The Arguments
The arguments for free trade are well-known: static economic gains resulting from an optimum allocation of resources in a world characterised by competition, plus dynamic gains, because openness contributes to investment, knowledge, innovation, productivity and growth. This is classical theory, more and more refined in the latter half of the twentieth century. It has been substantiated by econometric studies and empirical evidence.
Economic history shows that open economies grow faster and that autarkic economies tend to stagnation. So, policy makers and governments can safely assume that openness is better. However, that does not mean that openness is enough. Trade openness is a necessary, but not a sufficient, condition for sustained economic growth. In order to make good use of openness a country needs good institutions, functioning markets and macroeconomic and political stability.
These are important conditions. What if the domestic conditions are not fulfilled? Is more openness and more free trade always good under such circumstances? Moreover, do these conditions determine trade or does trade also affect the conditions? In other words: could more and open trade not result in a weakening of institutions, less stability and a deterioration of market relations? That complete openness is not always necessary is shown by the example of the Asian ‘tigers’. The newly industrializing countries of East Asia in the 1970s did experience unprecedented trade expansion and high economic growth with the help of much public intervention, aggressive policies, managed trade, gradual opening of markets.
Fast market reforms can also create problems. For a long period China has witnessed two-digit growth figures, among others facilitated by a speedy access to world markets. But within China this unprecedented growth rate gives rise to economic and environmental distortions. Pollution is enormous. Easy lending has resulted in a huge overhang of bad loans, threatening financial stability and people’s confidence. Moreover, in other countries Chinese competition on the basis of its comparative cost advantage may lead to rising unemployment that cannot easily be matched by increased exports to China. Without a comprehensive approach, integrating international policies concerning trade, investment, finance and money, this could violate the stability of trading partners and of the world economy.
That a gradual and conditional opening of markets can be a wise policy is shown by the EU. Long negotiations had to take place in order reach agreement with the accessory countries. These negotiations dealt with the consequences of European expansion for markets in both the old and the new Europe: agriculture, transport, internal migration, competition, environmental legislation. Nobody argued in favour of a prompt establishment of a fully free agricultural market within the enlarged EU. Countries were willing to further liberalise agriculture, because the allocation of resources was highly inefficient and subsidies could not be sustained. But at the same time there was fear for social consequences, as had also been the case during the negotiations to enlarge the then ‘old Europe’ with Spain, Greece and Portugal. The much worse position of farmers outside Europe would justify a removal of the barriers that those farmers have to overcome when they want to export to Europe. But this does not render the fears inside Europe itself irrational. Rural conditions within Europe are not only a burden on the European economy; they also reflect certain values. For similar reasons, Austria was afraid that a free transportation market would irreversibly violate the environment in the Alps. Not everything can be compensated through a reallocation of resources set free by expanded trade.
Many fears are related to specific interests. They can be addressed with rational economic counterarguments. However, are all such fears irrational? Anderson points out that the source of resistance to policy reforms is that ‘the expected losses in jobs, income and wealth are concentrated in the hands of a few who are prepared to support politicians who resist protection cuts, while the gains are sufficiently small per consumer and export firm and are distributed widely as to make it not worthwhile for those potential gainers to lobby for reform.’ This is often the case. However, resistance to reforms often also is based on more general considerations, instead of specific group interests. Anyway, whether the resistance were socially justified or not, it is a political fact, related to questions of distribution. Better information concerning the potential benefits from reducing trade distortions will not be sufficient. Many parties – consumers, labourers as well as producers – see trade barriers as mechanisms to restore, protect or sustain a socio-economic and political balance in the economy or in the nation. To inform them about the costs involved, for them as well as for others, and thus about the potential benefits of removing the costs, will not suffice. They will envisage the removal of the trade distortions as a source of uncertainty and instability. They will therefore weigh the costs and potential benefits differently. Is that irrational? Sometimes, but not always, because the initial situation preceding market liberalisation is one of inequality in welfare as well as in political power.
