Fair Trade (Part 2)

First, some clarifications. My argument is not against trade or free trade. From the outset I noted the potential benefits and advantages of trade and stressed the perils of protectionism. My argument is that trade liberalisation is not the simple remedy it sounds. Equally importantly, government should aim to do more than ensure an efficient allocation of resources globally. Taken together, these arguments point to the greater urgency of making trade fairer rather than freer.
What is free trade? I think we all agree that free trade is a theory. The theory is that the most efficient allocation of resources, globally, would be achieved if governments were to stay out of trade. If governments did not intervene, by using tariffs, subsidies, or regulations to increase the prices of goods paid by their consumers for things made in other countries, the result would be what economists describe as "Pareto efficient".

We disagree about how this theory translates into the real world and with what implications for policy. For Professor Bhagwati, free trade is the best practical guide we have to policy: if in doubt, liberalise, even if no other government is doing the same. By contrast, I stress that free trade only produces efficient outcomes if other necessary conditions are in place such as (near) perfect competition and information. To this end, governments must intervene to prevent monopolies, negative externalities, and market failures.

At the global level, competition among producers in different countries requires carefully negotiated rules among countries (the GATT, the WTO, exchange-rate rules) and their effective monitoring and enforcement. It requires access to accurate and available information, and genuine competition (as opposed to monopolies, oligopolies, and monopsonies among global producers and intermediaries). Without these conditions, trade quickly becomes inefficient and unfair.

What is fair trade? Fairer trade is not necessarily an argument against free trade (although doubtless it is sometimes used as such). "Fairness" has two dimensions. The first is procedural: are the rules fair, and are the processes used to monitor and enforce the rules fair? The second dimension of fairness is substantive: are the outcomes of trade fair? I will deal with each in turn.

For Professor Bhagwati the current state of the rules is "fair enough" for free trade to unleash efficiency-maximising global competition. On this I disagree. Taken as a whole the trading system has been shaped by the mercantilist interests of the largest and wealthiest countries. Liberalisation has taken place in a series of agreements, originally among a small group of industrialised countries who opened their markets to one another in a reciprocal way, creating a premier league of trading nations. Relegated to lower leagues, developing countries were long denied access to markets for their textiles and garments. The MultiFibre Agreement and its successor were finally phased out in 2005. Developing countries are still denied access (except through special discretionary agreements) to markets for their agricultural goods and commodities. This does not make freer trade a bad idea, it forces us to consider practicalities.

Our moderator, Saugato Datta, says surely I am arguing that the solution is to remove the protectionism in industrialised countries—to make trade freer. Yes, but the nub of this debate is how is this most likely to occur? Two means have been proposed. First, Professor Bhagwati argues that developing countries should liberalise unilaterally. My retort is that this will not induce industrialised countries to dismantle their protectionism. The invisible hand of free trade will not displace the deeply rooted lobbyists and agri-business interests in Brussels, Washington DC, and Tokyo.

~ Ngaire Woods, http://www.economist.com/debate/days/view/515