TRADING PLACES: Is Free Trade Faltering?

Friday, June 14, 2002

According to a 1998 study by the Organization for Economic Cooperation and Development, over the last half century nations that have been more open to trade have experienced double the annual growth rate of those that have been closed. So why would any nation be opposed to free trade? But, in fact, many developing countries are skeptical of free trade—believing that the rules of global trade benefit the rich, developed North at the expense of the poor, developing South. Are the critics right? With even President Bush's commitment appearing to falter, is the drive to greater free trade in crisis?

Recorded on Friday, June 14, 2002

Peter Robinson: Today on Uncommon Knowledge: free trade--win-win or win-lose?

Announcer: Funding for this program is provided by the John M. Olin Foundation and the Starr Foundation.

[Music]

Peter Robinson: Welcome to Uncommon Knowledge, I'm Peter Robinson. Our show today: free trade in the balance. According to a recent study, over the last half century, nations that were open to free trade experienced a rate of economic development that was double that of those that were not. So why would anybody oppose free trade? And yet many, particularly in the developing world, do oppose free trade, believing that the rules of global trade are rigged in favor of the rich, developed north and against the poor, developing south. Who's right? And with President Bush's own commitment to free trade unclear, he did after all enact a new tariff on steel imports, where does the United States itself stand in this debate?

With us today, two guests. Walden Bello is executive director of Focus on the Global South, a development policy program in Bangkok, Thailand. Jagdish Bhagwati is a professor of economics at Columbia University, a senior fellow at the Council on Foreign Relations, and the author of the book, Free Trade Today.

Title: (Sad) Song of the South

Peter Robinson: Nobel Prize winning economist Joseph Stiglitz: "The trade liberalization agenda has been set by the north (that is by the rich countries) or more accurately by special interests in the north. Consequently a disproportionate part of the gains has accrued to the advanced industrial nations. And in some cases the less developed countries have actually been worse off." Free trade making the rich countries richer and the poor countries poorer. Jagdish?

Jagdish Bhagwati: I think even a Nobel Prize laureate can be totally wrong. I think it's fundamentally…

Peter Robinson: Totally mistaken.

Jagdish Bhagwati: Totally mistaken.

Peter Robinson: Walden?

Walden Bello: I think he's right on target. I think he's…

Peter Robinson: Ah, marvelous, we have just what a television host likes to hear, a nice clean disagreement. Let's begin if we could with just the sort of the fundamental, in effect, the classroom principles. What's so special about free trade? As the argument goes, and you are one of the planet's leading proponents of the argument, why should nations open their borders to trade?

Jagdish Bhagwati: Fundamentally it's a question of sharing mutually from exchange. If I have surplus toothpaste and you have surplus toothbrushes and if we exchange one of each, teeth are going to get whiter, right, provided we remember to brush our teeth. So fundamentally that's the argument. That is really the underlying logic of any trade transaction and I think there's empirical evidence of a very substantial sort in the post war period, which underlies the wisdom of this, including for developing countries.

Peter Robinson: So it's the same argument that you'd make for the development of a nation's own economy. We should all simply specialize in the tasks that we tend to do best in which we have comparative advantages. And the argument is the same among nations as it is among individuals or among firms?

Jagdish Bhagwati: Yes, but remember that the comparative advantages can shift with a whole lot of policies like education. If I build up educated or labor force in India then I can get a Silicon Valley there like in Bangalore and then that becomes our comparative advantage. So that shifts the argument a little bit further into what kinds of general policies also you have for your society. But fundamentally wherever you are at or wherever you're going to, having an open economy is really going to be good for you whether you're poor or rich.

Peter Robinson: Now do you have any disagreement with Jagdish in principle?

Walden Bello: Well, I really would prefer to move from the theory of free trade to the actual practice of free trade.

Peter Robinson: So you grant the principle that he just laid out?

Walden Bello: I'm agnostic on that but in terms of the practice of free trade, what it has done really is that it has consolidated the advantages of a number of countries, a minority and world economy, and this has created structural disadvantages for many of the late comers.

