Along with open border requirements, another imposition was reducing government. Government had been the major employer in many of those countries. The idea was that all those displaced workers would get jobs in the burst of growth produced by opening borders. But, little foreign investment came, foreign agricultural products flowed in at subsidized prices even local wages could not compete with, and there was no way to develop local manufacturing without import tariffs. Many economies which accepted IMF debt with its impositions spiraled downward. Poverty increased.
  • Marco Caceres has a great summary of recent impacts of such policies in Honduras, in the Sept 3, 2014 edition of the Huffington Post. The problems of these policies of the 90s continue to this day, as the Honduran administration is currently negotiating with the IMF over the terms of a new $220 Million loan. The price might involve a forced devaluation of the currency, which improves possible sale of exports, but raises prices for consumers in Honduras. Caceres reports that across the period of 1995 to 2012, US subsidies to US farmers for rice totaled $13 billion and subsidies for corn totaled $84 billion.
Citizens of developing countries are relegated to continued poverty through our agricultural subsidization and our companion political philosophy of imposing open borders on young developing countries.
Citizens of the US are also harmed. We pay higher prices for food products than we would if foreign producers were allowed to sell us rice and corn at prices which would give them a fighting chance at a decent agricultural business outcome for their families. Just those two subsidies (and there are others) total almost $100 billion of our tax dollars–that hurts Americans also. I’d rather we spend it on infrastructure and education.
So, more free trade is something that is good for some, but not always good for all, and our trade negotiations need to take the unique needs of individual trade partners into account, along with their respective stages of growth. And, we need to try harder to look at the world as the realm we must be accountable to, not just our own healthy, wealthy country.
References:

http://www.ustr.gov/tpp/overview-of-the-TPP

http://www.huffingtonpost.com/marco-caceres/honduras-beware-of-neolib_b_5758970.html

http://www.brookings.edu/blogs/brookings-now/posts/2014/09/why-trade-matters?utm_campaign=Brookings+Brief&utm_source=hs_email&utm_medium=email&utm_content=14032209&_hsenc=p2ANqtz-8RTZ4df1FfeQusMXE9e5Cxrai3BXUczQyYdcR2J12AJ4A2qMJkLijgrQk5lDg9aQzumMGqXnp3K8eP1WTjT5B2XdjIyw&_hsmi=14032209

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