The il­lu­sion of free trade

Financial Mirror (Cyprus) - - FRONT PAGE -

The United States’ de­ci­sion to im­pose tar­iffs on steel and alu­minium im­ported from cer­tain coun­tries has added to the fears of a trade war. Some be­lieve that these tar­iffs are a dan­ger­ous move by the U.S. be­cause they will in­vite re­tal­i­a­tion and thus could lead to a mas­sive break­down of trade. The prob­lem with this way of think­ing, how­ever, is that it fo­cuses pri­mar­ily on for­mal barriers to trade and ig­nores in­for­mal and in­di­rect barriers. Even if there is a free trade agree­ment be­tween two coun­tries, it does not nec­es­sar­ily mean that busi­nesses in both coun­tries will be able to trade with each other with­out im­ped­i­ments, as is of­ten as­sumed.

Gov­ern­ments have a range of tools avail­able, for­mal and in­for­mal, de­signed to mit­i­gate the ef­fects of free trade. In other words, a free trade agree­ment will even­tu­ally evolve into some­thing very dif­fer­ent. For ex­am­ple, reg­u­la­tions can be put in place that im­pose mas­sive ad­di­tional costs on an ex­port­ing coun­try, forc­ing in­creases in prices. This wouldn’t in­volve the im­po­si­tion of tar­iffs, but it would make it more dif­fi­cult for ex­porters to com­pete with do­mes­tic man­u­fac­tur­ers. An­titrust laws can be im­ple­mented that fine com­pa­nies and force them to cut back their mar­ket share. The cost of do­mes­tic pro­duc­tion can be re­duced by re­lax­ing labour laws. Coun­tries may also en­ter into agree­ments know­ing full well that their con­sumers have lit­tle in­ter­est in cer­tain im­ports, such as Ja­panese con­sumers spurn­ing Amer­i­can cars. And ex­porters may be forced to sell prod­ucts in a coun­try through cer­tain whole­salers that dom­i­nate the do­mes­tic mar­ket, and hav­ing to do that may slash their rev­enue.

Free trade, in its purest form, is said to be fi­nan­cially ben­e­fi­cial to all coun­tries. That may be true, but this as­sump­tion ig­nores three vi­tal vari­ables. The first is tim­ing. When will the ben­e­fits will show them­selves? It could take years or even decades. The sec­ond is short-term vs. longterm im­pact. Some in­dus­tries may be­come un­com­pet­i­tive and even col­lapse be­fore oth­ers flour­ish. The third is how pat­terns of eco­nomic ac­tiv­ity change based on for­eign com­pe­ti­tion. Some busi­nesses will win, oth­ers will lose.

Free trade is not only an eco­nomic process but also a po­lit­i­cal one. The de­struc­tion of an in­dus­try can de­stroy the liveli­hoods of mil­lions of peo­ple, even if the coun­try’s gross do­mes­tic prod­uct surges. In eco­nom­ics, the as­sump­tion is that in­di­vid­u­als will pur­sue their self-in­ter­est. Oddly, econ­o­mists tend to as­sume that they will – or at least ought to – pur­sue those in­ter­ests only through eco­nomic ac­tiv­ity. But peo­ple can also pur­sue their self-in­ter­est po­lit­i­cally. A gov­ern­ment that ne­go­ti­ates a free trade agree­ment that dam­ages this gen­er­a­tion with the prom­ise of bet­ter things later is likely to face se­ri­ous po­lit­i­cal reper­cus­sions. The next gov­ern­ment will take a dif­fer­ent ap­proach.

Eco­nom­ics is a sub­set of pol­i­tics, and the po­lit­i­cal sys­tem moves to pro­tect the in­ter­ests of cit­i­zens to main­tain so­cial sta­bil­ity and, in democ­ra­cies, keep gov­ern­ments in place. The fo­cus on tar­iffs misses the re­al­ity of in­ter­na­tional trade, which has both an eco­nomic di­men­sion, fo­cused on in­creas­ing the wealth of na­tions, and a po­lit­i­cal di­men­sion, fo­cused on as­sur­ing that the wealth doesn’t flow into the hands of a few while the rest are left dev­as­tated.

The United States is not yet in this ex­treme con­di­tion, but it has en­tered into a se­ries of trade agree­ments that, while ben­e­fi­cial on the sur­face, have had some neg­a­tive con­se­quences. The most im­por­tant con­se­quence has been the trans­fer of fac­to­ries out of the U.S. to low-wage coun­tries. By the law of com­par­a­tive ad­van­tage, this should in the long run ben­e­fit the United States. But it will do so at a mas­sive cost to one sec­tor. GDP might rise, but that in no way in­di­cates that wealth would be dis­trib­uted in a way that the po­lit­i­cal sys­tem can en­dure.

Ev­ery gov­ern­ment has to con­sider three fac­tors when en­ter­ing into a trade agree­ment. The first is the ben­e­fit to an in­dus­try that will have ac­cess to a new mar­ket. The sec­ond is the da­m­age the agree­ment will do to those who will lose their jobs. The third, and trick­i­est, is how the for­eign gov­ern­ment with whom the trade deal is agreed will use non-tar­iff tools to shift the agree­ment to their ad­van­tage and, by def­i­ni­tion, against their trad­ing part­ner.

Peo­ple shouldn’t worry about a new trade war emerg­ing be­cause a con­stant and in­tense guer­rilla war is al­ready un­der­way in ev­ery trade regime to un­der­mine the agree­ment and re­shape it through sub­tle in­tru­sions. This is why mul­ti­lat­eral trade agree­ments have grown so trou­bling. A trade agree­ment that cre­ates a sin­gle regime en­com­pass­ing dras­ti­cally dif­fer­ent economies is in­her­ently im­plau­si­ble. The non-tar­iff trade barriers in each coun­try, not to men­tion the chal­lenges of mon­i­tor­ing and en­forc­ing the agree­ment, cre­ate mind­bog­gling hur­dles. The World Trade Or­gan­i­sa­tion can be used to set­tle some dis­agree­ments, but its de­ci­sions can be dif­fi­cult to en­force.

Free trade is rarely free, and when it is free, it im­poses costs in un­ex­pected places. The de­ci­sion of the U.S. to force a rene­go­ti­a­tion of trade re­la­tions is a re­sult of the fact that cer­tain sec­tors of the U.S. econ­omy have been hurt by prior trade regimes, and the U.S. is now us­ing the po­lit­i­cal process to pur­sue its self-in­ter­est. This is not new, nor is the sur­prise of those who have ben­e­fit­ted from the old regime or who are ide­o­log­i­cally com­mit­ted to the il­lu­sion of free trade. It is part of an on­go­ing shift in eco­nomic re­la­tions driven by po­lit­i­cal re­al­i­ties.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.