Peter Robinson: Let's see what Walden makes of the conclusions of a 1998 report on free trade by the Organization for Economic Cooperation and Development.

Title: Changing Stripes

Peter Robinson: Over the last half century, this OECD report says, and especially over the last decade, the Nineties are important here, "Nations that have been more open to trade have experienced double the annual growth rate of those that have been closed." The OECD report goes on to draw a very sharp contrast between two regions of the world. First, Asian nations of Korea, Taiwan, Singapore, Hong Kong, Malaysia, Thailand, and Indonesia, they started with closed economies, gradually opened them, and some three billion people in those countries have been lifted out of poverty. Second, African nations such as Nigeria, Cote d'Ivoire, and Tanzania, they start with closed economies and by and large, they keep their economies closed and they remain poor. Open economies, look what happened in Asia. Closed economies, look what happened with certain countries in Africa. Now how do you handle that argument?

Walden Bello: Well, the way that I would say this is that this is a very simplistic picture that they're giving of Africa and Asia. If you look at the east Asian economies, these were not free trade economies, these were hard hitting protectionists mercantilist economies with a great deal of state intervention, state support, state subsidization, that in fact made them blockbusters on the world markets. So, if you look at, in fact, which I would think is a much more accurate comparison, compare this mercantilist, protectionist, integrating to the world economy, East Asian economies, compare that to the Latin American countries, the African countries that were subjected to structural adjustment. That is, radical free market reform including the Eastern European economies by the International Monetary Fund. And it's fairly clear. The ones that, in fact, integrated the world economy with a sophisticated, non-free trade strong state intervention type of model, perform much better than the radical free trade economies. So this is why I think that these sort of statistics and these sort of pictures--let me just say that there's all the world of a difference between a free trade economy like Haiti, and Vietnam.

Peter Robinson: Now I have to say I know so little about Vietnam. Vietnam in other words has a strong state sector?

Walden Bello: Sure.

Peter Robinson: It is engaging in importing and exporting but the government is directing that to a large extent.

Walden Bello: It's a very heavily regulated economy like China is.

Peter Robinson: And it's growing at leaps and bounds.

Walden Bello: It's growing by leaps and bounds, it has become…

Peter Robinson: And in Haiti you have almost no functioning government as I make it out--almost no system of laws.

Walden Bello: Right, sure.

Peter Robinson: So they're open and there's no government--so your argument is Haiti in some sense should be a libertarian's dream?

Walden Bello: They're open and dead just like Argentina is open and dead.

Peter Robinson: Open and dead. All right, there's a nice term, open and dead.

Jagdish Bhagwati: I think Walden is making a mistake in saying that it's too simplistic. It is true that one can be overly simplistic but you can have a lot of governmental intervention for creating infrastructure for helping initially to an import substitution phase for industries and so on. But essentially what the Far Eastern economies did, for instance, was to have a lot of intervention. It was not a libertarian hands-off government, but the question was what was the nature of that intervention? They consistently routinely made it clear to their people that outward orientation was the important way to go. And open economy in the sense that you are not fearful of world markets, not fearful of direct foreign investment, you use the external world to learn from it, to profit from it. So you take countries like the four Far Eastern economies, South Korea, Taiwan, Hong Kong, and Singapore. Hong Kong is the most libertarian in a way, but even that has a substantial amount of intervention, but it's pure free trade. Singapore is almost pure free trade--no intervention of any kind on the trade front, which is really what we're talking about. South Korea and Taiwan went through a phase of import substitution for a while, but then they turned outward. And the secret of their success was that they went in for very rapid expansion of exports.

Peter Robinson: What about Walden's example of countries that are open but dead--Haiti and Argentina, they're quite different countries.

