Wednesday, March 24, 2004

It's a good thing, right?

This week came news that the Cairns group of nations will try to break the deadlock at the WTO by working with the G-20, a group of poorer developing nations that rather famously held out against the Europeans and Americans in the last round of negotiations at Cancun, arguing that before they could accept things like free trade in services the E.U. and the U.S. would have to end subsidies to domestic agricultural producers.

The idea that the Cairns group, which supports an end to agricultural subsidies, would team up with the G-20 would appear to be a good thing, if we assume that the final result of such an arrangement would be torpedoing subsidies which make products from the rich countries cheaper than those from poorer nations. This all sounds good, right?

It’s clear that the costs of free trade are shared unequally. Workers in developed nations lose out more than say, finance capital.
Well, maybe not. Leaving aside for the moment the fact that such an arrangement would pave the way for international de-regulation of trade in services, even the Americans are starting to realise that the benefits of free trade have been over-hyped, while the costs have yet to be adequately studied. Only a few days ago an article appeared in the New York Times warning that free trade had the potential for more negatives than positives:

In general, most economists believe that the "consumer surplus" that results from lower prices far outweighs the cost of lost jobs or lower wages. In other words, there are many more winners than losers. But recent research suggests that the magnitude of this advantage has been exaggerated. Also, the plight of the losers has clearly been sorely neglected in the economic literature.

Oh yeah. Let’s not forget that business groups lobbying for free trade deals don’t like to spend a lot of time studying losers. I guess it’s not really part of their job. But as the article by Jeff Madrick illustrates, it turns out that academics have been been amiss when it comes to studying the potential negative impacts of multi-sector free trade arrangements. Interestingly, the literature that has focused on the costs of such deals (on workers, for example) has generally failed to take into account other effects, such as technological change or unemployment.

Ground control to economic orthodoxy: free trade does not work in a vaccuum.

Speaking of the potential impact of free trade arrangements on the U.S. domestic economy, Madrick writes that

the basic tenets of free trade assume that the economy is operating at full employment - in other words, almost everyone who wants a job can find one. Not enough research has been done on the trade effects in an economy with persistent unemployment, which has characterized most of the last 30 years.
What is entirely clear, however, is that the losers from free trade require more of the nation's attention. And their numbers are growing as trade and job migration expand.

Now if the rich countries stand to lose productivity growth and employment as a result of free trade arrangements, there is a case to be made that the loss of certain kinds of jobs to developing nations is a good thing, rather like exporting economic development to those areas of the globe that have been excluded from western capitalism’s dizzying success. And to that extent, I agree. It is a good thing.

But a couple of thoughts keep popping up in my head.

It’s clear that the costs of free trade are shared unequally. Workers in developed nations lose out more than say, finance capital. It's important that there be sufficient programmes and services in place to help workers in an economy faced with restructuring as a result of free trade. Ironically, it's these same programmes that anti-globalisation activist Jane Kelsey seems to deride as "neo-statism".

Secondly, while ending subsidies that penalise cheap goods from poorer countries is a good thing, de-regulation of trade in services may not be. Not for us, or for the developing world. Remember that these services include things like water and power utilities as well as some pretty basic government services. A cross-sector de-regulation of trade in such services can have an impact on the delivery of public goods and services that is not always benign.

And last? O.k., it’s a cheap one, but if the costs of free trade have been poorly studied in the developed world, then I would guess that the costs for the developing world have received pretty scant attention.