Will technological change and the unilateral opening up of markets abroad contribute to a different understanding and weighing of the benefits and costs? Yes, in so far as trading costs are lowered and economic gains to be reaped come nearby. This is happening in the present era of globalisation. However, the perceived uncertainties and threats come closer too. Financial and monetary instabilities increase with globalisation, and economic inequality as well. Foreign control of investments, and thus of production, commercial and trade systems and sales, also increases with globalisation. This may retard the willingness to actively contribute to a further opening up. Such reluctance is not irrational. Even when it is clear that further liberalisation will contribute to growth and create more resources, it is uncertain who will reap he benefits and whether inequalities may not increase. It is too simple to conceive of this in terms of an ‘alarmist lobbying of protectionists’ alone. Such lobbies exist and do harm; however, there are also legitimate fears that cannot be taken away by better information. Such fears can be countered only through policies that go beyond creating expectations and beyond promises.
`World trade agreements, fully representative for all the interests concerned, would be the most credible way to address these fears. They form the best opportunity to bargain and exchange access and opportunities. The chances of success are greater the larger the number of countries involved and the broader the product and issues coverage of the negotiations. But here again, it will not be simple. All trade policy-making takes place in a context of both international and national inequality. Inequalities at home imply rigidity in the position of the negotiation partners. They may fear domestic instability resulting from different assessments and weighing of the outcome of the negotiation among various groups. For this reason, they cannot afford to be very flexible in the negotiations. Governments can try to introduce domestic compensation, but this is costly and will have to be financed out of the economic gains resulting from the expanding trade opportunities. Sometimes these opportunities have a different time frame. Often they cannot easily be taxed. All this will mean that governments will be cautious in instructions to their trade negotiators and that the negotiators themselves will exercise restraint.
This will add to a cautious approach that the same governments will choose because of the other inequality – that between the negotiating countries themselves. It is self-evident that this inequality leads to a lengthy negotiation process. The fact that previous rounds of negotiation have led to quite unequal results for the trading partners – the OECD countries benefited much more than most developing countries – and also the fact that many commitments resulting from these negotiations have not yet been implemented will add to a reluctance to engage themselves in further negotiations. Even if new rounds could be considered as beneficial to the world economy as a whole, weaker negotiation partners will hesitate. This, for instance, is the case for negotiations concerning services and investment.
It is also understandable that other countries are eager to speed up negotiations and action. They want to expand trade and boost the opportunities for growth. They are less afraid of an unequal distribution of the results. Because in their view multilateral negotiations become more and more cumbersome, they increasingly choose a different path: bilateral and regional negotiations, with free trade areas involving only a sub-set of countries. This is risky. Trade may be diverted from lower-cost developing countries, worsening the situation for non-participants in these talks.
Economic history shows that open economies grow faster and that autarkic economies tend to stagnation. So, policy makers and governments can safely assume that openness is better. However, that does not mean that openness is enough. Trade openness is a necessary, but not a sufficient, condition for sustained economic growth. In order to make good use of openness a country needs good institutions, functioning markets and macroeconomic and political stability.
These are important conditions. What if the domestic conditions are not fulfilled? Is more openness and more free trade always good under such circumstances? Moreover, do these conditions determine trade or does trade also affect the conditions? In other words: could more and open trade not result in a weakening of institutions, less stability and a deterioration of market relations? That complete openness is not always necessary is shown by the example of the Asian ‘tigers’. The newly industrializing countries of East Asia in the 1970s did experience unprecedented trade expansion and high economic growth with the help of much public intervention, aggressive policies, managed trade, gradual opening of markets.
Fast market reforms can also create problems. For a long period China has witnessed two-digit growth figures, among others facilitated by a speedy access to world markets. But within China this unprecedented growth rate gives rise to economic and environmental distortions. Pollution is enormous. Easy lending has resulted in a huge overhang of bad loans, threatening financial stability and people’s confidence. Moreover, in other countries Chinese competition on the basis of its comparative cost advantage may lead to rising unemployment that cannot easily be matched by increased exports to China. Without a comprehensive approach, integrating international policies concerning trade, investment, finance and money, this could violate the stability of trading partners and of the world economy.
That a gradual and conditional opening of markets can be a wise policy is shown by the EU. Long negotiations had to take place in order reach agreement with the accessory countries. These negotiations dealt with the consequences of European expansion for markets in both the old and the new Europe: agriculture, transport, internal migration, competition, environmental legislation. Nobody argued in favour of a prompt establishment of a fully free agricultural market within the enlarged EU. Countries were willing to further liberalise agriculture, because the allocation of resources was highly inefficient and subsidies could not be sustained. But at the same time there was fear for social consequences, as had also been the case during the negotiations to enlarge the then ‘old Europe’ with Spain, Greece and Portugal. The much worse position of farmers outside Europe would justify a removal of the barriers that those farmers have to overcome when they want to export to Europe. But this does not render the fears inside Europe itself irrational. Rural conditions within Europe are not only a burden on the European economy; they also reflect certain values. For similar reasons, Austria was afraid that a free transportation market would irreversibly violate the environment in the Alps. Not everything can be compensated through a reallocation of resources set free by expanded trade.
