The case for Free Trade

Jagdish Bhagwati

Beauty is in the eye of the beholder. Fairness in trade also is the way you choose to define it.

In my initial statement, I had taken, and taken apart, three fashionable concepts of fair trade
which are pitted against free trade today. My most distinguished friend, Professor Ngaire
Woods, is concerned with altogether different notions of fair trade, reflecting her
specialisation in political science rather than in economics, her interest in international
governance, and her proximity to the activist anti-trade movements and charities such as
Oxfam that dominate the English landscape. But even when arguing against free trade
because it is unfair according to her notions of fair trade, Professor Woods fails to persuade
me.

She claims at the outset that "free trade has a bad name". She believes this, not because of
unfair trade notions she cites (which I address below), but also because she seems to be
sympathetic to the allegations that free trade is a malign force. She quotes Oxfam, whose
writers on trade claim: "Trade robs poor people of a proper living, and keeps them trapped in
poverty." Try telling that to the nearly 500m people who have been pulled up over the poverty
line in the last two decades of rapid growth in India and China, in part because of changed
policies that included exploiting trade and inward investment opportunities that earlier
policies had shied away from.

The Report on the Future of the WTO by the expert group chaired by Peter Sutherland
addresses many such allegations against free trade that are circulating today and is best
consulted directly. My 2004 book, "In Defense of Globalization", also addresses the
allegations that trade undermines social objectives such as gender equality and democracy and
concludes that trade generally advances, rather than handicaps, these agendas as well.

Moreover, it is inaccurate to assume that free trade is rejected by the majority of people in
many countries. The polls in the United States, even in the middle of the current crisis, did not
shift a majority against free trade. In today's interdependent world economy, many seem to
understand that exports sustain their jobs and that protectionism may save a few thousand jobs
in terms of its direct impact on the protected activity but, when retaliation kicks in, the
country could lose hundreds of thousands of jobs instead. It would be a policy of "penny wise
and pound foolish". When my team and I recently debated three of America's staunchest
protectionists, with hundreds in the audience, I had been persuaded by pessimistic statements
such as that by Professor Woods that we would lose 55:45%. But the vote went 80:20% in our
favour.

But then are we who favour freer trade in danger, not because freer trade causes harm rather
than good or that the majority think so, but because of the charge that trade today is widely
considered to be unfair? Of course, if you ask in the polls, should trade be fair, without
elaborating what you mean by fairness, you are going to get a majority saying it should be.
You would have to be a knave or ghoulish to say otherwise. The important question is: if
people are exposed to proper debates, like the one I described or the one that Professor Woods
and I are having, and understand both what is meant by fairness and what are the arguments
for and against that specific notion of fair trade, what would be the vote? In that spirit, which
alone can contribute to an informed democracy, let me now consider Professor Woods’
concerns.

In essence, she produces three arguments. First, that (again quoting Oxfam) the "rules of the
trading system" are "rigged" against the developing countries. Second, the rules of the trading
system are made by the developed and not by the developing countries. Third, the distribution
of the gains from trade is skewed against the poor countries.

On the first argument, let me briefly say that "Part II and Special & Differential Treatment"
have long been applied to the developing countries at the GATT. Little was demanded by way
of reciprocal trade concessions. This is also why the frequent allegation that trade barriers are
higher on the average in the developed than in the developing countries is incorrect for
manufactures, which were the principal focus of GATT until 1995, since agriculture was
excluded by the 1955 waiver.

On the second argument, I certainly agree that several institutions, such as the IMF and the
World Bank, need more voice from the developing countries. It is scandalous that Dominique
Strauss-Kahn and Robert Zoellick were more or less nominated by the EU and the United
States respectively. By contrast, the WTO smells like roses. Pascal Lamy had to fight hard to
gain his first term. Also, the WTO works by consensus; there is almost no voting by financial
contribution. In fact, it is the free trade agreements with hegemonic powers that Professor
Woods seems to celebrate, which are the vehicle for the asymmetric exploitation of the
developing countries. All kinds of trade-unrelated demands, driven by lobbies in the
hegemonic power, are imposed on the developing countries in one-on-one negotiations, under
the cynical pretence that these demands are good for them: see my 2009 book, "Termites in
the Trading System: How Preferential Agreements Undermine Free Trade".

