Tear down these walls: making the case for free trade

Reason, July, 2003 by Charles Oliver

Free Trade Today, by Jagdish Bhagwati, Princeton, N.J.: Princeton University Press, 128 pages, $24.95

Free Trade Under Fire, by Douglas A. Irwin, Princeton, N.J.: Princeton University Press, 257 pages, $27.95

DOHA, QATAR, HAS gained more than a little renown as the headquarters of the U.S. Central Command during the invasion of Iraq. But how many people know that Doha is also the place the current round of global trade talks was launched back in 2001? The war has turned out to be much quicker and more successful than the latest efforts to reduce world trade barriers. After two years, the negotiators haven't produced even the framework of an agreement. And they still seem to be arguing over what exactly they'll negotiate about.

Blame it on an understandable fixation on the fight against terrorism. Blame it on a slow economy and the difficulty in convincing people who are already scared of losing their jobs that increased competition from abroad is a good idea. Blame it on a large and vocal anti-globalization movement. Blame it on any number of factors. But judging from its lack of action and words on behalf of free trade, it is clear that slashing trade barriers is not at the top of the Bush administration's agenda. Or that of any other industrialized country, it seems.

Fortunately, two of free trade's most able defenders have written new books arguing for renewed efforts at opening global markets. Columbia University economist Jagdish Bhagwati's Free Trade Today is the slighter of the two, both physically and intellectually. That's largely because the book is just a collection of three lectures delivered at the Stockholm School of Economics in 1998. But it still makes some telling points.

Bhagwati notes that the case for free trade was first made by Adam Smith in The Wealth of Nations. "It is the maxim of every prudent master of a family, never to make at home what it will cost more to make than to buy," Smith wrote. "The tailor does not make his own shoes but buys them from the shoemaker... What is prudence in the conduct of every family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the product of our own industry, employed in a way in which we have some advantage."

David Ricardo later solidified the case for free trade with his theory of comparative advantage. Ricardo argued that even if an individual, or nation, was better than all others at producing everything, trade would still make sense. To use Ricardo's famous example, let's say that Portugal produces both wine and cloth more cheaply than England. But let's also stipulate that it makes cloth at half the cost of England and wine at one-third the cost of England. In that case, both countries would benefit if Portugal concentrated on making wine and sold it to England for cloth. They'd each have more cloth and more wine at a lower total cost. Today, most mainstream economists accept the basic case for comparative advantage, but some argue that there are important exceptions, instances where trade does not raise overall welfare.

Bhagwati's first lecture, "Confronting Conventional Threats to Free Trade: The Postwar Revolution in the Theory of Commercial Policy," ably tackles the neoclassical economic literature that "qualifies" the free trade case. He agrees with critics such as Princeton's Paul Krugman that if there are significant market distortions, free trade may make conditions worse. For instance, if wages are "sticky" downward and can't fall to market-clearing levels, competition from low-wage countries could theoretically cause an increase in unemployment so large that the loss in income outweighs the welfare benefits from trade. But Bhagwati argues that such examples of market failure are much rarer than critics contend. And even where they do occur, the best response is to correct the distortion and proceed with free trade, not to impose new barriers. Bhagwati further argues that even if there is a case where trade protection may be the best course, we may still be wise in following a general principle of free trade.

Drawing on the "public choice" literature of government failure, Bliagwati contends that in the real world protectionist measures almost never follow the "benign" models suggested by neoclassical critics of free trade. Instead, special interests capture the trade programs and use them for their own ends, ends that rarely serve the general welfare. "The invisible hand may be frail, but the visible hand is crippled;' he writes.

Bhagwati's second lecture advocates delinking the social agendas of labor standards, human rights, and environmental protection from trade policy. "By trying to kill these two birds (i.e. social agendas and freer trade) with one stone (i.e. trade treaties and institutions), you are most likely to miss both;' he writes. He sees sanctions against products made with child labor as misguided. Such sanctions often force children into even more dangerous and degrading jobs, such as prostitution. "To make a dent on the problem;' he writes, "we need to do 'heavy lifting': for example, work with local [non-governmental organizations], ensure that children go to school when taken off work, and guarantee that the poor parents' incomes do not shrink below the survival line when the children's income disappears."