Jagdish Bhagwati: But you can die--I mean, you know, despite being open because being open helps you but it doesn't prevent you if you're dying of cancer. Or, you know, having fresh air might be great for you in terms of your general health, but it's not going to do anything if you're dying of cancer. So you've got civil strife for instance like in most of Africa, which is another of Walden's examples. Or you've got dictatorial governments, which are really printing money, spending it through the budget, having massive inflations. I mean you have inflation during the period in which Walden was I'm sure talking about in South America, which was four digits, it makes your mind boggle actually if you're an Asian. Now those are the things which unsettle their economies. It has nothing to do with being outward oriented or inward oriented.

Peter Robinson: Back to an earlier question: is Walden philosophically opposed to free trade or not?

Title: Trading Places

Peter Robinson: Other things being equal, that marvelous phrase that makes any argument that follows completely artificial. But other things being equal--so you have a country-- well, you have two countries which are in every way identical and one of them engages in free trade and the other does not. In your judgment, which country is making the right policy decision?

Walden Bello: Well this is exactly what I'm trying to say Peter, is that it's not accurate, it is fundamentally mistaken to say that Taiwan and Korea, or China, in their periods of rapid growth were free trade economies. What I'm trying to say here is that these were extremely protectionists when it came to their domestic market. I mean you know, it's only been in the last ten years that you have had Japanese cars come into Korea. I mean this is amazing. What I'm trying to say is not--is that we've got--they're not free trade economies, certainly they opened up, but they opened up while they at the same time protected their domestic markets.

Peter Robinson: Let me put on the table a question for the two of you because what you have now is a layman who has a problem. We look at the experience of the so-called Asian Tigers, and Jagdish says that good news is taking place because they're free trade and in spite of occasional protectionist interventions by the government. And Walden is saying, no, no, no, the good news is taking place almost in spite of the free trade, largely driven by the protectionist interventions and other kinds of economic interventions of strong central governments. So the question is, is there some statistical approach, is there some way to--you're both looking at the same picture and giving opposing accounts of why that took place, is there some way to settle this--some objective way to settle it?

Jagdish Bhagwati: Walden is both right and wrong. I mean, there has been massive protection to begin with in these systems. Certain types of protection, like on the car industry, on heavy industries, continued. But there's a great deal of literature now which shows that this is exactly the wrong kind of industrial policy because as long as those interventions were reinforcing the comparative advantage in light manufacturers, Korea managed to reinforce what, in fact, the market would have done anyway by choosing light manufacturers, just the way Japan did. When it started going into industrial policy and interventions for the heavy industry sector, ship building and a variety of things, that's when it lost its way like most people do.

Peter Robinson: Where they did not have a comparative advantage in the international marketplace in the first place.

Jagdish Bhagwati: And there was no clear signal from the marketplace as to where you want to go.

Peter Robinson: Right. The market wasn't screaming for ships from Korea.

Jagdish Bhagwati: So at some stage, if you look at Japan for example, and industrial policy in these countries, where it does seem to be succeeding is where, in fact, they're trying to predict the comparative advantage evolution.

Peter Robinson: Next topic, how badly have recent American actions damaged the movement toward freer trade?

Title: There's a New Tariff in Town

Peter Robinson: In recent months, President Bush has taken a couple of actions that bear on free trade. First he imposed tariffs of up to thirty percent on imported steel, which The Economist magazine called "America's most protectionist single action for two decades." And a few months after that he signed a farm bill that raised subsidies to American farmers by eighty percent, providing them something like $170 billion over the next decade. Now, it's not just in the United States. The overall level of subsidization of agriculture in the OECD countries, which is basically the industrialized countries, doubled from 182 billion in 1995 to 362 billion in 1998. So, the question here is that at least as regards agriculture and also as regards other politically sensitive industries--this is why I was talking about steel, steel--politically sensitive, the president imposes a tariff--the rich countries are not playing fair. So is Walden correct that free trade is something that the poorer countries ought to think twice about? That they're going to get ripped off by these rich countries.

