Special Section: Trade & Development - Mercantilism Today: How a dead philosophy comes back to life

National Review, Sept 15, 2003 by Julian Morris

Exports are good and imports bad, right? Wrong. All trade -- whether it is import or export, within nations or between them -- leads to economic growth, better jobs, and better health. Import barriers, by contrast, cause real economic and social damage. In mid September, trade ministers will meet in Cancun for the Fifth Ministerial Conference of the World Trade Organization -- and it's essential that these negotiators remain focused on liberalizing trade instead of getting sidetracked by protectionists.

The view that trade policy should focus on increasing exports and restricting imports can be traced back to the mercantilist pamphleteers of the 16th and 17th centuries. Funded by merchants seeking to promote their own interests, these early spin doctors claimed that the wealth of nations was a function of the balance of trade: the larger the trade surplus, the wealthier the country.

In 1776, Adam Smith debunked the mercantilists with a lengthy tome explaining the true nature and causes of the wealth of nations. He showed that wealth arose from people owning property and trading with one another. These activities lead to specialization and competition, which in turn drive the development of better, cheaper, more efficient goods (and modes of production) and, ultimately, economic growth. Sadly, Smith's analysis has rarely been heeded by governments, which continue to follow mercantilist policies.

Fortunately, some of today's most visible pamphleteers are fighting for trade liberalization. My own organization has established a global Freedom to Trade Campaign, with over 20 member groups from around the world, to demand the removal of government-imposed trade barriers of all kinds. These pro-trade forces have been aided considerably by multilateral trade negotiations, in which governments use their own protectionist trade barriers as bargaining chips in a huge game of "I'll cut mine, if you cut yours." The framework of rules established, first, in the General Agreement on Tariffs and Trade (GATT) and, subsequently, in the World Trade Organization (WTO) has served to encourage compliance with the agreements and to foster further liberalization.

While the GATT and WTO have accomplished much, there is one area where they have abjectly failed: agriculture. Politically powerful agricultural interests in Europe, the U.S., and Japan have maintained very harmful systems of subsidies and trade restrictions. But there are signs that the power of the agro-mercantilists is declining.

Most poor countries favor changes to WTO rules that would enable them to increase their exports of agricultural product. Because they account for a significant majority in the WTO, poor countries are in principle able to sway the outcome of negotiations. When trade ministers met in Doha, Qatar, for the Fourth Ministerial Conference of the WTO in 2001, they agreed to negotiate an agreement on opening up markets for agricultural products as part of a comprehensive new round of trade negotiations called the Doha Round.

But there's still a hitch. Even though people in poor countries stand to gain enormously from trade liberalization, their governments are often opposed to liberalization of imports. The main drivers of this opposition are local vested interests. "Development" NGOs also cause problems: They make much of the desirability of increasing imports from poor countries, but at the same time they demand that poor countries themselves be allowed to protect their local producers. They call such policies "fair trade," but their effect is far from fair, serving primarily to protect powerful special interests in the poor countries, while harming everyone else.

If more efficient imported technologies are made too expensive by tariffs or quotas, people will continue to buy the old technologies produced by local companies. That may seem like good news for the local economy, but it isn't. "Protected" companies end up producing goods that nobody wants, as foreign companies develop better, cheaper, and more efficient goods. The result is inefficiency and corruption, as companies pay ever-increasing sums to government officials in order to retain their protection from competition. Moreover, other local companies must pay higher prices for products -- so they become less competitive internationally.

In their eagerness to start a new round of negotiations, trade ministers agreed in Doha to revise and strengthen the provisions on "special and differential treatment" (S&D), which enable some countries to retain mercantilist policies. But negotiators failed to reach agreement on how to revise the S&D provisions, and this became one of the sticking points on the road to Cancun.

A more emotive issue has been the ongoing battle over implementation of a commitment to allow poor countries to produce and import generic copies of drugs that are still on patent in rich countries. As with S&D, this commitment was driven by a combination of vested interests and NGOs. The vested interests are the generics producers in countries such as India, Argentina, and Brazil, who don't want to pay royalties to the companies that developed the pharmaceuticals they produce. The NGOs are a hodgepodge of health and development groups claiming that because patent holders have exclusive licenses to market patented products, they will charge prices the poor cannot afford.