Free Trade Rules

Listen to the politicians – correction, most politicians – and you will be convinced that free trade is the panacea for the word’s economic ills. Perhaps it is. Trouble is no-one puts the rhetoric into practice, and so we can’t tell if free trade performs the miracles claimed in its name.
Among the strong dispensers of prescriptive free-trade rhetoric is American Secretary of State Colin Powell. He addressed APEC regional business leaders in Shanghai in October, just weeks after the September 11 terrorist attacks on the World Trade Centre and Pentagon, when world business confidence had slumped and global economic activity was rapidly slowing.
It was time for soothing balm, and Powell laid it on thick. “At this time of tragedy, at this time of anxiety, we should see the promise that is before us,” he said. “To achieve this promise will require the work not just of politicians and diplomats, not just of strong-bodied workers around the world, but of creative leaders such as you, who are continuing to spread the word about free-market economics, spread the word about free trade, spread the word about dropping barriers, spread the word about what good can come from open access to information, to markets, and the ability to take chance, the ability to take risk, the ability to go as far as you can go, limited only by your own ambitions.”
Phew! At the end of their two-day conference, APEC leaders issued declaration expressing their determination to revive the global economy by fighting protectionism and committing to the launch of new global trade talks. “We reaffirm our unyielding commitment to free and open trade and investment and resolve to work together to fight against protectionism in all forms,” they said.
Now, most business leaders probably subscribe to the conventional wisdom that “free and open trade and investment” is powerful economic medicine. But what comes out the other end, if governments take the recommended dose? Former prime minister Mike Moore, now director-general of the World Trade Organisation, gives some guidance with three basic arguments in favour of new round.
First, the development argument. Poor countries need to grow their way out of poverty and trade is key engine for growth. But the products of developing nations face many obstacles when entering rich country markets. By opening those markets, millions of people can be lifted out of poverty. Moore cites study that suggests developing countries would gain $155 billion year from further trade liberalisation, more than three times the $43 billion they get each year in overseas aid.
Second, general economic argument. 33 percent cut to barriers to trade in agriculture, manufacturing and services will boost the world economy by $613 billion, according to Michigan University study. That’s equivalent to adding an economy the size of Canada to the world economy. If trade barriers are cut completely, the boost to the world economy would be nearly $1.9 trillion: the equivalent of adding two more Chinas to the world economy. Moore argues that there is no better way to address the problems of economic slowdown than by strengthening the multilateral trading system through new negotiations.
Third, historical argument. Liberalisation and the multilateral trading system work. The past 50 years has seen “unparalleled prosperity and growth and more has been done to address poverty in these past 50 years than in the previous 500”, says Moore.
He argues that since 1960 child death rates have halved in developing countries; malnutrition rates have declined by one third and access to safe water has improved dramatically.
New Zealand Trade Minister Jim Sutton fortifies the case for being involved in the latest round of WTO negotiations, pointing out that the commitment among countries to work together is important for small nation like New Zealand. Only through the rules-based trading system of the WTO can we force larger, more powerful countries to obey the rules and stop blocking our products. The lamb tariff case against the United States and the beef case against South Korea are compelling recent examples.
More important, perhaps, Sutton rationalises that the Labour-Alliance Government supports rules-based trade, not free trade. “Small countries like us need rules, we need an enforcement agency like the WTO to protect our interests.”
The distinction is important. Politicians inclined to enthuse about “free trade” actually subscribe to system in which negotiators haggle over what should go into massive volumes of complex, even arcane, rule books that constrain trade. The debate inevitably engendered by trade policy, therefore, should be about what goes into the rule books, who puts it there, and who polices the codes that result.