The free trade debate

An interesting debate on free trade and the impact it could have on growth, equity and development is found on the Project Syndicate website.


Dani Rodrik in his provocative piece "Occupy the Classroom" recognises the diversity of intellectual frameworks in studying economic theory and states,


"In my book The Globalization Paradox, I contemplate the following thought experiment. Let a journalist call an economics professor for his view on whether free trade with country X or Y is a good idea. We can be fairly certain that the economist, like the vast majority of the profession, will be enthusiastic in his support of free trade.

Now let the reporter go undercover as a student in the professor’s advanced graduate seminar on international trade theory. Let him pose the same question: Is free trade good? I doubt that the answer will come as quickly and be as succinct this time around. In fact, the professor is likely to be stymied by the question. “What do you mean by ‘good?’” he will ask. “And good for whom?” 

The professor would then launch into a long and tortured exegesis that will ultimately culminate in a heavily hedged statement: “So if the long list of conditions I have just described are satisfied, and assuming we can tax the beneficiaries to compensate the losers, freer trade has the potential to increase everyone’s well-being.” If he were in an expansive mood, the professor might add that the effect of free trade on an economy’s growth rate is not clear, either, and depends on an altogether different set of requirements.

A direct, unqualified assertion about the benefits of free trade has now been transformed into a statement adorned by all kinds of ifs and buts. Oddly, the knowledge that the professor willingly imparts with great pride to his advanced students is deemed to be inappropriate (or dangerous) for the general public."

Jeffrey D. Sachs warns about the effects of globalisation and hence the need of a strengthened State thus,

"Yet globalization has also created major problems that need to be addressed. First, it has increased the scope for tax evasion, owing to a rapid proliferation of tax havens around the world. Multinational companies have many more opportunities than before to dodge their fair and efficient share of taxation.

Moreover, globalization has created losers as well as winners. In high-income countries, notably the US, Europe, and Japan, the biggest losers are workers who lack the education to compete effectively with low-paid workers in developing countries. Hardest hit are workers in rich countries who lack a college education. Such workers have lost jobs by the millions. Those who have kept their jobs have seen their wages stagnate or decline.

Globalization has also fueled contagion. The 2008 financial crisis started on Wall Street, but quickly spread to the entire world, pointing to the need for global cooperation on banking and finance. Climate change, infectious diseases, terrorism, and other ills that can easily cross borders demand a similar global response. 

What globalization requires, therefore, are smart government policies. Governments should promote high-quality education, to ensure that young people are prepared to face global competition. They should raise productivity by building modern infrastructure and promoting science and technology. And governments should cooperate globally to regulate those parts of the economy – notably finance and the environment – in which problems in one country can spill over to other parts of the world.

The need for highly effective government in the era of globalization is the key message of my new book, The Price of Civilization. Simply put, we need moregovernment nowadays, not less. Yet the role of government also needs to be modernized, in line with the specific challenges posed by an interconnected world economy."

Perhaps, the lone supporter of globalisation and free trade in the discussion is Jagdish Bhagwati who argues,

"The link between trade openness and economic prosperity is strong and suggestive. For example, Arvind Panagariya of Columbia University divided developing countries into two groups: “miracle” countries that had annual per capita GDP growth rates of 3% or higher, and “debacle” countries that had negative or zero growth rates. Panagariya found commensurate corresponding growth rates of trade for both groups in the period 1961-1999.

Of course, it could be argued that GDP growth causes trade growth, rather than vice versa – that is, until one examines the countries in depth. Nor can one argue that trade growth has little to do with trade policy: while lower transport costs have increased trade volumes, so has steady reduction of trade barriers.

More compelling is the dramatic upturn in GDP growth rates in India and China after they turned strongly towards dismantling trade barriers in the late 1980’s and early 1990’s. In both countries, the decision to reverse protectionist policies was not the only reform undertaken, but it was an important component.

In the developed countries, too, trade liberalization, which started earlier in the postwar period, was accompanied by other forms of economic opening (for example, a return to currency convertibility), resulting in rapid GDP growth. Economic expansion was interrupted in the 1970’s and 1980’s, but the cause was the macroeconomic crises triggered by the success of the OPEC cartel and the ensuing deflationary policies pursued by then-Federal Reserve Chairman Paul Volcker.

Moreover, the negative argument that historical experience supports the case for protectionism is flawed. The economic historian Douglas Irwin has challenged the argument that nineteenth-century protectionist policy aided the growth of infant industries in the United States. He has also shown that many of the nineteenth century’s successful high-tariff countries, such as Canada and Argentina, used tariffs as a revenue source, not as a means of sheltering domestic manufacturers."

Perhaps there is a meeting ground of views - a middle path? Trade liberalisation and globalisation do offer opportunities for growth and development. But this does not suppose the abdication of the role of the State to intervene more aggressively in areas it should.Domestic policies have to be in place in order to ensure that benefits of free trade and globalisation reach the bottom of the pyramid. Globalisation along with a responsive State that caters to issues of inclusive growth and sustainability is perhaps the way forward? Globalisation does not mean an abdication of the State's responsibilities. It would mean a greater engagement to ensure the fruits of globalised world reach the vast majority rather than being restricted to a few.Can the WTO facilitate such an engagement? Does it give enough room for domestic State policy to achieve this balance?