Jagdish Bhagwati: But you don't get ripped off. I think that's the wrong way to look at it. My old teacher, a great radical, Joan Robinson at Cambridge used to say, if you throw rocks into your harbor, that's no reason for me to throw rocks into my own. Essentially what she was saying was that it's good for me to have no restrictions--or reduced restrictions on trade because trade leads to gains--true. If your door is closed, you know, I would get less by their trade. But it doesn't mean that I should then close my own door because then I get doubly hurt. But I would simply go on to say also, to be partly on Walden's side but in a nuanced way, which is because today we are all sort of saying, look here are all the statistics which you read out. Right. And things are even getting worse and what is bad about the U.S. actions is that while we are entering a multi-lateral trade negotiations post-Doha, we have actually used the WTO consistent procedures to increase protection. So we are sending out all the wrong signals. My worry is not about this in itself, because they're hurting themselves and they're hurting the rest of the world too, but…

Peter Robinson: The Americans are and the Europeans who subsidize agriculture are.

Jagdish Bhagwati: But the real problem is that when we do things like that and we are supposed to be the ones who are most free trade oriented, the big proponents of free trade, ideologically and so on, when we do this it's very difficult for President Arroyo of the Philippines, for the Prime Minister of India, who are all trying to move a little closer to free trade. We are never going to be at free trade, but you know, we are trying to liberalize here and there as the democratic processes permit, then you see all the people who oppose liberalization. And then you say look the big dog on the block is doing something which is hypocritical and that makes our life more difficult in the developing countries.

Walden Bello: Well I think definitely, whatever our respected positions on free trade, I think Jagdish and I have a consensus on the double standards that, in fact, operate in the world economy. Basically what the United States does is that when it suits me I'll do free trade, but I will also be unilateral. But for you guys out there, okay, you only have to bring your tariffs down. You guys have to practice free trade.

Peter Robinson: So would Walden support free trade if he thought the rich countries were playing fairly?

Title: Free Traitors

Peter Robinson: Are you opposed to free trade or is it simply the hypocrisy that you see in an action like this by President Bush--the hypocrisy that you see in the European Union by saying to the so-called Third World, you must engage in pure free trade while we subsidize our farmers and every other political group that we need to get elected. Is that what really annoys you? If the first world would behave better, would you then be more in favor of free trade?

Jagdish Bhagwati: You see that reinforces the point I was making which is that when people like Walden pick on this sort hypocrisy or double standards, when intellectuals, I mean he's one of the influential intellectuals in the Third World, they will reinforce the lobbies, the industrial lobbies, and so on, which don't want to have reduced protection. So in that sense, it is an extremely important downside of what President Bush has been doing.

Walden Bello: Well, I think in response to your question Peter, as I said, you know, I'm not really that hung up on, you know, the theory of free trade. I'm a pragmatist, you know. I don't oppose trade. I'm for trade but it all depends on what the rules are for trade and I'm for fair trade, and this is what I'm trying to say here. That the history of East Asia shows, you know, that interventions, even protectionist interventions, in fact, build up capacity so that at a future time these countries like Korea, were able to become efficient, effective, economies. So what I'm saying here is that we really, really need to be pragmatic about trade policy. There are times when you're a protectionist and that's the rational thing to do, there are times when you liberalize. But the important thing is the national interest that guides you in terms of developing your economy. So basically Peter I'm saying, I would put above everything else somebody from the Third World, development over trade. Thus trade, certain trade policies assist in development, if they do, fine. If they don't, then I'm not going for that. And certainly the so-called structural adjustment free trade policies that have been imposed by the IMF and the World Bank, they have consistently eroded the capacity of Third World countries like the Philippines to be able to develop.

Peter Robinson: How would you grade the IMF and the World Bank? Walden has several times now said that they have imposed rigid, liberal in the sense of small government free market regimes, or attempted to do so, imposed these strictures on Third World countries and that's caused trouble and resentment and so forth. How would you grade the World Bank?

Walden Bello: And not only on trade but on capital.

Peter Robinson: Capital, right. Monetary policy...

Jagdish Bhagwati: The policies extent of the IMF extend not just to trade, which is very minimalist, but to pushing countries rapidly into capital account convergeability or to sometimes called financial liberalization. So our financial firms can, you know, go in, you know, and basically operate without any restrictions but people can take their monies out and so on. And that was very imprudently done and there…

Peter Robinson: You give them a low grade?