Many fears are related to specific interests. They can be addressed with rational economic counterarguments. However, are all such fears irrational? Anderson points out that the source of resistance to policy reforms is that ‘the expected losses in jobs, income and wealth are concentrated in the hands of a few who are prepared to support politicians who resist protection cuts, while the gains are sufficiently small per consumer and export firm and are distributed widely as to make it not worthwhile for those potential gainers to lobby for reform.’ This is often the case. However, resistance to reforms often also is based on more general considerations, instead of specific group interests. Anyway, whether the resistance were socially justified or not, it is a political fact, related to questions of distribution. Better information concerning the potential benefits from reducing trade distortions will not be sufficient. Many parties – consumers, labourers as well as producers – see trade barriers as mechanisms to restore, protect or sustain a socio-economic and political balance in the economy or in the nation. To inform them about the costs involved, for them as well as for others, and thus about the potential benefits of removing the costs, will not suffice. They will envisage the removal of the trade distortions as a source of uncertainty and instability. They will therefore weigh the costs and potential benefits differently. Is that irrational? Sometimes, but not always, because the initial situation preceding market liberalisation is one of inequality in welfare as well as in political power.
Will technological change and the unilateral opening up of markets abroad contribute to a different understanding and weighing of the benefits and costs? Yes, in so far as trading costs are lowered and economic gains to be reaped come nearby. This is happening in the present era of globalisation. However, the perceived uncertainties and threats come closer too. Financial and monetary instabilities increase with globalisation, and economic inequality as well. Foreign control of investments, and thus of production, commercial and trade systems and sales, also increases with globalisation. This may retard the willingness to actively contribute to a further opening up. Such reluctance is not irrational. Even when it is clear that further liberalisation will contribute to growth and create more resources, it is uncertain who will reap he benefits and whether inequalities may not increase. It is too simple to conceive of this in terms of an ‘alarmist lobbying of protectionists’ alone. Such lobbies exist and do harm; however, there are also legitimate fears that cannot be taken away by better information. Such fears can be countered only through policies that go beyond creating expectations and beyond promises.
`World trade agreements, fully representative for all the interests concerned, would be the most credible way to address these fears. They form the best opportunity to bargain and exchange access and opportunities. The chances of success are greater the larger the number of countries involved and the broader the product and issues coverage of the negotiations. But here again, it will not be simple. All trade policy-making takes place in a context of both international and national inequality. Inequalities at home imply rigidity in the position of the negotiation partners. They may fear domestic instability resulting from different assessments and weighing of the outcome of the negotiation among various groups. For this reason, they cannot afford to be very flexible in the negotiations. Governments can try to introduce domestic compensation, but this is costly and will have to be financed out of the economic gains resulting from the expanding trade opportunities. Sometimes these opportunities have a different time frame. Often they cannot easily be taxed. All this will mean that governments will be cautious in instructions to their trade negotiators and that the negotiators themselves will exercise restraint.
This will add to a cautious approach that the same governments will choose because of the other inequality – that between the negotiating countries themselves. It is self-evident that this inequality leads to a lengthy negotiation process. The fact that previous rounds of negotiation have led to quite unequal results for the trading partners – the OECD countries benefited much more than most developing countries – and also the fact that many commitments resulting from these negotiations have not yet been implemented will add to a reluctance to engage themselves in further negotiations. Even if new rounds could be considered as beneficial to the world economy as a whole, weaker negotiation partners will hesitate. This, for instance, is the case for negotiations concerning services and investment.
It is also understandable that other countries are eager to speed up negotiations and action. They want to expand trade and boost the opportunities for growth. They are less afraid of an unequal distribution of the results. Because in their view multilateral negotiations become more and more cumbersome, they increasingly choose a different path: bilateral and regional negotiations, with free trade areas involving only a sub-set of countries. This is risky. Trade may be diverted from lower-cost developing countries, worsening the situation for non-participants in these talks.