Original ideas on global trade

A recent commentary I authored on global trade based on a forum held at the Cato Institute:

Business Times - 23 Jun 2006


Time for unilateral trade liberalisation

Some US economists now say expanding global trade does not require new agreements

By LEON HADAR
WASHINGTON CORRESPONDENT

MORE than four years after the launch of the Doha Round under the auspices of the World Trade Organisation (WTO), with its goal of continuing to remove trade barriers to products and services, the prospects for a successful outcome look more distant than ever.

Some US economists are now arguing that expanding global trade does not require new trade agreements. They, instead, suggest that the US objectives of the Doha Round - including better opportunities for American businesses, greater affordability and choice for consumers, improved prospects for farmers and producers in developing countries and greater international receptivity to US policies - could be achieved through unilateral trade liberalisation.

Professor Jagdish Bhagwati of Columbia University, one of the world's most prominent trade economists and editor of a recent book about unilateral trade liberalisation, puts it in simple terms: 'If you agree with the case for free trade, that it increases economic growth and reduces poverty, that it is a win-win proposition for those who practise it, you have to agree with the case for unilateral trade liberalisation.'

Sequential reciprocity

Prof Bhagwati, the author of Going Alone: The Case for Relaxed Reciprocity in Freeing Trade, spoke last week during a policy forum sponsored by the Cato Institute, a Washington-based think-tank promoting free trade. 'If liberalising trade is good for me, it doesn't make sense for me not to pursue it just because you've decided not to move in that direction,' he explained, arguing that unilateral trade liberalisation sets in motion a process he describes as 'sequential reciprocity'.

If the United States removes more barriers to trade and demonstrates that these unilateral moves have created a more prosperous America, a pressure will mount on other economies to take the same route or be left behind.

After all, most economists agree that both developed and developing economies gain from liberalised trade in goods and services and from a strengthened multilateral trading system. Hence the World Bank has estimated that if the Doha Round would be concluded, the global gains from liberalising trade would be almost US$300 billion annually.

Prof Bhagwati and the other speaker at the forum, trade economist Daniel Ikenson, are still hoping for a last-minute breakthrough in the Doha trade negotiations among the 149 members of the WTO, leading to an agreement before time runs out at the end of July.

Most analysts agree if such an accord is not reached this year, the chances of renewing negotiations in 2007 are close to zero since US President George W Bush's Trade Promotion Authority expires next year and is not expected to be renewed before the 2008 presidential elections.

Political analysts believe that the decision by the White House to ask the politically savvy US trade negotiator Rob Portman to move to another job was a sign that it was not very bullish about the prospects for the Doha Round. But even without progress on Doha, the US has an opportunity to play a leadership role on the global trade front by pursuing its own unilateral trade liberalisation agenda, Mr Ikenson argues. 'At 1.4 per cent in 2005, the average applied tariff rate in the United States is relatively low,' he notes. 'But that average obscures the fact that duty rates on many products are in double-digit percentages, which discourages importation of those products and keeps domestic prices higher than they would be otherwise.'

Most of the products subject to high US tariffs are necessities such as clothing, footwear, and food, all products to which lower-income families devote a larger proportion of their budgets than do higher-income families.

Those are also the products that developing countries are likely to produce and export. So getting rid of them should be seen as a win-win proposition.

As Mr Ikenson puts it: 'US tariffs and quotas are not assets to be relinquished only in exchange for better access abroad.' They are, in fact, 'liabilities that raise the costs of production for US producers and the cost of living for US consumers'.

On moral grounds alone, US Congress should support a plan that would cut the most regressive US taxes, reduce wasteful government spending, boost economic prospects for US firms and give the developing world a better chance to share in the benefits of the global economy.

'We don't need permission from the rest of the world to do what would clearly benefit us and most of the global economy,' Mr Ikenson stresses.

Discriminatory deals

While from Prof Bhagwati's perspective the best-case scenario would be the strengthening of the foundations of the multilateral free trade system through a successful completion of the Doha Round, he prefers a process of unilateral trade liberalisation led by the US over the mishmash of discriminatory bilateral trade pacts that are bound to swell if Doha fails.

He recalls that one of his former students at the Massachusetts Institute of Technology, the now renowned economist Paul Krugman, once challenged the case for unilateral trade liberalisation by arguing that if two productive and efficient companies, one American and one Japanese, compete globally, the American one is bound to lose if the Japanese government decides to protect its market from foreign competition while the American did not.

'The problem with that example is that you wouldn't expect the Japanese company to be as productive and efficient as the American one if it was operating under the protection of the Japanese government,' Prof Bhagwati counters. 'We cannot force other governments from taking steps that hurt their economies, by pursuing protectionism,' he suggests. 'But it shouldn't prevent us from doing the right thing by removing or own barriers to foreign competition.'

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