Jagdish Bhagwati: I'm afraid I do. A low grade is, a low grade--no, I would expel them from…

Peter Robinson: Ah, that bad.

Jagdish Bhagwati: …university.

Peter Robinson: Because it seems to me…

Walden Bello: Very significant quote!

Peter Robinson: Walden is saying I'm a pragmatist; I want to know what works. And it strikes me, listening to Walden, that in the developing world it would be easier to see that free trade works if there were not this overlay of the western world pushing it, backing, trying to jam it down their throats--the IMF, the World Bank, and then President--this entire overlay that just makes it hard to take.

Jagdish Bhagwati: I think the last few years they were going by analogy with trade as far as financial liberalization was concerned. And one thing you learn in the classroom is that, you know, there are similarities between financial liberalization and trade liberalization, but there are fundamentally…

Peter Robinson: Quite different.

Jagdish Bhagwati: So the differences are much more important. When you're dealing with financial liberalization, unless you're very prudent and cautious and putting monitoring in place, adapt the local institutions like the banking procedures, debt equity ratios, you're playing with fire and then the analogy is playing with fire. It's good for you, you know, but on the other hand, it can burn down where you're living.

Peter Robinson: Last topic, predictions about the future of free trade.

Title: Ebb Tide?

Peter Robinson: The Economist magazine again: "The lesson of the early twentieth century is that globalization is reversible." Globalization is reversed by the First World War and then it's reversed by economic policy, trade policy, during the Depression--people become protectionist and so forth. I continue the quotation, "This time, the current time, global integration might stall if the risk and cost of doing business abroad rises, perhaps as a consequence of fears about security," that is the terrorist threat, "or if governments once more turn their backs on open trade. Either of these threats could prove decisive." So, the question is, this is not a question of ideology or even of principle or even really of past practice, but a question about the future. Has the movement toward freer trade already crested, perhaps in the 1990s, and might we see a reversal in the years ahead? Walden?

Walden Bello: Nothing is determined that things can, in fact, be reversed. But what I would say is that I think countries would like to integrate into the world economy, but what they're asking for is good rules, okay, that is very sensitive to the different areas where countries are in the world economy. And I think that if the North, if the developed countries are willing to see that they're not going to jam down doctrinal rules about free trade on countries, but instead look into the leads of these countries that, in fact, they need to develop, and that has to be respected so that you can't have a one shoe fits all type of trade regime, then I think the south countries, you know, will integrate…

Peter Robinson: Are you optimistic that it'll actually happen that way in the coming three years, four years, five years?

Walden Bello: Well, I'm not optimistic precisely because I think that there is in the North either a doctrinal view about free trade or there is this very, what we've already talked about, this sense that I can be unilateral if I want to and I can be a free trader when I want to. And this is in fact what you have in Washington at this point. So, I would say here Peter that there's a lot of dissatisfaction in the South at this point because we were sold a bag of goods like free trade that has created enormous problems for our economy. And beyond that there's also the hypocrisy.

Peter Robinson: Jagdish, are you an optimist on this matter?

Jagdish Bhagwati: Yes, I think I am at the moment because I think it's fundamentally a lot of things of changed compared to the, you know, to the early part of the twentieth century. And the policymakers are still keen in the developing countries, not necessarily all the intellectuals that certainly Walden doesn't buy into that, but I think the policymakers have tried alternate models and are now saying look, we were too fearful of the outside world, we want to use it the way the far eastern economies did. Let us, like the Mexicans looking across Rio Grande, you know. Porfirio Diaz said years ago, "Poor Mexico, how far from God and how near the United States." Today they turned it around and said, look what a wonderful thing, Mexico is next to the United States. It gives us opportunities.

Peter Robinson: Jagdish Bhagwati and Walden Bello, thank you very much. I'm Peter Robinson, for Uncommon Knowledge, thank you for joining us.