“Jagdish Bhagwati is one of the world's most distinguished economists. Currently a university professor at Columbia, Mr. Bhagwati is a rare academic who has the great ability to communicate his ideas to a more general audience. In works such as his recent book, "In Defense of Globalization," Mr. Bhagwati has become famous as a persuasive and articulate proponent of expanding world trade to help improve the lot of the poor. In "Termites in the Trading System," Mr. Bhagwati argues that not all trade deserves our equal support, however, and mounts a brisk and spirited attack on preferential, so-called "free trade" agreements that are, in his view, leading the world trading system astray.
Wait a minute: Aren't these agreements — such as NAFTA — almost invariably opposed by anti-trade groups precisely because they open up markets? Why is one of the world's staunchest supporters of free trade protesting so passionately against this method of reducing trade barriers?
The problem, Mr. Bhagwati shows, is that not all trade agreements are created equal. The right way to reduce trade barriers, he explains, is on a multilateral basis and in a nondiscriminatory way. After World War II, America led the world in creating the General Agreement on Tariffs and Trade (GATT), which did just that, by encouraging the reduction of tariffs and liberalization of other import restrictions. In recent years, however, countries have increasingly bypassed this system. Now, it is common for two or more countries to agree to eliminate tariffs and reduce other trade barriers for each other, but not for others, as is the case with NAFTA. Such agreements have been in vogue around the world, particularly with the current Bush administration: Under Bush, America has concluded a major trade agreement with Central American countries (CAFTA) and a series of bilateral agreements with countries ranging from Oman to Australia, and — most recently and controversially — Colombia.
The main problem with these bilateral and regional agreements is that they exclude other countries. In Mr. Bhagwati's view, they are more accurately called "preferential" trade agreements because they discriminate against non-participating countries. This is a violation, Mr. Bhagwati suggests, of the principle of nondiscriminatory trade liberalization that served as the cornerstone of the tremendously successful post-World War II trading system under the GATT (and now the WTO).”
Douglas A. Irwin, “How Free Is Free Trade?: Bhagwati's 'Termites in the Trading System'”, The New York Sun (21 July 2008).
http://www.nysun.com/arts/how-free-is-free-trade-bhagwatis-termites-in/82251/?print=8831966121
Douglas A. Irwin is professor of economics at Dartmouth College and author of Free Trade Under Fire.
In certain respects, the world trading system is in great shape. In recent years, for example, world trade has been rising at a rates of 7 to 10 per cent a year in volume terms. In the case of the developing countries, including Africa, exports have been rising at rates above 10 per cent a year and China has registered increases of 20 to 30 per cent a year. U.S. exports, in quantity terms, have been rising at a pace of more than 6½ per cent a year, and this year, due to the decline in the dollar, U.S. exports are booming. Looking to the longer-term, over the past half century, the rise in world trade has been unprecedented, and the open and multilateral trading system created in the wake of the Great Depression and a truly devastating worldwide war has spread prosperity across the face of the globe.
But in other respects, the world trading system is in terrible shape. It is not just the great imbalances that describe the balance of payments of the world’s major trading countries, not least of which is the huge trade deficit of the United States. Nor is it the wide swings in currency values on foreign exchange markets, with the price of the dollar in terms of key currencies doubling and halving in a matter of years. It is not even the introduction of petty tariffs and quotas here and there on a whim and with no real purpose or the opposition of the groups that openly oppose trade and deny its benefits. Given the excellent trade performance of the system in terms of results, and the ineffectiveness of the anti-trade opponents in actually affecting policy, all these could be forgotten or forgiven.
What can not be forgotten or forgiven are the constant attacks on the trading system by those that say they support free and open trade. As they well know, the creation and management of the postwar trading system was centered on a multilateral – indeed, a worldwide – approach to gaining the benefits from freer and fairer international trade. Multilateral negotiations involving an increasing number of the world’s countries were periodically conducted with the objective of reducing barriers to trade and eliminating discriminatory treatment of foreign goods and services so as to gain the production efficiencies and consumption diversities inherent in the widest possible market. The latest of these negotiations, called the Doha Development Round, focuses on opening agricultural and service markets, with an emphasis on trade expansion by developing countries and expanded intellectual property regulation to the benefit of the more economically advanced countries. However, progress on the various GATT and WTO trading rounds has become increasing difficult, and the Doha Round has stalled.
The reason progress is slower is that the commitment to a free and open trading system has become weaker and weaker. The GATT/WTO negotiating approach, and the world trading system itself, is based on four guiding principles, called “the four pillars of GATT: Nondiscrimination and multilateralism among all signatories; Expansion of trade through a reduction in trade barriers; reciprocity as the basis for trade negotiations; and the Establishment of known and enforced rules governing the conduct of international trade. The very purpose of these rules is to promote a universal system of benefit to each and every country and to avoid the fragmentation of the world trading system into different blocs, each narrow and focused unto itself. It is these principles that are being challenged.
What we have seen in recent decades is the step-by-step abandonment of principles of the monetary and trading systems established at Bretton Woods and the early postwar years. Professor Bhagwati is right. In our pursuit of narrow bilateral and regional trade agreements we have abandoned the worldwide focus that has served us so well in the past. The friends of free trade, in their pursuit of free trade, are instead establishing a system of preferential trade, one that may well subvert the very goals they say they want to achieve.
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