Economics The Politics of ‘Free’ Trade

Writing about the “invisible hand” in recent column in the Financial Times, economics professor John Kay disabused readers of commonly held view about Adam Smith. No, he did not argue that self-interested actions tend cumulatively to lead to better society.
“In fact, the passage in The Wealth of Nations that contains the metaphor is hardly song of praise for liberal economics,” Kay pointed out. “Smith is arguing that import restrictions are unnecessary, because British merchants will naturally prefer to buy from other British traders rather than entrust their fortunes to unreliable foreigners.”
Maybe so. But in these days of globalisation, isn’t there growing bank of evidence in favour of free trade?
The American magazine Business Week fortified this belief in June last year, when it reported the hard data from study from the free-market-oriented Fraser Institute in Vancouver. Written by economists James D Gwartney, of Florida State University, and Robert Lawson, of Capital University in Columbus, Ohio, the study found that “countries with the freest trade had the highest gross domestic product growth from 1990 to 2000”.
The top fifth of countries ranked by freedom of trade had average annual per capita GDP growth of two percent adjusted for inflation, from 1990 to 2000 while the bottom fifth on the free-trade scale saw inflation-adjusted GDP per capita grow mere 0.2 percent annually.
Richer countries tend to be more open than poorer countries. The top fifth of countries ranked by openness had an average per capita GDP of US$23,401 in 2000. That’s more than twice the US$9852 average for the second quintile, and more than six times the US$3621 of the 20% of countries with the most restrictive trade conditions.
Bit by gradual bit, global barriers are being dismantled in multilateral trade agreements. An assessment of the gains to New Zealand from the Uruguay round of trade negotiations, carried out by the Ministries of Foreign Affairs and Trade and Agriculture and Forestry, reckons they amounted to more than $9 billion from 1995-2005, based on $3.1 billion earned from lower tariff barriers and $6.13 billion from higher agricultural export receipts.
On the other side of the barricades, however, support to farmers is estimated by the OECD to have reached US$235 billion in 2002, around the same level as in 2001. This support represented 31 percent of total farm receipts in the OECD area, ranging from one percent in New Zealand to more than 70 percent in Norway and Switzerland. The level of support increased in 2002 for all countries except Japan and New Zealand (where it remained the same) and in Poland and the United States (where it decreased).
In the upshot, no matter the degree of liberalisation, world trade is neither “free”, nor governed by “fair” rules, according to Alfred Oehlers, associate professor of economics at the Auckland University of Technology. “The game is played by means fair and foul, relying on barriers of various kinds, competitive devaluations, rigged rules, special deals and, failing all else, outright coercion.”
Trade policy became focused on bilateral agreements in the wake of the breakdown of ministerial talks in Cancun on the Doha round of multilateral negotiations under World Trade Organisation auspices, and the yearning for “free” trade was feature of the politicking. In this country opposition politicians were critical of the Clark Government’s failure to nudge New Zealand into the line-up for negotiating so-called free trade agreement with the United States.
As chair of New Zealand’s APEC Business Advisory Council, Sir Dryden Spring takes issue with the tendency of countries to rush head-long into bilateral negotiations (this was to have been among the issues he would take up at the APEC ministerial talks in Bangkok in October).
“Bilateral free trade agreements,” are misnamed, he said. “I am not aware of any completed bilateral agreements which are free trade agreements – they are preferential trade agreements. They give preference to the parties involved, and this is trade distorting and trade diverting.”
Indeed. The point was underlined by Business New Zealand chief executive Simon Carlaw last year (perhaps unintentionally) when he urged the Government “let’s go after this free trade agreement” with the USA. If we had been part of the North America Free Trade Agreement, he pointed out, we wouldn’t have been affected by the American decision to slap controversial tariffs on steel imports.
Business leaders might think they are striking blow for “free” trade, when they urge the Government to do what must be done to sign New Zealand up for Nafta membership. What they really want is the privilege and commercial advantage of being on the Washington side of the barriers. M