The dispiriting thing is that the talks could founder over the refusal to compromise, when the costs of compromise were indeed so low. (The political costs, I mean. When a country binds itself not to resort to protection, the economic costs are not just low but negative.) Governments no longer judge a successful Doha Round to be capable of delivering them a net political gain. Since that was the reason for the WTO in the first place, the game appears to be up.
Multilateral trade liberalization brought the world an awfully long way after 1945, but that era has come to an end. The trade-reform agenda is unfinished--especially in the developing world--but future progress, if any, will come from unilateral unreciprocated liberalization, or from discriminatory bilateral (or plurilateral) agreements, or some blend of the two. There has been a lot of the first lately, which is good. The danger lies with the second. It is a trend that the United States pioneered with its proliferating (until recently) regional FTAs. A rationale often offered for that approach was that regional FTAs were building blocks for broader multilateral liberalization, with the WTO presiding over the subsequent assembly. Skeptics said no: regional FTAs would complicate the system and create frictions that would make broader trade reform more, not less, difficult. I'd say the skeptics have been proven right.
The FTA tendency is capable, given an enfeebled WTO, of eventually unwinding some of what has been achieved over the past half-century. (On this, see Jagdish Bhagwati's new book.) If a growing China, India and Brazil follow the US example and use their muscle to develop their own hub-and-spoke networks of trade preference, the eventual costs in forgone trade and income could be great. The logic of trade protection never sleeps.
With Doha breathing its last, bilateral deals, or regional trade agreements, are the best liberalizers can hope for (though even that hope may be pretty anemic). The traditional stance of ardent free-traders such as Clive and myself has been to oppose bilateral deals on the grounds that they obstruct broad multilateral action. Well, now that broad multilateral action seems to be out of the question, we have to decide: are they better than nothing at all?
I'm not sure. On the one hand, they break down local interest groups that obstruct trade. On the other hand, they can divert trade flows in ways that are even more distortionary than broad tariffs. And they will probably create their own new interest groups--clothing retailers with relatives in the Panamanian garment trade, say--that will fight just as fiercely as the loathesome sugar lobby does today.
In pure theory, probably not. On the other hand, bilateral deals with America could help some poor people in Latin America right now. How many eggs am I willing to break in the hope of someday getting an omelette?
Something is better than nothing. We're not going to get huge trade gains (through any method) until congress decides that "unilateral unreciprocated liberalization" is beneficial. I'd estimate about 200 or so more years before that happens.
On a similar note, I've often wondered what would happen if a large economy where to implement a sort of unilateral "spite tariff" by taxing every import from and export to a given country at the highest rate that country taxes on any export or import.
Any chance of getting this into the next batch of request topics?
Don't make the perfect the enemy of the good.
I'll take whatever free trade I can get; people are still pissed about NAFTA for gods sake. Baby steps.
What's the deal with trade barriers? What's a good metaphor? Are trade barriers like the Alps or Pyrenees, which GATT and WTO and NAFTA etc. have been gradually eroding away so sometime in the future the world will have totally free trade? Sugar barriers have effectively been around forever. Or are they like crabgrass in the lawn, intruding here and there until, one fine day you find your whole lawn is crabgrass?
I don't recall many stories on the growth of barriers, but that might be just a function of how media attention works.
Mulilateral trade agreements must inevitably clash with the differing sore spots in each country's politically-strongest native industries (e.g. corn growers for the US, ag subsidies in general for the EU, etc.), creating an enormous collective action problem.
Even NAFTA was something of a political miracle, aided greatly by an unusually strong global economy that mitigated the effect of protectionist instincts. (Probably didn't hurt that Mexico doesn't have its ag house in order, and thus imports corn from the US.)
If a number of similar-looking bilateral agreements can be brought to fruition, there is at least the possibility that three, four, or five bilaterally-aligned actors might be able to come together at some point and negotiate a broader, multilateral compromise. Otherwise, since you can't have all at once, you're probably stuck with nothing if bilateral is off the table.
"What's the deal with trade barriers? What's a good metaphor?"
I view them as a self imposed embargo. The day logic and general welfare defeat special interests is the day the embargo is lifted.
I fully support free trade, but like a plant, trade must be nurtured. Free traders cannot believe their own hubris and simply insist that their idea is so good & eventually all the world will adopt free trade. People (especially citizens that don't understand the underlying benefits of trade/comparative advantage) must be convinced. If free-traders can't do that, then yes, they must go back to the drawing board and develop better rationales.
A rationale often offered for that approach was that regional FTAs were building blocks for broader multilateral liberalization, with the WTO presiding over the subsequent assembly. Skeptics said no: regional FTAs would complicate the system and create frictions that would make broader trade reform more, not less, difficult. I'd say the skeptics have been proven right.
Of course, in the case of the US, the same people opposing trade liberalization through multilateral deals oppose the bilateral deals as well.