For the third argument, Professor Woods turns to Oxfam again, citing its assertion that the
gains from trade had accrued almost entirely to the developed and middle-income developing
countries. But the middle-income developing countries often ceased to be "poor" countries
because of changed policies that exploited trade better, among other reforms. Oxfam created a
"stir", according to Professor Woods, maybe among other British charities and the singing
troubadours whose electric guitars seem to drown out the voices of scholars effectively in
Britain. But elsewhere, the 2002 Oxfam report is seen to be the rank nonsense that it is.

I will begin by recapping some key points concerning alternative notions of fair trade. The
audience should know now that we have as many as six different senses in which fair trade
has been discussed in the debate, so that any discussion would be meaningless unless we
define which sense is the one at issue. These are, listing my three first, as follows:

1. Fair trade means reciprocity of openness. It is lacking when others are less open than
we are. It is contended that free trade in the presence of such unfair trade harms
oneself.
2. Fair trade means that others must have the same labour standards (and domestic
environmental standards and whatever we decide to put into the pot) as we have. It is
argued that if this is not the case, we harm ourselves by freeing trade with such other
nations.
3. Fair trade means that we should pay a just, not the market, price when we buy from
other (chiefly poor) nations in free trade. If we pay only the market price in trade, we
 are exploiting the poor producers; such free trade must be rejected and replaced by
trade only at market-plus prices.
4. Fair trade requires that the distribution of the gains from trade be fair, between and
within nations. It is not, and therefore free trade is not acceptable.
5. Fair trade means that all nations, including the poor nations, have a voice in
governance at the WTO which sets the rules for trade. This is not the case.
6. Fair trade means that we must reject the rigged rules that govern free trade today.
Hypocrisy and disregard for the interests of the poor nations follow, making free
trade's outcomes unfair.

Both my earlier statements, the first dealing with my list of three, and my response to Ngaire
Woods' claims on the latter three, have stated clearly the different problems with all six
charges of unfair trade, and their allegedly adverse implications for free trade. There is much
in the trade literature on each of these topics, of course, and what I have argued here by way
of examining critically and often refuting the claims that unfair trade undermines the case for
free trade, is only the tip of an enormous iceberg: our audience, if they wish to get into any or
all of these six areas, has an excessively rich smorgasbord, indeed Babette's Feast, to bite into.
So, let me use the limited space I have at my disposal, not to say more on this set of issues to
answer some of Professor Woods' responses, but rather to concentrate instead on other
specifics where I would like to dispute the added claims that Professor Woods makes
mistakenly against the case for free trade itself.

First, she believes that I believe that free trade is a silver bullet that unambiguously (i.e.
invariably) works to benefit a country and that "It does not seem to require other policies". I
doubt if any serious proponent of free trade believes either proposition. On the former issue,
my own early work showed, for instance, that one could have "immiserising growth" under
free trade if the decline in the terms of trade resulting from growth created losses that
outweighed the primary gain from growth. The relevant question always is, however, whether
this model is the correct one to use to make policy. Here, few believe today that the
widespread export pessimism (to which I was reacting) which would justify a significant
departure from free trade was unjustified. Equally important, even ruling out such malign
outcomes as an important central tendency, free traders have always been clear that the gains
from trade may be negligible if there are inflexibilities in production and consumption: the
gains are directly proportional to reallocation.

Also, while theoretical models do not establish a firm relationship between growth and
openness, the fact is that, as Professor Arvind Panagariya, a noted international economist has
shown in an article in The World Economy, for a period of nearly 30 years countries that have
had high growth rates have also had greater openness in trade. At the same time, there is
practically no example of a closed country having anything except a dismal economic
performance on a sustained basis when it has been autarkic.

Again, she claims that across African economies, manufacturing has dropped as a share of
GDP in the period since 1975, despite opening their economies. Analysis of African countries
does not corroborate this assertion: South Africa, Botswana, Malawi and Ivory Coast, among
others, appear to show a rise in the ratio after 1975 (the earlier data being often unavailable).
In any event, growth can arise through agriculture and primary resource trade;
industrialisation is not a correct measure in this instance, as we learnt long ago from
Argentina under Peron.
On the latter issue, Professor Woods could not be more wrong. You may liberalise trade, but
if you have strict licensing which prevents expansion and reduction of output by firms, as we
in India did, there will be negligible gains from trade. India profited from significant trade
liberalisation after 1991 in particular because industrial licensing was also removed. GATT
itself recognises how a trade concession could be nullified indirectly by non-trade policies:
the so-called non-violation violation. So, if you agree to open the door to your castle and do
so, but you build a moat round it with alligators thrown in to boot, you have effectively offset
the opening of the door. I could go on with masses of such examples, but they would only
illustrate what should be obvious by now.