Some responses: China, India, and, to a lesser extent, Brazil, have already created their systems of FTAs, and are continuing to enlarge them.
I haven't read Bhagwati's book yet, but the effect of FTA's is that currently a little under half of America's exports are to countries that have FTAs finalised with America (although you do have to include Korea and Colombia to get to the almost-half figure). These countries mostly lack tariffs for American goods, meaning that half of America's goods are sold tariff free as a result of the agreements. That cannot be bad for trade. The agreements are mostly similar to each other, with small differences.
The regulatory differences are all that remain after tariffs are destroyed. The notion that there is a lobbying group that will fight as hard to maintain a differential between Costa Rica's rules of origin and Colombia's as the sugar lobby has fought to maintain tariffs seems absurd on its face. One of the great things about the problems inspired by the "spaghetti bowl" effect is that they benefit no one particularly, and should be much easier to remove. A world in which FTAs are as prolific as BITs are today is a world in which the hard problems will already have been solved, with the WTO just needing to sweep away the remaining easy ones.
Frankly, I think people overcredit the idea that the U.S. serves as an example to other countries. Other countries are going to try to form hub-and-spoke arrangements and fenced-off multilateral blocs no matter what the U.S. does.
So, forming as many bilateral and small-multilateral trade treaties as possible as soon as possible strikes me as a very good idea, because they make it harder to form monolithic protectionist blocs. For example, the existing US-Chile and US-Peru deals and the signed US-Columbia trade deal serve as chinks in any effort to make the proposed Mercosur-plus-Andean Community SAFTA a fenced-off South American bloc.
Oh, another thing. Sure, the resulting trade distortions are possibly less efficient than uniform high tariffs. But the rents from those distortions accrue most to countries that sign lots of bilateral FTAs. Assuming everyone rationall tries to maximize their share of the tariff-avoidance rents by signing as many bilateral FTAs as possible, we wind up with every country signing some 160 bilateral FTAs . . . at which point, as James said, the hard problems are solved.
Oh, and btw, this is very big news. US manufacturing trade with it's FTA partners is in surplus, something that has not previously been the case. Since the trade imbalance has been one of the chief anti-NAFTA and, hence, anti-trade arguments, this should be shouted from the rooftops.
Dollars to donuts most of the FTA countries actually do themselves a favor by using it as an excuse to lower their own tarrifs but sell it to their people as "opening" the US market.
The US market is already very, very open. Korean products aren't being held back by US tarrifs, but I wonder if the reverse is not true?
The US market is already very, very open. Korean products aren't being held back by US tarrifs, but I wonder if the reverse is not true?
The recent trade agreement with Korea opened up their markets to US goods more than the reverse (due to the relatively already open US market you cite). Korea has traditionally been a fairly closed market, but it seems to be opening up as time goes on. Or at least this is what I recall from listening to NPR a few months ago... if the facts are different, blame my memory.
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As Aaron points out, the U.S. market is already very open for most products. (There are, of course, some notable exceptions.) With average MFN tariffs on the order of 4%, the chances that trade diversion is going to be a very noticeable phenomenon isn't very likely. I say more free trade agreements!
Hmmmm
@ James of England
"Oh, and btw, this is very big news. US manufacturing trade with it's FTA partners is in surplus, something that has not previously been the case. Since the trade imbalance has been one of the chief anti-NAFTA and, hence, anti-trade arguments, this should be shouted from the rooftops."
That's because the value of the dollar is in the toilet. When the dollar gets stronger then manufacturing goes into the toilet.
Plus a large portion of that "surplus" is from steel production because China needs all the steel it can get it's hands on.
Frankly I'm not totally convinced that there is any such thing as "free trade". Perhaps traditional barriers are reduced but new barriers certainly do arise. Japans customs import inspections that results in perishable products decaying on the piers comes to mind.
Memomachine,
It's true that the weak dollar has a big impact on the balance of trade. Note, however, that the trade balance is still in deficit. When you say that a large part of the surplus is from China, you either misunderstood the statement (that trade with FTA partners is in surplus) or you believe that the US has an FTA with China. If it is the latter, then allow me to assure you that it has not happened, and will not happen for the foreseeable future.
It gives the lie to the old argument that FTAs were responsible for the deficit. Although they have generally seen a smaller deficit than non-FTA trade, this is the first time that the difference has been this stark.
Memomachine,
It's true that the weak dollar has a big impact on the balance of trade. Note, however, that the trade balance is still in deficit. When you say that a large part of the surplus is from China, you either misunderstood the statement (that trade with FTA partners is in surplus) or you believe that the US has an FTA with China. If it is the latter, then allow me to assure you that it has not happened, and will not happen for the foreseeable future.
It gives the lie to the old argument that FTAs were responsible for the deficit. Although they have generally seen a smaller deficit than non-FTA trade, this is the first time that the difference has been this stark.